<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DRAFT
FORM 10-K
----------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-7473
HARLYN PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
(213) 746-0745
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
COMMON STOCK ON WHICH REGISTERED
$0.10 PAR VALUE AMEX
</TABLE>
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, 1996 the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $2,383,000.
As of July 31, 1996 the issuer had 4,753,284 shares of Common Stock
outstanding.
Documents incorporated by reference--Part III--Proxy Statement.
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<PAGE>
PART I
ITEM 1. BUSINESS
(See page 5, "Liquidity and Capital Resources," re: Harlyn Products, Inc.'s
ability to remain as a going concern and its intention to sell its Thailand
and domestic operations.)
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>
1996 1995
---- ----
<S> <C> <C>
1st quarter (July-September).................................. 19% 25%
2nd quarter (October-December)................................ 42% 33%
3rd quarter (January-March)................................... 18% 18%
4th quarter (April-June)...................................... 21% 24%
--- ---
100% 100%
=== ===
</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 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 maintained a gold lease arrangement ("the gold agreement"),
pursuant to which it held gold on consignment to meet customer orders. Under
the terms of the 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 17,450 and
22,000 ounces of gold on consignment at June 30, 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
1
<PAGE>
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.)
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.
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, 1996, the Company employed approximately 119 U.S. employees. Of
these, 76 were factory employees. Of the remainder of the employees, 3 were
executive personnel, 28 were engaged in administrative and clerical work, and
12 were engaged in sales and marketing. In addition, there were approximately
250 employees in Thailand. The Company does not have a collective bargaining
agreement and believes that its employee relations are good.
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, administrative and 1519-1525 S. Main St. 20,160 * $12,253(1)
sales offices L.A., CA 90015
Manufacturing facility 1515 S. Main St. 7,700 * $ 3,442
L.A., CA 90015
Manufacturing facility 115 Venice Blvd. 6,500 * $ 3,019
L.A., CA 90015
Manufacturing facility 117 Venice Blvd. 7,200 * $ 3,044
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.
(1) Effective September 21, 1996, the monthly rental for this lease was
reduced to $6,500.
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.
2
<PAGE>
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, 1996, no matter was submitted to a vote
of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock traded on the American Stock Exchange: Symbol
HRN.
The American Stock Exchange has suspended trading and the Company has
applied for delisting of its stock which is traded over-the-counter.
TABLE OF HIGH AND LOW DAILY CLOSING PRICES BY QUARTER
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996 FISCAL YEAR ENDED JUNE 30, 1995
------------------------------- -------------------------------
QUARTER 1 2 3 4 1 2 3 4
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High..... 3.13 3.13 1.50 1.56 5.00 4.63 4.38 3.50
Low...... 2.38 .88 1.00 1.00 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, 1996 there were 198 record holders of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA--ALL FIGURES IN $000 EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED: 6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
------------------ -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales...................... $ 25,915 $36,009 $33,483 $30,647 $27,534
Net (Loss) Income.............. (14,535) (1,873) 1,476 1,560 1,111
E.P.S.*........................ (3.06) (.39) .32 .35 .25
Total Assets................... 19,154 36,847 35,705 27,855 27,765
Long-term Debt................. 741 1,240 5,871 387 1,633
</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 1996, 1995 and 1994.
See Note 15 in Notes to Consolidated Financial Statements for summarized
unaudited quarterly financial data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1996 Compared to 1995
Net sales for fiscal 1996 were $25,915,000 compared to $36,009,000 for
fiscal 1995, a decrease of 28%. Domestic sales decreased by $9,380,000 (or
36%) from 1995 due to lower net sales to the retail jewelry market as a result
of refocusing sales from stock merchandise to the core business of the
Company, family jewelry. Net sales by Harlyn's Thailand subsidiaries to
unaffiliated customers decreased by $714,000 (or 7%) over 1995 due to
continuing weaknesses in European 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 1996 was $389 per
troy ounce compared to $384 in 1995, a difference which had no material impact
on sales.
