<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended DECEMBER 31, 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
--------------- ---------------
Number of Shares of Common Stock outstanding as of February 13, 1996: 4,753,284
1
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HARLYN PRODUCTS, INC.
---------------------
INDEX
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<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION:
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5 & 6
Notes to Financial Statements 7 & 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of 12
Security Holders
Signature 12
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
1995 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $210,000 $265,000
Accounts receivable, net 13,422,000 12,648,000
Inventories 16,269,000 15,965,000
Prepaid expenses and other current assets 1,286,000 1,051,000
----------- -----------
Total current assets 31,187,000 29,929,000
Equipment, net 5,138,000 5,451,000
Other assets 1,407,000 1,467,000
----------- -----------
$37,732,000 $36,847,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Bank line of credit $11,988,000 $10,953,000
Current portion of long term debt and capital lease
obligations 3,741,000 4,239,000
Accounts payable and accrued expenses 4,674,000 3,639,000
----------- -----------
Total current liabilities 20,403,000 18,831,000
Long term debt, net of current portion 1,315,000 1,240,000
----------- -----------
Total liabilities 21,718,000 20,071,000
----------- -----------
Shareholders' equity:
Common stock: $.10 par, authorized 10,000,000 shares;
issued 4,753,284 at December 31, 1995 and
June 30, 1995 475,000 475,000
Additional paid-in capital 2,413,000 2,413,000
Retained earnings 13,126,000 13,888,000
----------- -----------
Total shareholders' equity 16,014,000 16,776,000
----------- -----------
$37,732,000 $36,847,000
=========== ===========
</TABLE>
See notes to financial statements.
3
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $10,889,000 $11,956,000 $15,950,000 $21,000,000
Cost of sales 7,399,000 8,161,000 10,581,000 13,742,000
----------- ----------- ----------- -----------
Gross profit 3,490,000 3,795,000 5,369,000 7,258,000
Selling, general & administrative 3,144,000 2,688,000 5,350,000 5,027,000
----------- ----------- ----------- -----------
Income from operations 346,000 1,107,000 19,000 2,231,000
Interest expense 512,000 403,000 1,075,000 793,000
----------- ----------- ----------- -----------
Income (loss) before income taxes (166,000) 704,000 (1,056,000) 1,438,000
Provision (benefit) for income taxes (294,000) (91,000) (294,000) 114,000
----------- ----------- ----------- -----------
Net income (loss) $128,000 $795,000 ($762,000) $1,324,000
=========== =========== =========== ===========
Net income (loss) per share $0.03 $0.17 ($0.16) $0.27
=========== =========== =========== ===========
Average number of shares &
equivalent shares outstanding 4,753,284 4,809,144 4,753,284 4,832,832
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
4
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------
1995 1994
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($762,000) $1,324,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 640,000 740,000
Changes in operating assets & liabilities:
Accounts receivable (774,000) (5,628,000)
Inventories (304,000) 563,000
Prepaid expenses and other current assets (235,000) 98,000
Accounts payable and accrued expenses 1,035,000 142,000
--------- ----------
Net cash provided by operating
activities (400,000) (2,761,000)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (327,000) (1,645,000)
Other assets 60,000 (49,000)
--------- ----------
Net cash used for investing activities (267,000) (1,694,000)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 1,035,000 4,834,000
Repayments/retirements of long term debt (423,000) (912,000)
Proceeds from exercise of warrants - 626,000
--------- ----------
Net cash provided by financing
activities 612,000 4,548,000
--------- ----------
NET CHANGE IN CASH & CASH EQUIVALENTS (55,000) 93,000
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 265,000 521,000
--------- ----------
CASH & CASH EQUIVALENTS-END OF PERIOD $210,000 $614,000
========= ==========
</TABLE>
(continued)
See notes to financial statements.
5
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $1,122,000 $788,000
Income taxes $4,000 $225,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended December 31, 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
six months ended December 31, 1994, at prices ranging from $2.04 to $2.80.
The related income tax benefit increased additional paid in capital by
$129,000.
See notes to financial statements.
6
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HARLYN PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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. All intercompany transactions, accounts and
balances have been eliminated.
