<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 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
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
---------------------
Common Stock $0.10 par value AMEX
---------------------------- ----
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 X NO
-------- --------
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. [ ]
As of July 31, 1995 the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $4,041,000.
As of July 31, 1995 the issuer had 4,753,284 shares of Common Stock
outstanding.
Documents incorporated by reference - Part III - Proxy Statement
<PAGE>
PART I
ITEM 1: BUSINESS
Since 1966, the principal business of Harlyn Products, Inc. (the "Company")
has been the manufacture of gold and silver jewelry in the United States and
Thailand and the wholesale distribution of such items to distributors,
department stores and retail jewelers throughout the Americas, the Orient and
Europe. The Company features a domestic service policy on U.S. special
orders of delivery within two days of order, and primarily utilizes its
Thailand capacity to satisfy International demand. The Company also sells
items from stock. Currently, more than 90% of sales are derived from gold
and silver jewelry items.
The Company manufactures gold and silver items such as family jewelry,
precious and semi-precious stone jewelry, diamond jewelry, initial jewelry,
and wedding bands. These product groups may comprise rings, pendants,
earrings, chains, pins and tie tacks. The Company's jewelry is intended for
sale in the medium price range and is predominately worn by women.
The Company manufactures its own products in Los Angeles, California and
through its subsidiaries, Harlyn Products (Thailand), Ltd. and Harlyn
International Co., Ltd., in Bangkok, Thailand. The Company uses its Thailand
subsidiaries as a source for its own supply and for third-party sales
internationally. In the United States, the Company directly markets its
products to national, regional and local stores. Internationally, the Company
utilizes sales representatives and jewelry fairs to market its products.
Historically, the Company's domestic sales have followed a seasonal pattern
with peak sales in the periods immediately preceding Christmas and Mother's
Day. The approximate percentages of total net sales for each fiscal quarter
of the fiscal years 1995 and 1994 are shown in the following table:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
1st quarter (July-September) 25% 19%
2nd quarter (October-December) 33% 36%
3rd quarter (January-March) 18% 20%
4th quarter (April-June) 24% 25%
</TABLE>
The Company distributes base metal (non-precious) jewelry samples to retail
outlets, which secure custom orders for gold or silver items made to
consumers' specifications. Base metal
2
<PAGE>
samples are difficult to distinguish in appearance from gold jewelry and
serve as visual aids, helping consumers select designs of their choice. The
Company also uses gold plated silver jewelry samples, which are carried by
the Company's sales representatives as sales aids.
The jewelry business is highly competitive, with price, quality and service
being the bases for competition. While the Company is an important factor in
the ring manufacturing industry, there are numerous companies engaged in
offering products similar to those of the Company. Some of these companies
have been established longer and have greater financial resources and sales
and marketing capabilities than the Company.
The Company experienced no shortage of raw materials during the past fiscal
year, and it does not anticipate any in the foreseeable future. However, due
to the speculative nature of these commodities, there is no way to predict
future costs to the Company.
The Company maintains a gold lease arrangement pursuant to which it holds
gold on consignment to meet customer orders. The Company maintains a lease
arrangement which provides for a credit line of up to $10,625,000. The gold
consignment agreement requires the Company to maintain certain financial
covenants with respect to working capital, capital expenditures, debt
service coverage and other financial ratios. At June 30, 1995, the Company
was not in compliance with the covenant for the maintenance of debt service
coverage. Management is involved in ongoing discussions with the gold
consignor and anticipates a positive outcome.
The Company sells gold and silver rings and jewelry items under the trade
names of "Del Conte Mfg. Co.," "Palomar Co.," "P.C. Mfg. Jewelers," "Harlyn
Products," "Paramount," "Harlyn Thailand," "Wilshire International," "George
Hoffman and Sons" and "Ro-Mel." Sales to Wal-Mart accounted for 10% of the
Company's sales in 1995, while sales to the J.C. Penney Company accounted for
11% and 12% of the Company's sales in 1994 and 1993.
The National Stamping Act requires that a manufacturer of gold products stamp
a trademark on any item with a quality mark such as 10K or 14K gold. The
Company uses the registered trademarks: "PALOMAR," "PC," and the letter "P"
in a pear-shaped form.
On June 30, 1995, the Company employed approximately 180 U.S. employees. Of
these, 112 were factory employees. Of the remainder of the employees, 4 were
executive personnel, 27 were engaged in administrative and clerical work, and
37 were engaged in sales and marketing. In addition, there were
approximately 375 employees in Thailand. The Company does not have a
collective bargaining agreement and believes that its employee relations are
good.
3
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ITEM 2: PROPERTIES
The Company's executive and administrative offices are located at 1515 South
Main Street, Los Angeles, California. The Company occupies the following
facilities:
<TABLE>
<CAPTION>
Square Lease Monthly
Use Location Footage Expiry Rental
- --- -------- ------- ------ --------
<S> <C> <C> <C> <C>
Executive, 1519-1525 S. Main St. 20,160 * $17,513
administrative L.A., CA 90015
and sales offices
Manufacturing 1515 S. Main St. 7,700 * $ 3,442
facility L.A., CA 90015
Manufacturing 115 Venice Blvd 6,500 * $ 3,019
facility L.A., CA 90015
Manufacturing 117 Venice Blvd. 7,200 * $ 3,044
facility L.A., CA 90015
Factory/Office Thailand 40,000 **
</TABLE>
* A partnership created by Harold Weisbrod, chairman of the Board of
Directors and principal stockholder of the Company, leases to the Company the
facilities at 1515 and 1519-1525 South Main Street and 115 Venice Boulevard,
Los Angeles, California. The facility at 117 Venice Boulevard in Los Angeles
is leased to the Company by an irrevocable trust for Mr. Weisbrod's children.
The leases covering these facilities are currently on a month-to-month basis.
** In 1994, the Company purchased a parcel of land, less than 1 acre, in a
suburb of Bangkok, Thailand. The Company completed construction of a factory
with office space on the land parcel in December 1994. This new building
houses the facilities of Harlyn International.
The Company owns or leases all equipment used in its production processes.
The Company believes that all of its equipment is in good condition and is
adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the fiscal quarter ended June 30, 1995, no matter was submitted to a vote
of the Company's security holders.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock trades on the American Stock Exchange: Symbol HRN.
