<PAGE>
FORM 10-Q/A
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 MARCH 31, 1996
--------------
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 March 31, 1996
- ----- -----------------------------
Common Stock. $.10 par value 4,753,284
<PAGE>
HARLYN PRODUCTS, INC.
---------------------
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL STATEMENTS:
Balance Sheets March 31, 1996 and June 30, 1995 3
Statements of Operations Three Months and
Six Months Ended March 31, 1996 and 1995 4
Statements of Cash Flows Nine Months Ended
March 31, 1996 and 1995 5-6
Notes to Financial Statements Nine Months Ended
March 31, 1996 and 1995 7-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II - OTHER INFORMATION AND SIGNATURES 13
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
2
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
--------- ----------
1996 1995
--------- ----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $439,000 $265,000
Accounts receivable, net 5,082,000 12,648,000
Inventories 15,525,000 15,965,000
Prepaid expenses and other current assets 334,000 1,051,000
------------ ------------
Total current assets 21,380,000 29,929,000
Land, building & equipment, net 4,840,000 5,451,000
Other assets 286,000 1,467,000
----------- -----------
$26,506,000 $36,847,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Bank line of credit $8,860,000 $10,953,000
Current portion of long term debt and capital lease obligations 3,476,000 4,239,000 41
Accounts payable and accrued expenses 4,442,000 3,639,000
------------ ------------
Total current liabilities 16,778,000 18,831,000
Long term debt, net of current portion 571,000 1,240,000
------------ ------------
Total liabilities 17,349,000 20,071,000
------------ ------------
Shareholders' equity:
Common stock: $.10 par, authorized 10,000,000 shares;
issued 4,753,284 at March 31, 1996 and June 30, 1995 475,000 475,000
Additional paid-in capital 2,413,000 2,413,000
Retained earnings 6,269,000 13,888,000
----------- -----------
Total shareholders' equity 9,157,000 16,776,000
----------- -----------
$26,506,000 $36,847,000
=========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 4,592,000 $6,324,000 $20,542,000 $27,324,000
Cost of sales 3,781,000 3,878,000 15,187,000 17,620,000
----------- ---------- ----------- -----------
Gross profit 811,000 2,446,000 5,355,000 9,704,000
Product line termination charge 2,500,000 0 2,500,000 0
Selling, general & administrative 3,916,000 2,599,000 9,266,000 7,627,000
----------- ---------- ----------- -----------
Income (loss) from operations (5,605,000) (153,000) (6,411,000) 2,077,000
Interest expense 427,000 458,000 1,503,000 1,250,000
----------- ---------- ----------- -----------
Income (loss) before income taxes (6,032,000) (611,000) (7,913,000) 827,000
Benefit for income taxes 0 (379,000) (295,000) (264,000)
----------- ---------- ----------- -----------
Net income (loss) ($6,032,000) ($232,000) ($7,619,000) $ 1,091,000
=========== ========== =========== ===========
Net income (loss) per share ($1.27) ($0.05) ($1.60) $0.23
=========== ========== =========== ===========
Average number of shares &
equivalent shares outstanding 4,753,284 4,828,995 4,753,284 4,831,322
=========== ========== =========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($7,619,000) $1,091,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 1,055,000 1,145,000
Provision for product line termination 2,500,000 -
Provision for losses on trade receivables 691,000 -
Provision for impairment of other assets 651,000 -
Changes in operating assets & liabilities:
Accounts receivable 6,875,000 (1,504,000)
Inventories (2,060,000) (311,000)
Prepaid expenses and other current assets 717,000 (9,000)
Accounts payable and accrued expenses 803,000 (1,643,000)
------------ ------------
Net cash provided by (used for) operating activities 3,613,000 (1,231,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (444,000) (1,954,000)
Other assets 530,000 37,000
------------ ------------
Net cash provided by (used for) investing activities 86,000 (1,917,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit agreement (2,856,000) 3,570,000
Repayments/retirements of long term debt (669,000) (1,262,000)
Proceeds from exercise of warrants - 714,000
------------ ------------
Net cash (used for) provided by financing activities (3,525,000) 3,022,000
------------ ------------
NET CHANGE IN CASH & CASH EQUIVALENTS 174,000 (126,000)
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 265,000 521,000
------------ ------------
CASH & CASH EQUIVALENTS-END OF PERIOD $439,000 $395,000
============ ============
</TABLE>
(Continued)
See notes to financial statements.