The accompanying consolidated financial statements are unaudited, but in
the opinion of management of the Company contain all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the financial
position at December 31, 1995 and the results of operations and changes in cash
flows for the three and six months ended December 31, 1995. Certain information
and footnote disclosures normally included in 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 statements 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 six months ended December 31, 1995 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 maintains a gold lease arrangement ("the gold agreement"),
pursuant to which it holds gold on consignment to meet customer orders. Under
the terms of the gold consignment agreement, the Company is 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 is less. The Company held 21,700 and 22,000
ounces of gold on consignment at December 31, 1995 and June 30, 1995,
respectively. Consigned gold is not included in the Company's inventory. The
gold consignor has a security interest in substantially all assets of the
Company. The gold agreement expired on January 31, 1996 and management is
involved in ongoing discussions with the consignor regarding continuation of the
gold agreement. The Company is in violation of certain covenants of the gold
agreement. Nonetheless, 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.
7
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NOTE 3 - Bank Credit Agreement:
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 December 31, 1995. Management believes it will
be successful in extending its credit agreement with the lender or making
alternative arrangements with another lender. (See Liquidity and Capital
Resources).
NOTE 4 - Income Taxes:
The provisions and 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 six months ended December 31, 1995 was
offset by a valuation allowance since the future benefit of the credit is not
assured. Included in other current assets is $603,000 in federal income tax
refunds, principally relating to net operating loss carry-backs. The $294,000 in
income tax benefit for the three and six months ended December 31, 1995,
reflects the final determination for such carrybacks computed, based upon the
Company's filing of its June 30, 1995 corporate tax return. The Company
anticipates collecting these amounts by or around March 31, 1996. Beginning in
December 1994, the Company was granted a three year foreign tax holiday on most
income earned in Thailand. The income tax credit of $91,000 for the three months
ended December 31, 1994 resulted from a change in the estimated effective tax
rate for the year ending June 30, 1995 resulting from the foreign tax holiday.
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>
December 31, June 30,
1995 1995
------------ -----------
<S> <C> <C>
Raw materials $ 3,705,000 $ 3,508,000
Work-in-progress 3,247,000 3,010,000
Finished goods 9,317,000 9,447,000
----------- -----------
$16,269,000 $15,965,000
=========== ===========
</TABLE>
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
8
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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 are 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 Six Months Ended
December 31, December 31,
1995 1994 1995 1994
------------------ ----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.9 68.3 66.3 65.4
----- ----- ----- -----
Gross profit 32.1 31.7 33.7 34.6
Operating expenses 28.9 22.5 33.5 23.9
----- ----- ----- -----
Income from operations 3.2 9.3 0.1 10.6
Interest expense 4.7 3.4 6.7 3.8
----- ----- ----- -----
Income (loss) before income taxes -1.5 5.9 -6.6 6.8
Provision (benefit) for income taxes -2.7 -0.8 -1.8 0.5
----- ----- ----- -----
Net income (loss) 1.2% 6.6% -4.8% 6.3%
===== ===== ===== =====
</TABLE>
Six Months Ended December 31, 1995 Compared to Six Months Ended
- ---------------------------------------------------------------
December 31, 1994:
- ------------------
Consolidated net sales for the six months ended December 31, 1995 were
$15,950,000 as compared to $21,000,000 for the same period in 1994. This
represents a decrease of 24.0% in net sales for the period. Sales by Harlyn's
U.S. operations decreased by $4,729,000 or 30% for the six months ended December
31, 1995, primarily due to lower sales of promotional and stock goods to mass
merchandisers and independent retailers. The Company redesigned its marketing
programs and narrowed its customer focus, which reduced sales to certain less
profitable market segments. Sales by Harlyn's Thailand operations decreased by
$321,000 or 6% for the six months ended December 31, 1995 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 34.6% for the six
months ended December 31, 1994 to 33.7% for the six months ended December 31,
1995. At June 30, 1995 the Company established a reserve of $1,555,000 to
reconfigure its product distribution
9
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program, and to terminate certain product lines. During the six months ended
December 31, 1995, the Company utilized this reserve to liquidate certain
inventory items to melt down gold and recover stones from certain jewelry
products, and to sell certain product lines at below their carrying values. The
net impact of these activities during the six months ended December 31, 1995
increased gross profit by 2%. Management expects to continue to address its
product distribution programs and the configuration of its product lines, but
does not believe any additional reserves are needed at this time .