TABLE OF HIGH AND LOW DAILY CLOSING PRICES BY QUARTER
-----------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1994 Fiscal Year Ended June 30, 1995
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
QUARTER 1 2 3 4 1 2 3 4
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- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH 3.38 5.00 5.00 5.00 5.00 4.63 4.38 3.50
- -----------------------------------------------------------------------------------
LOW 2.81 3.38 3.88 4.06 4.06 3.50 3.25 2.38
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
There were no dividends paid in any of the above fiscal quarters. The
Company's ability to pay dividends is restricted by its credit agreement; see
note 6 in Notes to Consolidated Financial Statements.
As of June 30, 1995 there were 204 record holders of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA - All figures in $000 except per share data.
<TABLE>
<CAPTION>
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- -----------------------------------------------------------------------------------
Fiscal Year 6/30/95 6/30/94 6/30/93 6/30/92 6/30/91
Ended:
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 36,009 $ 33,483 $ 30,647 $ 27,534 $ 29,338
- -----------------------------------------------------------------------------------
Net (Loss) Income $ (1,873) $ 1,476 $ 1,560 $ 1,111 $ 1,593
- -----------------------------------------------------------------------------------
E.P.S. * $ (.39) $ .32 $ .35 $ .25 $ .34
- -----------------------------------------------------------------------------------
Total Assets $ 36,847 $ 35,705 $ 27,855 $ 27,765 $ 26,556
- -----------------------------------------------------------------------------------
Long-term Debt $ 1,240 $ 5,871 $ 387 $ 1,633 $ 147
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</TABLE>
* E.P.S. is stated as (Loss) Earnings per common share and common share
equivalent.
See Note 14 in Notes to Consolidated Financial Statements for summarized
financial data on the Company's domestic and foreign operations for fiscal
years 1995, 1994, and 1993.
See Note 15 in Notes to Consolidated Financial Statements for summarized
unaudited quarterly financial data.
5
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Net sales for fiscal 1995 were $36,009,000 compared to $33,483,000 for fiscal
1994, an increase of 8%. Domestic sales increased by $1,379,000 (or 6%) over
1994 due to higher sales to the retail jewelry market in the first half of
the year, partially a result of the Company's expanded marketing efforts.
Net sales by Harlyn's Thailand subsidiaries to unaffiliated customers
increased by $1,147,000 (or 13%) over 1994 as a weakened European economy was
offset by expansion into Middle Eastern and South American markets. The
Company's sales volume can be affected by significant fluctuations in the
price of gold as the Company's selling prices to customers are adjusted to
correspond with fluctuations in the gold price. The average gold price in
1995 was $384 per troy ounce compared to $379 in 1994, a difference which had
no material impact on sales.
Gross profit for fiscal 1995 was $12,089,000 compared to $12,931,000 in fiscal
1994. Gross profit margin for fiscal 1995 decreased from 39% to 34%. The
decrease in gross profit was primarily due to a less favorable product mix in
the United States, competitive pricing pressures and production
inefficiencies caused by bringing the new Thailand facility online.
Selling, general and administrative expenses in fiscal 1995 increased from
$9,484,000 to $10,494,000 and, as a percent of net sales, from 28% to 29%.
The increase is due primarily to higher costs associated with new marketing
and promotional programs targeting stock merchandise sales to independent
retailers and additional expenses incurred in the opening of the Thailand
facility.
In fiscal 1995, management initiated plans to reduce overhead and
administrative costs, to eliminate certain marginal product lines and improve
cash flow by disposing of inventories through alternative distribution
channels. Product lines targeted under the plan include Fashion Z, Wilshire
International and George Hoffman and Sons. In implementing these plans,
management provided a $1,555,000 charge to operations during the fourth
quarter of 1995 to reflect terminated product lines and costs associated with
utilizing alternative distribution channels to liquidate inventory.
Interest expense increased by $355,000 in fiscal 1995 due both to higher
interest rates and higher levels of borrowings.
6
<PAGE>
During fiscal 1995, the Company recorded a $1,749,000 consolidated pretax
loss. U.S. pretax losses of $2,635,000 were partially offset by $886,000 of
pretax income in Thailand. The majority of Thailand income was generated by
the Company's new subsidiary, Harlyn International, which began a three year
tax holiday in December 1994 as a Thai Board of Investment sponsored
corporation. The Company does not provide for U.S. income taxes on earnings
in Thailand because it intends to reinvest those earnings indefinitely. The
decrease in the effective tax rate is primarily the result of the tax holiday
in Thailand, the benefit derived from the U.S. pretax losses, all principally
offset by the provision for a valuation allowance against the Company's net
deferred income tax asset.
1994 COMPARED TO 1993
Net sales for fiscal 1994 were $33,483,000 compared to $30,647,000 for fiscal
1993, an increase of 9%. Domestic sales increased by $5,159,000 (or 26%)
over 1993 due to a recovery in the retail jewelry market and the domestic
economy as a whole, as well as the Company's intensified and expanded
marketing efforts. Net sales by Harlyn Thailand to unaffiliated customers
decreased by $2,323,000 (or 21%) over 1993 as a weakened European economy
affected the Company's European markets; while total net sales by Harlyn
Thailand, including sales to Harlyn U.S., decreased by $599,000 (or 4%). The
average gold price in 1994 was $379 per troy ounce compared to $347 in 1993,
which had a $600,000 positive impact on sales.
Gross profit for fiscal 1994 was $12,931,000 compared to $10,885,000 in
fiscal 1993. The increase in gross profit was primarily due to the increase
in U.S. sales volume. Gross margin increased from 36% to 39% due to greater
domestic sales of products manufactured in Thailand at more favorable labor
rates.
Selling, general and administrative expenses in fiscal 1994 increased from
$7,689,000 to $9,484,000 and, as a percent of net sales, from 25% to 28%.
The increase is due primarily to higher costs associated with new marketing
and promotional programs targeting stock merchandise sales to independent
retailers. It also included expenses of $124,000 related to the opening of
the new Thailand subsidiary, Harlyn International, and the creation of a new
venture in China. Income from operations increased by $251,000 (or 8%) from
the prior year.
Interest expense increased by $473,000 in fiscal 1994 due both to higher
interest rates and $287,000 in bank fees related to loan extensions of the
Company's U.S. borrowings.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," effective July 1, 1993. The cumulative
effect of adopting SFAS No. 109 as of July 1, 1993 and the effect on the
Company's consolidated financial statements for the year ended June 30, 1994
was not significant.