3
<PAGE>
Gross loss for fiscal 1996 was ($1,629,000) compared to a gross profit of
$10,534 in fiscal 1995. Gross profit margin for fiscal 1995 decreased from 29%
to a gross loss of 6%. The decrease in gross profit was due to the significant
decline in sales volume resulting in less absorption of overhead, price
concessions given to customers on the close-out of discontinued product lines,
losses incurred in melting unsaleable inventory to recover gold, reduction to
net realizable value of slow-moving merchandise and competitive price
pressures.
Selling, general and administrative expenses in fiscal 1996 increased from
$10,494,000 to $11,244,000 and, as a percent of net sales, from 29% to 43%.
The increase is due primarily to increased professional fees, the write-off of
a barter asset, an investment in China, and a real estate and tax refund in
Thailand.
In fiscal 1995, management initiated plans to reduce overhead and
administrative costs, to eliminate certain marginal product lines and to
improve cash flow by disposing of inventories through alternative distribution
channels. Product lines targeted under the plan included 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. In fiscal
1996, product line termination charges were $2,500,000 and $4,200,000 for the
third and fourth quarters, respectively, in the United States and $650,000 in
the fourth quarter in Thailand.
Interest expense increased by $169,000 in fiscal 1996 due to higher levels
of borrowings.
During fiscal 1996, the Company recorded a $14,830,000 consolidated pretax
loss of which $65,000 related to the Company's Thailand operations. During
fiscal 1995, the Company's Thailand operations generated $886,000 of pre-tax
income. Thailand's 1996 income and the majority of Thailand's 1995 income were
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
loses, all principally offset by the provision for a valuation allowance
against the Company's net deferred income tax asset.
1995 Compared to 1994
Net sales for fiscal 1995 were $36,009,000 compared to $33,483,000 for
fiscal 1994, an increase of 7.5%. Domestic sales increased by $1,378,000 (or
5%) over 1994 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
increased by $1,148,000 (or 13%) over 1994. The average gold price in 1995 was
$384 per troy ounce compared to $379 in 1994.
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 in 1994 to $10,494,000 and, as a percent of net sales, from 28% to
29%. The increase was 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.
Interest expense increased by $355,000 in fiscal 1995 over 1994 due both to
higher interest rates and higher levels of borrowings.
4
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on its credit facilities, gold consignment program, and
internally generated funds to finance operations. Due to substantial write-
offs of inventory and other assets during the past fiscal year, the Company is
suffering severe liquidity problems, and its ability to remain as a going
concern is questionable. Should the Company be unable to reach continuing
accommodations with its bank and gold lessor (more fully discussed below), it
could be forced to file for protection and reorganization under Chapter 11 of
the Bankruptcy Act.
The Company has signed a letter of intent whereby another domestic public
company would buy substantially all the assets and assume the liabilities of
the Company's Thailand subsidiaries. The effect of the proposed transaction on
the Company's working capital would not, in itself, be sufficient for the
Company to continue its domestic operations. Furthermore, no assurances can be
made that the proposed transaction will be consummated. [On November 14, 1996,
the transaction was consummated with the L.L. Knickerbocker Co., Inc.]
The Company is also negotiating for the sale of its domestic operations to
another domestic public company. The effect of the proposed transaction on the
Company's financial position is yet to be determined. No assurances can be
made that this or any other transaction to sell the assets or stock of the
Company will be consummated.
The Company leases gold under the terms of the expired gold consignment
agreement (see page 2) which provided that the Company could 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 17,450 ounces, or
approximately $6,666,000, of gold on consignment at June 30, 1996. 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 security interest in substantially all assets of the
Company. The gold agreement expired on January 31, 1996. Under the terms of
the expired agreement, the Company would be in violation of certain covenants
of that 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. If the gold consignor were to terminate the
current arrangement, it is questionable whether other gold consignors would be
willing to enter into similar arrangements. Without a gold leasing
arrangement, the Company could not continue to operate.
The Company has a credit agreement with a bank that expires on October 1,
1996. The agreement includes a line of credit and a term loan. As of June 30,
1996, the line of credit and term loan provided for maximum borrowings of
$10,500,000 and $4,000,000, respectively. As of July 1, 1996, the line of
credit was reduced to $8,500,000 and the term loan was reduced to $2,833,000.
As of August 14, 1996, the line of credit was further reduced to $8,000,000.