5
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $1,271,000 $1,216,000
Income taxes 4,000 225,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended March 31, 1995, the Company exchanged inventory
in the amount of $615,000 for an equal amount of future benefit under a barter
agreement. As of March 31, 1996, management determined there to be a permanent
impairment in the remaining value of this asset in the amount of $503,000, as
continued utilization could not be determined to be probable.
Stock warrants for 214,063 shares of common stock were exercised during the
nine months ended March 31, 1995, at prices ranging from $2.04 to $2.80. The
related income tax benefit increased additional paid in capital by $129,000.
6
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation:
The consolidated financial statements are unaudited and include the
financial position, results of operations, and cash flows of Harlyn Products,
Inc. (USA) and its subsidiaries (collectively, the "Company"). All intercompany
transactions, accounts and balances have been eliminated. In order to improve
operating results, the Company has determined that it must refocus and align its
operating priorities to concentrate on a new marketing strategy emphasizing high
margin special order jewelry and an immediate reduction of its inventory of low
margin product. Management must also finalize arrangements with its bank and
gold lessor. If the Company is unable to implement its business turnaround
strategy to return to profitability and finalize arrangements with its bank and
gold lessor to obtain alternative sources of funds, there would exist a concern
about the Company's ability to remain as a going concern.
The accompanying consolidated financial statements are unaudited, but in
the opinion of management of the Company contain all adjustments necessary to
present fairly the financial position at March 31, 1996, and the results of its
operations for the three months and nine months ended March 31, 1996 and 1995.
Certain information and footnote disclosures normally included in the financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that information presented therein is not misleading. For
further information, refer to the financial statement and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 as filed with the Securities and Exchange Commission. The results
of operations for the three and nine months ended March 31, 1996 are not
necessarily indicative of the results of operations to be expected for the
fiscal 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.
NOTE 2 - Gold Consignment Agreement:
The Company maintained a gold lease arrangement ("the gold agreement"),
pursuant to which it held gold on consignment to meet customer orders. Under
the terms of gold agreement, the Company was entitled to lease an aggregate of
25,000 ounces of fine gold or an aggregate consigned gold value not to exceed
$10,625,000, whichever was less. The Company held 18,825 and 22,000 ounces of
gold on consignment at March 31, 1996 and June 30, 1995, respectively. Consigned
gold is not included in the Company's inventory. The gold consignor has a
secondary security interest in substantially all assets of the Company. The
gold agreement expired on January 31, 1996, and the Company is in violation of
certain covenants of the gold agreement. Management is involved in ongoing
discussions with the consignor regarding continuation of the gold agreement.
While the gold consignor is currently extending accommodations to the Company,
no assurances can be given that such accommodations will continue or an
extension of such arrangement will be entered into. (See Liquidity and Capital
Resources.)
7
<PAGE>
NOTE 3 - Bank Credit Agreements:
The Company previously had an agreement with its United States bank which
provided a line of credit of $10,500,000 and long-term debt of $5,000,000. The
Company was not in compliance with certain financial covenants of agreement. At
March 31, 1996, the Company had $7,009,000 and $3,167,000 outstanding,
respectively, against the line of credit and long-term debt agreements.
Substantially all of the Company's assets were pledged against these loans. The
domestic bank has currently extended accommodations to the Company and is in
ongoing discussions to extend the agreement. No assurances can be given that
such accommodations will continue or an extension of such arrangement will be
entered into.
The Company has borrowing arrangements with two banks in Thailand. The
primary lender has provided facilities totaling $4,000,000 as of March 31, 1996
against which the Company has borrowed $2,683,000. The Company has pledged
against these loans its land, building and equipment in Bangkok, which, at March
31, 1996, had a net book value of $2,975,000. The bank has also been provided
with personal and corporate guarantees in connection with these loans. An issue
has arisen with respect to the documentation that the Company has supplied to
the bank in connection with one of these loans. In order to correct this
situation, the Company has met with the bank and is in the process of replacing
earlier inaccurate documentation that had been supplied to the bank with
documentation concerning existing purchase orders that had been issued by the
Company to its Thailand subsidiary during the period covered by the bank loan.
In addition, the Company had borrowed $205,000 from another Thailand bank as at
March 31, 1996. (See Liquidity and Capital Resources.)