7
<PAGE>
The effective tax rate in 1994 and 1993 was 27% and 30%, respectively, as the
Thailand operation contributed substantial amounts of profit at lower tax
rates than in the United States. The decrease in the effective rate from 1993
was principally due to the availability of certain tax credit carryforwards
arising in 1994. The Company does not provide for U.S. income taxes on
earnings in Thailand because it intends to reinvest those earnings
indefinitely.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on its credit facilities, gold consignment program, and
internally generated funds to finance operations.
Under the terms of the gold consignment agreement, the Company is entitled to
lease the lesser of an aggregate of 25,000 ounces of fine gold or an
aggregate consigned gold value not to exceed $10,625,000. The Company held
22,000 ounces, or approximately $8,515,000, of gold on consignment at June
30, 1995. This gold is not included in the Company's inventory. The Company
pays the gold consignor a consignment fee calculated using the dollar
equivalent value of ounces outstanding and based on the daily Second London
Gold Fixing.
The gold consignor has a security interest in substantially all assets of the
Company. The consignment agreement requires the Company to maintain certain
covenants with respect to working capital, capital expenditures, debt service
coverage and other financial ratios. At June 30, 1995, the Company was not
in compliance with the debt service coverage covenant. Management is involved
in ongoing discussions with the gold consignor regarding an extension of their
agreement and believes such discussions will be successful. Management's plans
concerning this matter are described in Note 1 to the Consolidated Financial
Statements.
The consignment agreement is terminable by the Company or the gold consignor
upon 90 days notice. If the gold consignor were to terminate its existing
gold consignment arrangement, the Company does not believe it would
experience an interruption of its gold supply that would materially adversely
affect its business. The Company believes that other gold consignors would
be willing to enter into similar arrangements if the current gold consignor
terminates its relationship with the Company.
The Company has a credit agreement with a bank that includes a revolving line
of credit and a $5,000,000 term loan. The line of credit agreement provides
for maximum borrowings of $10,500,000 subject to a borrowing base of 65% of
eligible accounts receivable plus the lesser of 30% of inventory or
$4,000,000. Outstanding borrowings under the line of credit totaled
$9,305,000 at June 30, 1995. Approximately $8,000 was available under the
line of credit at
8
<PAGE>
June 30, 1995. Borrowings bear interest at the bank's prime rate (9.0% at
June 30, 1995) plus 0.5%. The line of credit currently expires on April 1,
1996, subject to annual renewal. The term loan requires monthly principal
payments of $83,000 plus interest at the bank's prime rate (9.0% at June 30,
1995) plus 0.5% through March 1999. On July 21, 1995, subsequent to the
fiscal 1995 year end, the bank increased the interest rate applicable to both
the line of credit and term loan to its prime rate (8.75% at July 21, 1995)
plus 1.5%.
Substantially all assets are pledged as collateral for borrowings under the
credit agreement, which is, however subordinated to the gold consignment
agreement to the extent of gold on hand. The credit agreement contains
certain restrictive covenants, including maintenance of minimum working
capital, tangible net worth, cash coverage, current ratio, debt to tangible
net worth and insurance coverage. The agreement also requires the Company to
maintain profitable operations on a semiannual basis. Additional restrictions
place limits on other encumbrances, liens and borrowings, liquidations or
mergers, loans and guarantees, payment of any dividends, retirement of stock,
fixed asset expenditures and leasing activities. At June 30, 1995, the
Company was not in compliance with certain of these covenants. Management is
involved in ongoing discussions with the bank regarding non-compliance with
the credit agreement. Management will continue its discussions with the bank
concerning an extension of its credit agreement and believes such discussions
will prove successful. Management's plans concerning this matter are described
in Note 1 to the Consolidated Financial Statements.
The Company also has a credit agreement with a bank in Thailand that includes
a revolving line of credit and a 26,108,000 Thai Baht term loan ($1,060,000
at June 30, 1995). The line of credit provides for maximum borrowings of
40,000,000 Thai Baht (approximately $1,600,000 at June 30, 1995).
Outstanding borrowings under the line of credit at June 30, 1995 totaled
30,000,000 Thai Baht (approximately $1,200,000 at June 30, 1995) and bear
interest at 14.5%. The credit agreement does not contain any restrictive
covenants and is collateralized by the manufacturing facility and
corresponding land in Thailand. The term loan requires monthly principal
payments of $22,000 plus interest at the bank's minimum lending rate (10.25%
at June 30, 1995) plus 1.0% through May 1999.
During the year ended June 30, 1995, $1,129,000 of cash was used for
operating activities compared to $2,197,000 for the comparable period of the
prior year. Cash used in investing activities increased from $2,242,000 to
$2,295,000 for the year ended June 30, 1994 and 1995, respectively. The
primary component of cash used in investing activities was the construction
of the Company's new manufacturing facility in Thailand.
9
<PAGE>
Net receivables increased by $1,349,000 from a June 30, 1994 balance of
$11,299,000 to $12,648,000 as of June 30, 1995 primarily due to increased
U.S. sales particularly sales of stock merchandise which generally carry
lengthier payment terms. Reserves for sales returns and doubtful accounts
increased from $356,000 to $725,000 due to rising levels of returned product
and a weakening of financial strength in certain U.S. jewelry retailers.
Management believes it will continue to meet its obligations on a timely
basis. Plans to reconfigure the Company's product distribution program and
terminate certain product lines will generate additional cash proceeds. In
addition, plans to further reduce overhead and decrease spending related to
certain marketing and promotional programs will assist the Company in
returning to profitability.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item 14 in
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information for Part III, Items 10, 11, 12, and 13 is hereby incorporated
by reference to the Company's Proxy Statement, which will be filed with the
commission within (120) one hundred twenty days of the close of the fiscal
year pursuant to regulation l4A.
11
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
(1) CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 13
Consolidated Balance Sheets, June 30, 1995 and 1994 14
Consolidated Statements of Operations for the Years Ended
June 30, 1995, 1994 and 1993 15
Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1995, 1994 and 1993 16
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1995, 1994 and 1993 17-18
Notes to Consolidated Financial Statements 19-29
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted inasmuch as they are not required or
because the required information is included in the financial statements or
in the notes thereto.
(3) EXHIBITS
Consent of Independent Auditors
(b) Report on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered.