Selling, general and administrative expenses increased by $323,000 to
$5,350,000 for the six months ended December 31, 1995 from $5,027,000 in the
same period in 1994. The major factors affecting the change were increases in
professional fees and the allowance for doubtful accounts.
Interest expense increased from $793,000 for the six months ended December
31, 1994 to $1,075,000 for the comparable period in 1995 due to higher interest
rates on higher levels of borrowing in both the U.S. and Thailand.
Three Months Ended December 31, 1995 Compared to Three Months Ended
- -------------------------------------------------------------------
December 31, 1994:
- ------------------
Net sales decreased 8.9% to $10,889,000 for the three months ended December
31, 1995 from $11,956,000 for the comparable three months in 1994. The decrease
was principally due to the reasons stated above in the discussion of the six
month period. For the three months ended December 31, 1995, sales by Harlyn's
U.S. operations decreased from the comparable period in 1994 by $1,378,000 or
14.4%, principally due to the reasons stated above in the discussion of the six
month period. For the same comparable period, Harlyn's Thailand sales increased
by $309,000 or 12.7%, primarily due to increased third party sales.
Gross profit as a percentage of net sales increased from 31.7% for the
three months ended December 31, 1994 to 32.1% for the comparable period in 1995.
See the above discussion of the six month period.
Selling, general and administrative expenses increased $456,000 to
$3,144,000 for the three month period ended December 31, 1995 from $2,688,000
for the comparable three month period in 1994, principally due to the reasons
stated above in the discussion of the six month period.
Interest expenses increased $109,000 for the three months ended December
31, 1995 compared to the same period in 1994, principally for the reasons stated
in the discussion of the six month period.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net receivables increased by $774,000 from $12,648,000 on June 30, 1995 to
$13,422,000 on December 31, 1995. This increase was primarily due to the
seasonal nature of sales in which the Company realizes its greatest volume of
sales in its second fiscal quarter.
The Company relies on its credit facilities, gold consignment program and
internally generated funds to finance operations. Outstanding bank debt at
December 31, 1995 amounted to line of credit borrowings of $11,988,000 against
available consolidated credit lines of $12,100,000 and $4,883,000 of long term
debt of which $3,568,000 is current. Due to the Company's non-compliance with
certain bank covenants as of December 31, 1995, a term loan, in the amount of
$3,417,000 nominally due within the next four years, has been reclassified as
short-term debt on the Company's balance sheet as of December 31, 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
or in making alternative arrangements with another lender.
Under the gold agreement, the Company leases substantially all of the gold
it uses and is not required to pay the lessor until product into which the gold
is incorporated is sold (see Note 2 - Gold Consignment Agreement). 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. Management is involved in ongoing discussions with the lessor
regarding continuation of the gold agreement. If the current gold lessor does
not reach a new agreement with the Company, management believes that other gold
lessors would be willing to enter into similar arrangements.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on December
5, 1995.
(b) The following directors were elected at the meeting:
Harold Weisbrod
Edward Dudziak
James Freedman
William Hood
Barbara Rodriguez
Roger Kuppinger
SIGNATURE
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.
By:/s/ Daniel Goodstein
--------------------------------
Daniel Goodstein
Vice President and
Chief Financial Officer
Date: February 13, 1996
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 208,000
<SECURITIES> 2,000
<RECEIVABLES> 14,422,000
<ALLOWANCES> 1,000,000
<INVENTORY> 16,269,000
<CURRENT-ASSETS> 31,187,000
<PP&E> 17,418,000
<DEPRECIATION> 12,280,000
<TOTAL-ASSETS> 37,732,000
<CURRENT-LIABILITIES> 20,403,000
<BONDS> 0
475,000
0
<COMMON> 0
<OTHER-SE> 15,539,000
<TOTAL-LIABILITY-AND-EQUITY> 37,732,000
<SALES> 10,889,000
<TOTAL-REVENUES> 10,889,000
<CGS> 7,399,000
<TOTAL-COSTS> 7,399,000
<OTHER-EXPENSES> 2,944,000
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 512,000
<INCOME-PRETAX> (166,000)
<INCOME-TAX> (294,000)
<INCOME-CONTINUING> 128,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