8
<PAGE>
NOTE 4 - Income Taxes:
The benefits for income taxes are based on the effective annual tax rates
expected for the related years. A tax benefit related to losses in the United
States for the three and nine months ended March 31, 1996 was offset by a
valuation allowance since the future benefit of the credit is not assured. The
$295,000 income tax benefit for the three and nine months ended March 31, 1996
reflects the final determination for such net operating loss carrybacks
computed, based upon the Company's filing of its June 30, 1995 corporate tax
return. 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.
NOTE 5 - Inventories:
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
Raw materials $ 2,974,000 $ 3,508,000
Work-in-progress 3,370,000 3,010,000
Finished goods 9,397,000 9,447,000
----------- -----------
$15,741,000 $15,965,000
=========== ===========
</TABLE>
NOTE 6 - Other Charges:
Product line termination charges of $2,500,000 were recorded during the
three months ended March 31, 1996 to reconfigure the Company's product
distribution program and to terminate certain product lines. The Company will
use this reserve to liquidate certain inventory items, to melt down gold and
recover stones from certain jewelry products, and to sell certain lines below
their carrying values.
Included in selling, general & administrative expenses at March 31, 1996 is
approximately $651,000 representing a charge for the permanent impairment of
amounts recorded under a barter agreement and an investment in China. In
addition, during the three months ended March 31, 1996, the Company recorded
approximately $462,000 of other valuation write-downs for certain assets in
Thailand.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Harlyn Products, Inc. (the "Company") designs and manufactures gold and
silver jewelry in the United States and Thailand which it sells to retail
jewelers, department and discount stores and distributors throughout the
Americas, the Orient and Europe. Products consist of family jewelry, precious
and semi-precious stone jewelry, diamond jewelry, initial jewelry and wedding
bands and include rings, earrings, chains, pins and tie-tacks. The Company's
products are intended for sale in the medium price range and re predominantly
worn by women.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items in the Company's Statements of
Operations.
<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------
Three Months Ended Nine Months Ended
March 31 March 31
1996 1995 1996 1995
------ ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 82.3 61.3 73.9 64.5
------ ----- ----- -----
Gross profit 17.7 38.7 26.1 35.5
Product line termination charge 54.4 12.2
Operating expenses 85.3 41.1 45.1 27.9
------ ----- ----- -----
Income (loss) from operations (122.0) (2.4) (31.2) 7.6
Interest expense 9.3 7.2 7.3 4.6
------ ----- ----- -----
Income (loss) before income taxes (131.3) (9.6) (38.5) 3.0
Provision (benefit) for income taxes - 6.0 1.4 1.0
------ ----- ----- -----
Net income (loss) (131.3)% (3.6)% (37.1)% 4.0%
====== ===== ===== =====
</TABLE>
Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1995:
- ------------------------------------------------------------------------------
Consolidated net sales for the nine months ended March 31, 1996 were
$20,542,000 as compared to $27,324,000 for the same period in 1995. This
represents a decrease of 24.8% in net sales for the period. The Company has
continued to experience disappointing results in the marketplace. Sales have
been below expectations, with lower-than-anticipated sell-through to customers.
Sales by the Company's U.S. operations amounted to $13,928,000, a decrease of
10
<PAGE>
$6,145,000 or 30.6% for the nine months ended March 31, 1996, primarily due to
lower sales of promotional and stock goods to mass merchandisers and independent
retailer as well as a decline in sales of family jewelry. Sales by Harlyn's
Thailand operations amounted to $6,614,000, a decrease of $637,000 or 8.8% for
the nine months ended March 31, 1996, primarily due to reduced sales to
customers in Mexico as a result of the peso devaluation.
Gross profit as a percentage of net sales decreased from 35.5% for the nine
months ended March 31, 1995 to 26.1% for the nine moths ended March 31, 1996.
Included in cost of sales for the nine months ended March 31, 1996, is
approximately $900,000 relating to write-downs to net realizable value of
inventories in Thailand and to estimated amounts relating to the recovery of
inventory from slow-moving domestic customers. In addition, gross profit margins
decreased due to the decline in sales and the relative nature of fixed costs in
Thailand.
During the period ended March 31, 1996, the Company established a reserve
of $2,500,000 to reconfigure its product distribution program and to terminate
certain product lines. The Company will use this reserve to liquidate certain
inventory items, to melt down gold and recover stones from certain jewelry
products, and to sell certain product lines below their carrying values.