12
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INDEPENDENT AUDITORS' REPORT
Board of Directors of
Harlyn Products, Inc.:
We have audited the accompanying consolidated balance sheets of Harlyn
Products, Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 1995. Our audits
also included the financial statement schedule listed in the Index at Item
14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Harlyn Products, Inc. and
subsidiaries at June 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
October 16, 1995
Los Angeles, California
13
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HARLYN PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
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<TABLE>
<CAPTION>
ASSETS (Notes 6, 7 and 13) 1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 265,000 $ 521,000
Accounts receivable - trade, less allowance for doubtful accounts
and sales returns of $725,000 and $356,000 in 1995 and 1994,
respectively (Notes 6 and 7) 12,648,000 11,299,000
Inventories - less product line termination allowance
of $1,555,000 in 1995 (Notes 1, 2, 3, 6 and 7) 15,965,000 16,922,000
Prepaid expenses and other current assets (Note 5) 1,051,000 899,000
Deferred income taxes (Notes 2 and 8) 334,000
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Total current assets 29,929,000 29,975,000
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PROPERTY, PLANT AND EQUIPMENT, NET (Notes 2, 4, 6 and 7) 5,451,000 4,752,000
DEFERRED INCOME TAXES (Notes 2 and 8) 65,000
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OTHER ASSETS (Notes 5, 6 and 9) 1,467,000 913,000
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TOTAL $36,847,000 $35,705,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 6) $10,953,000 $ 6,810,000
Current portion of long-term debt (Notes 7 and 9) 4,239,000 1,300,000
Accounts payable 2,887,000 2,943,000
Accrued liabilities 752,000 976,000
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Total current liabilities 18,831,000 12,029,000
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LONG-TERM DEBT (Notes 7 and 9) 1,240,000 5,871,000
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COMMITMENTS AND CONTINGENCIES (Notes 6 and 13)
SHAREHOLDERS' EQUITY (Notes 5, 10, 11 and 13):
Preferred stock, $1 par value; 1,000,000 shares authorized; none issued
Common stock, $.10 par value; 10,000,000 shares authorized; 4,753,284
shares in 1995 and 4,484,533 shares in 1994 issued and outstanding 475,000 448,000
Additional paid-in capital 2,413,000 1,596,000
Retained earnings 13,888,000 15,761,000
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Total shareholders' equity 16,776,000 17,805,000
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TOTAL $36,847,000 $35,705,000
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</TABLE>
See accompanying notes to consolidated financial statements.
14
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HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
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<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
NET SALES (Notes 2 and 14) $36,009,000 $33,483,000 $30,647,000
COST OF SALES (Note 5) 23,920,000 20,552,000 19,762,000
----------- ----------- -----------
GROSS PROFIT 12,089,000 12,931,000 10,885,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Notes 5 and 9) 10,494,000 9,484,000 7,689,000
PRODUCT LINE TERMINATION CHARGE
(Note 1) 1,555,000
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INCOME FROM OPERATIONS 40,000 3,447,000 3,196,000
INTEREST EXPENSE (Notes 6 and 7) 1,789,000 1,434,000 961,000
----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (1,749,000) 2,013,000 2,235,000
PROVISION FOR INCOME TAXES
(Notes 2 and 8) 124,000 537,000 675,000
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NET (LOSS) INCOME $(1,873,000) $ 1,476,000 $ 1,560,000
----------- ----------- -----------
----------- ----------- -----------
(LOSS) EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT
(Notes 2 and 12) $ (0.39) $ 0.32 $ 0.35
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
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<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992 4,425,247 $443,000 $1,420,000 $12,725,000 $14,588,000
Redemption of common stock
(Note 5) (32,246) (4,000) (95,000) (99,000)
Net income 1,560,000 1,560,000
--------- -------- ---------- ----------- -----------
BALANCE, JUNE 30, 1993 4,393,001 439,000 1,325,000 14,285,000 16,049,000
Common stock issued for
services 4,000 14,000 14,000
Common stock issued upon
exercise of options 87,532 9,000 257,000 266,000
Net income 1,476,000 1,476,000
--------- -------- ---------- ----------- -----------
BALANCE, JUNE 30, 1994 4,484,533 448,000 1,596,000 15,761,000 17,805,000
Common stock issued upon
exercise of options 54,688 5,000 148,000 153,000
Common stock issued upon
exercise of warrants 214,063 22,000 540,000 562,000
Income tax benefit from
exercise of warrants 129,000 129,000
Net (loss) (1,873,000) (1,873,000)
--------- -------- ---------- ----------- -----------
BALANCE, JUNE 30, 1995 4,753,284 $475,000 $2,413,000 $13,888,000 $16,776,000
--------- -------- ---------- ----------- -----------
--------- -------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,873,000) $ 1,476,000 $ 1,560,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for losses on accounts receivable 581,000 211,000 118,000
Provision for product line terminations 1,555,000
Depreciation and amortization 1,559,000 1,900,000 1,739,000
Other 96,000 14,000
Deferred income taxes 399,000 (125,000) (184,000)
Changes in operating assets and liabilities:
Accounts receivable (1,930,000) (2,404,000) (854,000)
Inventories (1,213,000) (4,867,000) (276,000)
Prepaid expenses and other current assets (23,000) 2,000 (209,000)
Accounts payable (56,000) 1,602,000 282,000
Accrued liabilities (224,000) (6,000) 408,000
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,129,000) (2,197,000) 2,584,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,260,000) (2,197,000) (858,000)
Other assets (35,000) (45,000) 65,000
----------- ----------- -----------
Net cash used in investing activities (2,295,000) (2,242,000) (793,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments) 4,142,000 (1,118,000) (791,000)
Additions to long-term debt 7,182,000
Repayments of long-term debt (1,689,000) (1,462,000) (1,246,000)
Proceeds from exercise of options and warrants 715,000 266,000
Redemption of common stock (99,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,168,000 4,868,000 (2,136,000)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
17
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
NET CHANGE IN CASH AND CASH EQUIVALENTS $ (256,000) $ 429,000 $(345,000)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 521,000 92,000 437,000
---------- ---------- ---------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 265,000 $ 521,000 $ 92,000
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $1,724,000 $1,397,000 $ 540,000
Income taxes $ 216,000 $ 906,000 $ 331,000
</TABLE>
During the year ended June 30, 1995, the Company exchanged inventory in the
amount of $615,000 for an equivalent amount of future benefits under a barter
arrangement (see Note 9).
Stock warrants for 214,063 shares of common stock were exercised during the
year ended June 30, 1995 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 consolidated financial statements.
(Concluded)
18
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------
1. GENERAL
Harlyn Products, Inc. (the "Company") is a California
corporation engaged in manufacturing and selling gold
and silver jewelry to department stores and retail
jewelers throughout the United States. The Company also
manufactures and sells jewelry through its Thailand
subsidiary to customers worldwide, primarily in Europe
and Japan.
The Company incurred a $1,873,000 net loss for the year
ended June 30, 1995. In addition, as discussed in Notes
6 and 13, there were violations of certain financial
covenants of the United States bank credit agreement for
the Company's revolving line of credit and term loan and
also a violation of the debt service coverage covenant of
the gold consignment agreement.
The loss was caused principally by the Company's decision
to reconfigure its product distribution program and to
terminate certain product lines. A $1,555,000 reserve
was charged to the fourth quarter of 1995 to reflect
anticipated costs to be incurred in implementing this
program. Also, a deferred tax asset valuation allowance
of $1,201,000 was established in the fourth quarter of 1995
as described in Note 8.
Management has initiated plans to reduce overhead and
certain administrative costs to improve profitability.
These plans consist principally of a decrease in certain
marketing and promotional programs which proved unsuccessful
during 1995. Management will continue its discussions with
its bank and gold consignor to extend these agreements and
believes the discussions will be successful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its
subsidiaries, Harlyn (Thailand) Company Limited
("Thailand"), Harlyn International Limited
("International"), Wilshire International, Inc.
("Wilshire") and George Hoffman Jewelry Manufacturing,
Inc. ("Hoffman"). All significant intercompany balances
and transactions have been eliminated in consolidation.
19
<PAGE>
SALES - Sales are recognized when products are shipped
less allowances for sales returns, based upon
management's assessment of potential returns.
CASH EQUIVALENTS - The Company considers all highly
liquid investments purchased with a maturity of three
months or less to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of
cost or market using the first-in, first-out method of
accounting.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and
equipment are stated at cost. Depreciation and
amortization are being provided for principally on the
straight-line method over the estimated useful lives of
the assets (see Note 4). Leasehold improvements are
amortized over the related lease term. Certain product
samples, which have a resale value, are stated at the
lower of cost or market.
INCOME TAXES - The Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes," effective July 1, 1993. SFAS No. 109
requires the liability method of accounting for deferred
income taxes and the recognition of net deferred tax
assets subject to an ongoing assessment of
realizability. The cumulative effect of adopting the
Statement as of July 1, 1993 and the effect on the
Company's consolidated financial statements for the
years ended June 30, 1995 and 1994 was not significant.
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting and
income tax purposes.
FOREIGN CURRENCY TRANSLATION - The financial position
and results of operations of Thailand and International
are measured using the local currency (Baht) as its
functional currency. Assets and liabilities have been
translated at current exchange rates, and related
revenues and expenses have been translated at average
exchange rates in effect for the period. The cumulative
effect of the foreign currency translation is not
material.
EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT -
Earnings per common share and common share equivalent
are computed based upon the weighted average number of
shares of common stock and common share equivalents
assumed outstanding during the related periods.
CONCENTRATIONS OF CREDIT RISK - The Company's financial
instruments that are exposed to concentration of credit
risk consist primarily of trade accounts receivable.
These amounts result primarily from sales to
department stores and retail jewelers. Sales to one
customer accounted for 10% of sales in 1995. Trade
receivables from this customer totaled $444,000 as of
June 30, 1995. Sales to another customer accounted for
11% and 12% of sales in 1994 and 1993, respectively.
Trade receivables from this customer totaled $487,000
as of June 30, 1994. Ongoing credit evaluations of its
customers' financial condition are performed by the
Company and an allowance for doubtful accounts is
maintained.
RECLASSIFICATIONS - Certain reclassifications have been
made to the prior years financial statements to conform
with the current year presentation.
20
<PAGE>
3. INVENTORIES
At June 30, 1995 and 1994, inventories consisted of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Raw materials $ 3,508,000 $ 2,507,000
Work-in-process 3,010,000 4,684,000
Finished goods 9,447,000 9,731,000
----------- -----------
Total $15,965,000 $16,922,000
----------- -----------
----------- -----------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
At June 30, 1995 and 1994, property, plant and equipment consisted of the
following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives 1995 1994
<S> <C> <C> <C>
Land $ 468,000 $ 461,000
Machinery and equipment 5 2,016,000 2,234,000
Building and improvements 5-20 4,161,000 2,428,000
Furniture and fixtures 5 2,732,000 2,521,000
Product displays and samples 3-5 7,554,000 6,769,000
Construction in progress 227,000 853,000
----------- -----------
Total 17,158,000 15,266,000
Less accumulated depreciation and
amortization 11,707,000 10,514,000
----------- -----------
Property, plant and equipment, net $ 5,451,000 $ 4,752,000
----------- -----------
----------- -----------
</TABLE>
Depreciation expense for the years ended June 30, 1995, 1994 and 1993 was
$1,559,000, $1,900,000 and $1,739,000, respectively.
5. RELATED PARTY TRANSACTIONS
The Company leases its U.S. manufacturing and administrative office
facilities on a month-to-month basis. Three of the facilities are
owned by a revocable trust created by the Chairman of the Board of
Directors, and one is owned by an irrevocable trust for the benefit of
the children of the Chairman (the "Lessors"). Total rent expense
related to the above leases, net of taxes, insurance and maintenance
expenses, was $324,000 in 1995 and 1994 and $329,000 in 1993.
As of June 30, 1995, $76,000 was receivable from one of the Lessors for
reimbursement of earthquake construction costs and is repayable in
installments of $5,000 per month. Accordingly, $60,000, the current
portion, is included in prepaid expenses and other current assets, and
$16,000 is included in other assets at June 30, 1995. Outstanding
balances accrue interest at the Company's short-term borrowing rate. In
1993, the Company redeemed 32,246 shares of stock owned by a partnership
created by the Chairman for consideration of $99,000.
21
<PAGE>
During 1995, 1994 and 1993, the Company incurred printing
expenses of $618,000, $533,000 and $263,000, respectively, from
companies controlled by the Chairman.
6. BANK LINE OF CREDIT
The Company has a credit agreement with a bank that includes a
revolving line of credit and a $5,000,000 term loan (see Note 7).