Selling, general and administrative expenses increased from $7,627,000 or
27.9% of net sales for the nine months ended March 31, 1995 to $9,266,000 or
45.1% of net sales for the comparable period in 1996. The primary reasons for
the increase were the write-off of a tax refund claim in Thailand which was
deemed not probable of collection, an increase in the allowance for doubtful
accounts in both Thailand and the United States, the write-off of certain non-
trade receivables in the United States, the write-off of an investment in China
and of a barter asset in the United States, and increase in professional fees.
Interest expense increased from $1,250,000 or 4.6% of net sales for the
nine months ended March 31, 1995 to $1,503,000 or 7.3% for the comparable period
in 1996, due to higher rates on higher levels of borrowings in both the United
States and Thailand.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
- ---------------------------------------------------------------------------
1995:
- -----
Net sales for the three months ended March 31, 1996 were $4,592,000 as
compared to $6,324,000 for the same period in 1995. This represents a decrease
of 27.4% in net sales for the period. Sales by the Company's United States
operations amounted to $3,052,000, a decrease of $1,416,000 or 31.7%. Sales by
the Company's Thailand operations amounted to $1,540,000, a decrease of $316,000
or 17%. The reasons for the declines are stated above in the discussion for the
nine month period.
Gross profit as a percentage of net sales decreased from 38.7% for the
three months ended March 31, 1995 to 17.7% for the comparable period in 1996,
for the reasons stated above in the discussion for the nine month period.
During the period ended March 31, 1996, the Company established a reserve
of $2,500,000 to reconfigure its product distribution program and to terminate
certain product lines. The Company will use this reserve to liquidate certain
inventory items, to melt down gold and recover stones from certain jewelry
products, and to sell certain product lines below their carrying values.
11
<PAGE>
Selling, general and administrative expenses increased from $2,599,000 or
41.1% of net sales for the three months ended March 31, 1995 to $3,916,000 or
85.3% for the comparable period in 1996, for the reasons stated above in the
discussion of the nine month period.
Interest expense decreased from $458,000 for the three months ended March
31, 1995 to $427,000 for the comparable period in 1996 due to reduced bank
borrowings and reduced gold having been leased.
LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------
The Company relies on its credit facilities, gold consignment program and
internally generated funds to finance its operations. The Company's Gold
Consignment Agreement and Bank Credit Agreements are discussed in Notes 2 and
3, respectively. The Company is currently in discussion with its bank lender and
gold lessor in the United States for an extension and modification of the
current lines to support operations. While the bank lender and gold lessor are
currently extending accommodations to the Company, no assurances can be given
that such accommodations will continue or an extension of either arrangement
will be entered into.
In order to improve operating results, the Company has determined that it
must refocus and align its operating priorities to concentrate on an new
marketing strategy emphasizing high margin special order jewelry and an
immediate reduction of its inventory of low margin product. Management must also
finalize arrangements with its bank and gold lessor. In addition, as previously
disclosed, the Company has engaged Barrington Associates, a regional investment
banking firm, to advise the Company's Board of Directors in evaluating its
strategic options including possible sale of the entire company or some of its
divisions, a merger with or acquisition of another company, joint venture with a
strategic partner, or raising additional capital to grow the business.
If the Company is unable to implement its business turnaround strategy to
return to profitability and finalize arrangements with its bank and gold lessor
or obtain alternative sources of funds, there would exist a concern about the
Company's ability to remain as a going concern.
12
<PAGE>
PART II. OTHER INFORMATION
None.
**************************
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
- ----------------------------------
Harold Weisbrod
(Chairman of the Board)
/s/ EDWARD DUDZIAK /s/ DAN GOODSTEIN
- ---------------------------------- ----------------------------------
Edward Dudziak Dan Goodstein
(President & Chief Operating Officer) (Chief Financial Officer)
Date: May 23, 1996
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 439,000
<SECURITIES> 0
<RECEIVABLES> 5,082,000
<ALLOWANCES> 1,114,000
<INVENTORY> 16,291,000
<CURRENT-ASSETS> 22,146,000
<PP&E> 17,579,000
<DEPRECIATION> 12,739,000
<TOTAL-ASSETS> 27,272,000
<CURRENT-LIABILITIES> 16,778,000
<BONDS> 0
0
0
<COMMON> 475,000
<OTHER-SE> 9,448,000
<TOTAL-LIABILITY-AND-EQUITY> 27,272,000
<SALES> 4,592,000
<TOTAL-REVENUES> 4,592,000
<CGS> 4,389,000
<TOTAL-COSTS> 4,389,000
<OTHER-EXPENSES> 5,866,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 427,000
<INCOME-PRETAX> (6,090,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,090,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,090,000)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