The line of credit agreement provides for maximum borrowings of
$10,500,000 subject to a borrowing base of 65% of eligible
accounts receivable plus the lesser of 30% of inventory or
$4,000,000. Outstanding borrowings under the line of credit
totaled $9,305,000 at June 30, 1995. Approximately $8,000 is
available under the line of credit at June 30, 1995. The line
of credit is used to fund working capital requirements, and
borrowings bear interest at the bank's prime rate (9% at
June 30, 1995) plus 0.5%. The line of credit expires on April 1, 1996.
As of July 21, 1995 the interest rates for the line of credit and term
loan were amended to the bank's prime rate (8.75% at July 21, 1995) plus
1.5%.
The line of credit includes a subfeature which provides for the
issuance of commercial letters of credit, not to exceed an
aggregate at any time of $100,000. Letters of credit may be for
periods of up to 180 days with expiration dates no later than
April 1, 1996. There were no outstanding borrowings under
letters of credit at June 30, 1995.
The credit agreement contains certain restrictive covenants,
including maintenance of minimum working capital, tangible net
worth, cash coverage, current ratio, debt to tangible net worth
and insurance coverage. The agreement also requires the Company
to maintain profitable operations on a semiannual basis.
Additional restrictions place limits on other encumbrances, liens
and borrowings, liquidations or mergers, loans and guarantees,
payment of any dividends, retirement of stock, fixed asset
expenditures and leasing activities. At June 30, 1995, the
Company was not in compliance with certain of these covenants.
Management is involved in ongoing discussions with the bank regarding
non-compliance with the credit agreement. Management's plans
concerning this matter are further described in Note 1.
Substantially all assets are pledged as collateral for borrowings
under the credit agreement which is, however, subordinated to the
gold consignment agreement referred to in Note 13 to the extent
of the consigned gold on hand.
The Company also has a credit agreement with a bank in Thailand
that includes a revolving line of credit and a 26,108,000 Thai
Baht term loan ($1,060,000 at June 30, 1995) (see Note 7). The
line of credit provides for maximum borrowings of 40,000,000 Thai
Baht (approximately $1,600,000 at June 30, 1995). Outstanding
borrowings under the line of credit at June 30, 1995 totaled
30,000,000 baht (approximately $1,200,000) and bear interest at
14.5%. The credit agreement does not contain any restrictive
covenants and is collateralized by the manufacturing facility and
related land in Thailand.
22
<PAGE>
7. LONG-TERM DEBT
At June 30, 1995 and 1994, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Term loan payable to bank, due in monthly principal
payments of $83,000 plus interest at the bank's prime
rate (9.0% at June 30, 1995) plus 1.5% through March
1999 (see Note 6) $3,917,000 $4,917,000
Term loan payable to a foreign bank, due in monthly principal
payments of $22,000 plus interest at the bank's minimum
lending rate, (10.25% at June 30, 1995) plus 1.0% through
May 1999 (see Note 6) 1,060,000 1,192,000
Loan from irrevocable trusts bearing interest at 7.25%
annually (see Note 9) 410,000 815,000
Other 92,000 247,000
---------- ----------
Total 5,479,000 7,171,000
Less current portion 4,239,000 1,300,000
---------- ----------
Long-term debt $1,240,000 $5,871,000
---------- ----------
---------- ----------
</TABLE>
The entire $3,917,000 term loan payable to the bank was classified as
short-term due to the Company's non-compliance with certain financial
covenants contained in the Company's credit agreement with the bank as
described in Note 6.
Accordingly, the annual future principal payment maturities on long-term
debt are as follows: 1996, $4,239,000, 1997, $295,000; 1998,$287,000;
1999, $248,000 and thereafter $410,000.
8. INCOME TAXES
The provision for income taxes consisted of the following for the
years ended June 30:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $(168,000) $ 382,000 $ 260,000
State (4,000) 121,000 54,000
Foreign (103,000) 159,000 545,000
--------- --------- ---------
Total current (275,000) 662,000 859,000
Deferred 399,000 (125,000) (184,000)
--------- --------- ---------
Provision for income taxes $ 124,000 $ 537,000 $ 675,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
Deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes, and (b) operating loss and tax credit
carryforwards. The following represents the tax effects of
significant items comprising the Company's deferred income taxes
as of June 30, 1995 and 1994. A valuation allowance is provided
when it is more likely than not that some or all of the deferred
tax assets will not be realized. As of June 30, 1995, the Company
has a $1,201,000 net deferred tax asset, however, the Company
provided a valuation allowance to offset the net deferred tax
asset since the future benefit of these assets is not assured.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Difference in book and tax depreciation $ (157,000) $(216,000)
Provision for product line terminations 673,000
Accruals for bad debts and sales returns 230,000 123,000
Profit in intercompany inventory 38,000 100,000
Accrued and deferred compensation 186,000 160,000
Tax credit carryforwards 203,000 87,000
Foreign organizations costs 45,000 45,000
State income taxes (73,000) 76,000
Other 56,000 24,000
Valuation allowance (1,201,000)
----------- ---------
Total $ 0 $ 399,000
----------- ---------
----------- ---------
</TABLE>
At June 30, 1995, the Company had an approximate $600,000 net
operating loss carryforward ("NOL") for federal tax purposes
that expires on June 30, 2010.
The differences between the actual provision for income taxes and
that computed by applying the statutory federal income tax rate
of 34% were as follows for the years ended June 30:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax computed on income at federal statutory rate $(595,000) $ 684,000 $ 760,000
State franchise tax, net of federal tax benefit (160,000) 65,000 57,000
Decreases in taxes resulting from foreign income
subject to tax at other than federal statutory rate (405,000) (116,000) (151,000)
Benefit of tax credit carryforwards (87,000)
Other 83,000 (9,000) 9,000
Valuation allowance 1,201,000
--------- --------- ---------
Accrual (benefit) provision for income taxes $ 124,000 $ 537,000 $ 675,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company intends to invest the undistributed earnings of its
foreign subsidiary indefinitely. At June 30, 1995, the
cumulative amount of undistributed earnings on which the Company
has not recognized United States income taxes is approximately
$5,635,000.
24
<PAGE>
9. OTHER ASSETS
At June 30, 1995 and 1994, other assets include $561,000 and
$677,000 of advances made by the Company to irrevocable trusts,
established in June 1990 for the purpose of providing retirement
benefits to certain executive officers and employees. The rights
of the participants to retirement benefits are limited to the
assets of the individual trusts (principally life insurance
policies), against which the Company has priority claims for all
advances made by it. Such advances are collateralized by the
cash surrender value of the life insurance policies. The Company
has no future obligations to make additional advances or to pay
retirement benefits to the participants. The Company is,
however, obligated to transfer to the individual trusts any
income tax savings actually realized by it as a result of the
trusts' being included in consolidated tax filings of the
Company. Borrowings of $410,000 against the cash surrender value
of the related life insurance policies are included in long-term
debt in the accompanying consolidated balance sheet (see Note 7)
as of June 30, 1995.
During 1995, the Company entered into a barter agreement whereby
it exchanged $615,000 of its inventory in exchange for barter
credits to be used for advertising, travel and promotional
services. The credits, which expire in July 1999, are valued at
the Company's cost of the inventory exchanged, which approximated
its fair market value. As of June 30, 1995 and 1994 barter
credits of $603,000 and $53,000 are included in other assets in
the accompanying consolidated balance sheets.
Under the terms of the agreement, the Company is required to pay
cash equal to a negotiated amount of the bartered services and to
use the barter credits to pay the balance. These credits are
charged to expense as they are used. During the year ended June
30, 1995, the Company charged $16,000 to selling, general and
administrative expenses for barter credits used. The Company
assesses the recoverability of barter credits periodically.
Factors considered in evaluating the recoverability include
management's plans with respect to advertising and other
expenditures for which barter credits can be used. Any
impairment losses are charged to operations as they are
determined. During the year ended June 30, 1995 the Company
charged $80,000 to selling, general and administrative expenses
for such impairment losses.
10. SHAREHOLDERS' EQUITY
At June 30, 1995, warrants to purchase an aggregate of 217,190
shares held by members of the Company's Board of Directors,
expiring in 1999, were exercisable at prices ranging from $2.04
to $4.38 per share, the fair market values on dates of grant.
11. STOCK OPTION PLAN
The Company has a qualified incentive stock option plan that
authorizes the issuance to its key employees of up to 483,399
options to purchase shares of common stock of the Company at a
price which may not be less than 100% of fair market value on the
date of the grant. The options are generally exercisable in
equal annual installments during the period from the date of
grant until the option expires, which is generally five years, to
a maximum of ten years.
25
<PAGE>
The following is a summary of activity in the plan for the three
years ended June 30, 1995:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
<S> <C> <C>
Outstanding - June 30, 1992 263,281 2.72 - 3.40
Granted 65,000 2.50 - 3.25
-------
Outstanding - June 30, 1993 328,281 2.50 - 3.40
Granted 165,000 4.38 - 4.81
Exercised (87,532) 2.72 - 3.40
Canceled (22,186) 2.72 - 3.40
-------
Outstanding - June 30, 1994 383,563 2.50 - 4.81
Granted 26,875 2.50 - 3.00
Exercised (54,688) 2.80
Canceled (33,125) 2.80 - 3.40
-------
Outstanding - June 30, 1995 322,625 2.50 - 4.81
-------
-------
</TABLE>
At June 30, 1995, 115,750 options were exercisable at prices
ranging from $2.50 to $4.81 per share.
12. EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Earnings per common share and common share equivalent are
computed using the weighted average number of common shares
outstanding during the period, including common share equivalents
arising from the assumed conversion of any outstanding dilutive
stock options and warrants. Proceeds from the exercise of such
options and warrants are assumed to be used to repurchase the
Company's common stock at the average market price ("treasury
stock" method) for each of the three years during the period
ended June 30, 1995. Weighted average common shares and common
share equivalents outstanding were computed as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Average of common shares outstanding 4,727,000 4,409,000 4,415,000
Average of dilutive options and warrants
outstanding 354,000 681,000 297,000
Shares assumed to be repurchased under
the treasury stock method (252,000) (487,000) (255,000)
--------- --------- ---------
Average of common shares and common
share equivalents outstanding 4,829,000 4,603,000 4,457,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
Fully diluted earnings per share for each year have not been
presented, as the computation would dilute the per share amounts
by less than 3%, which is not considered to be significant.
13. COMMITMENTS AND CONTINGENCIES
BONUS PLAN - The Company has a bonus plan for key employees.
The plan provides for performance-based bonuses aggregating 12%
of pre-tax profits in excess of a maximum of 25% of shareholders'
equity at the start of the year. No amounts were charged to
expense in 1995, 1994 and 1993.
26
<PAGE>
CONSIGNMENT INVENTORY - The Company has a consignment agreement
with a gold consignor, providing for a maximum aggregate
consignment of 25,000 fine troy ounces of gold. At June 30, 1995
and 1994, the Company had on consignment 22,000 and 21,472 troy
ounces, respectively, of gold from the gold consignor. This gold
is not included in inventories on the consolidated balance
sheets. As gold is manufactured into finished products and sold,
the Company pays the prevailing gold market price for the gold
utilized. The fair market value of the consigned gold
approximated $8,515,000 and $8,340,000, at June 30, 1995 and
1994, respectively. The gold consignors have a security interest
in substantially all of the assets of the Company. The Company
pays to the gold consignors a consignment fee based on the dollar
equivalent value of ounces outstanding, computed based on the
Second London Gold Fixing, as defined in the agreement.
The consignment agreement requires the Company to maintain
certain covenants with respect to working capital, capital
expenditures, debt service coverage and other financial ratios.
At June 30, 1995, the Company was not in compliance with the
covenant for the maintenance of debt service coverage.
Management is involved in ongoing discussions with the gold
consignor and anticipates a positive outcome, however, the
Company has not received a waiver regarding such non-compliance.
Management's plans concerning this matter are described in Note 1.
OPERATING LEASES - The Company leases its principal U.S.
operating facilities from related parties (see Note 5) under
month-to-month leases.
The Company also leases certain Thailand facilities and certain
equipment under noncancelable operating leases expiring through
1999. Future minimum rental payments under noncancelable
operating leases are as follows: 1996, $44,000; 1997, $24,000;
1998, $16,000 and 1999, $7,000.
Rent expense relating to noncancelable operating leases was
$51,000, $82,000 and $155,000 in 1995, 1994 and 1993,
respectively.
POTENTIAL ASSESSMENT - The U.S. Customs Service has made claims
for certain custom duties and penalties against the Company. The
Company has established a reserve for what it believes to be its
potential ultimate liability regarding such claims and is
continuing to work with the U.S. Customs Service to resolve such
claims. The Company believes that the reserves should be adequate
for the ultimate outcome with regard to such claims, and that the
effect of any additional customs duties and penalty, if any, will
not be material to the consolidated financial statements.
27
<PAGE>
14. GEOGRAPHIC INFORMATION
The following summarizes the Company's domestic and foreign
operations for each of the three years ended June 30, 1995 and
identifiable assets as of June 30, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
UNITED
1995 STATES THAILAND ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers $26,215,000 $ 9,794,000 $36,009,000
Intercompany sales 11,615,000 $(11,615,000)
----------- ----------- ------------ -----------
Net sales $26,215,000 $21,409,000 $(11,615,000) $36,009,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Income (loss) before income taxes $(2,635,000) $ 1,011,000 $ (125,000) $(1,749,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Identifiable assets $37,256,000 $29,034,000 $(29,443,000) $36,847,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
1994
Net sales to unaffiliated customers $24,836,000 $ 8,647,000 $33,483,000
Intercompany sales 5,731,000 $ (5,731,000)
----------- ----------- ------------ -----------
Net sales $24,836,000 $14,378,000 $ (5,731,000) $33,483,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Income (loss) before income taxes $ 1,066,000 $ 456,000 $ 491,000 $ 2,013,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Identifiable assets $32,536,000 $15,665,000 $(12,496,000) $35,705,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
1993
Net sales to unaffiliated customers $19,677,000 $10,970,000 $30,647,000
Intercompany sales 4,007,000 $ (4,007,000)
----------- ----------- ------------ -----------
Net sales $19,677,000 $14,977,000 $ (4,007,000) $30,647,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Income (loss) before income taxes $ 742,000 $ 1,967,000 $ (474,000) $ 2,235,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Identifiable assets $24,746,000 $ 9,935,000 $ (6,826,000) $27,855,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
28
<PAGE>
15. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
FISCAL 1995 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
<S> <C> <C> <C> <C>
Net sales $9,044,000 $11,956,000 $6,324,000 $ 8,685,000
Gross profit $3,463,000 $ 3,795,000 $2,446,000 $ 2,385,000
Net income (loss) $ 529,000 $ 795,000 $ (232,000) $(2,965,000)
Earnings per share $ 0.11 $ 0.17 $ (0.05) $ (0.62)
Fiscal 1994
Net sales $6,449,000 $12,080,000 $6,790,000 $ 8,164,000
Gross profit $2,817,000 $ 4,504,000 $2,753,000 $ 2,857,000
Net income (loss) $ 345,000 $ 1,058,000 $ 126,000 $ (53,000)
Earnings per share $ 0.08 $ 0.23 $ 0.03 $ (0.01)
</TABLE>
As discussed in Note 1, management has initiated plans to eliminate
certain marginal product lines, improve cash flow by disposing of
inventories through alternative distribution channels and reduce
overhead and administrative expenses. In implementing these plans,
management provided a $1,555,000 charge to operations during the fourth
quarter of 1995 to reflect terminated product lines and costs associated
with utilizing alternative distribution channels to liquidate certain
inventory. Additionally, as described in Note 8, the Company provided a
$1,201,000 valuation allowance against its net deferred income tax asset
at June 30, 1995.
During the three months ended June 30, 1994, the Company incurred $124,000
of start-up costs associated with a new venture in China and new operations
in Thailand. Additionally, selling, general and administrative expenses
for the three months ended June 30, 1994 included an increase of $600,000,
compared to the same quarter in the previous year, of selling and marketing
expenses related to the initiation of marketing and promotional programs.
* * * * * *
29
<PAGE>
HARLYN PRODUCTS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGES TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales
returns:
Year ended June 30, 1995 $356,000 $ 581,000 $(212,000)(a) $ 725,000
-------- ---------- --------- ----------
-------- ---------- --------- ----------
Year ended June 30, 1994 $350,000 $ 211,000 $(205,000)(a) $ 356,000
-------- ---------- --------- ----------
-------- ---------- --------- ----------
Year ended June 30, 1993 $400,000 $ 118,000 $(168,000)(a) $ 350,000
-------- ---------- --------- ----------
-------- ---------- --------- ----------
Product line termination
allowance -
Year ended June 30, 1995 $ 0 $1,555,000 $ 0 $1,555,000
-------- ---------- --------- ----------
-------- ---------- --------- ----------
</TABLE>
(a) Write-off of uncollectible accounts, net of recoveries.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange 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
-----------------------
Harold Weisbrod
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Harold Weisbrod /s/ William Hood
- ----------------------------- -----------------------------
Harold Weisbrod William Hood, Vice Chairman,
Chairman of the Board Chief Executive Officer, and Director
/s/ Edward Dudziak /s/ Randall Monson
- ----------------------------- -----------------------------
Edward Dudziak Randall Monson
President, Chief Operating Chief Financial Officer
Officer, and Director
/s/ James Freedman
- ----------------------------- -----------------------------
Roger Kuppinger James Freedman
Director Director
- -----------------------------
Barbara Rodriguez
Director October 16, 1995
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Harlyn Products, Inc.:
We consent to the incorporation by reference in Registration Statement No.
33-21366 on Form S-8 of Harlyn Products, Inc. of our report dated October 16,
1995 appearing in this Annual Report on Form 10-K of Harlyn Products, Inc.
for the year ended June 30, 1995
DELOITTE & TOUCHE LLP
Los Angeles, California
October 16, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 257,000
<SECURITIES> 8,000
<RECEIVABLES> 13,373,000
<ALLOWANCES> 725,000
<INVENTORY> 15,965,000
<CURRENT-ASSETS> 29,929,000
<PP&E> 17,158,000
<DEPRECIATION> 11,707,000
<TOTAL-ASSETS> 36,847,000
<CURRENT-LIABILITIES> 18,831,000
<BONDS> 0
<COMMON> 475,000
0
0
<OTHER-SE> 16,301,000
<TOTAL-LIABILITY-AND-EQUITY> 36,847,000
<SALES> 36,009,000
<TOTAL-REVENUES> 36,009,000
<CGS> 23,920,000
<TOTAL-COSTS> 23,920,000
<OTHER-EXPENSES> 11,468,000
<LOSS-PROVISION> 581,000
<INTEREST-EXPENSE> 1,789,000
<INCOME-PRETAX> (1,749,000)
<INCOME-TAX> 124,000
<INCOME-CONTINUING> (1,873,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,873,000)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