As of June 30, 1996, outstanding borrowings under the line of credit and term
loan were $8,199,000 and $2,917,000, respectively. As of September 15, 1996,
outstanding borrowings under the line of credit and term loan were $7,501,000
and $2,668,000, respectively. The line of credit agreement provides for
Borrowing Base Limitations of 60% of eligible accounts receivable plus the
lesser of 30% of eligible inventory or $4,000,000. Since the Company exceeded
the Borrowing Base Limitations, the bank provided an overadvance feature which
provided $3,250,000 from June 24, 1996 to August 14, 1996 and $3,000,000 after
August 14, 1996 in excess of the receivable and inventory borrowing bases
discussed above. The term loan requires monthly principal payments of $83,000
plus interest. Borrowings bear interest at the bank's prime rate (8.25% at
June 30, 1996) plus 1.5%.
Substantially all assets of the Company are pledged as collateral for
borrowings under the credit agreement which is subordinated to the gold
consignment agreement to the extent of gold on hand. The agreement requires
the Company to maintain satisfactory insurance coverage, to limit its gold
pool to 20,000 troy ounces, and places limits on other encumbrances, liens and
borrowings, liquidations or mergers, loans and guarantees, payment of any
dividends, retirement of stock, and pledging of fixed assets.
5
<PAGE>
The Company has not arranged with the bank for continuation of the agreement
beyond October 1, 1996. If the agreement were not renewed and the Company is
unable to find replacement financing, the Company could not continue to
operate.
The Company also has credit agreements with two banks in Thailand that
provide revolving lines of credit and a term loan. The lines of credit provide
for maximum borrowings of 70,000,000 Thai Baht (approximately $2,800,000).
Outstanding borrowings under the lines of credit at June 30, 1996 totaled
38,000,000 Thai Baht (approximately $1,528,000 at June 30, 1996) and bear
interest at 14 to 15%. The credit agreement does not contain any restrictive
covenants and is collateralized by the manufacturing facility and land in
Thailand. The Bank has also been provided with personal and corporate
guarantees in connection with these loans. The term loan provides for maximum
borrowing of 30,000,000 Thai Baht (approximately $1,200,000) and requires
monthly payments of $22,000 plus interest of 14.25%. Borrowings under the term
loan were 19,500,000 Thai Baht (approximately $780,000) at June 30, 1996.
During the year ended June 30, 1996, $2,705,000 of cash was used for
operating activities compared to $1,129,000 for the comparable period of the
prior year. Cash used in investing activities were $1,094,000 for the year
ended June 30, 1996, primarily for the termination of a retirement trust and
the write-off of a barter asset (see Note 9), and $2,295,000 for the year
ended June 30, 1995, primarily for the construction of the Company's new
manufacturing facility in Thailand.
Net receivables decreased by $8,513,000 from a June 30, 1995 balance of
$12,648,000 to $4,135,000 as of June 30, 1996 primarily due to lower U.S.
sales volume and increased returns. Reserves for sales returns and doubtful
accounts increased from $725,000 to $1,269,000 due to rising levels of
returned product and a weakening of financial strength in certain U.S. jewelry
retailers.
The Company has filed its fiscal 1996 Federal tax return, and a Form 1139,
"Corporation Application for Tentative Refund", applicable to fiscal years
ended June 30, 1984, 1985 and 1986. On September 18, 1996, the Company
received $548,000 of the Form 1139 refund claimed. These refund claims have
been made under Section 172(f) of the Internal Revenue Code, an area of the
tax law without significant precedent, and there may be substantial opposition
by the IRS to the Company's refund claims. Accordingly, since no assurances
can be made to the Company's entitlement to such refunds, the amount of the
claims has not been reflected on the Company's financial statements as at and
for the year ended June 30, 1996.
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
On October 17, 1996, Registrant retained Rose, Snyder & Jacobs as its
certified public accountants and to begin to audit the fiscal year ended June
30, 1996.
On September 27, 1996, the Registrant was informed by its independent
auditors, Deloitte & Touche LLP ("Deloitte") of Deloitte's resignation,
effective as of that date.
The reports of Deloitte on the financial statements of the Registrant for
each of the two fiscal years in the period ended June 30, 1995 did not contain
any adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. For the two
fiscal years in the period ended June 30, 1995 and from July 1, 1995 through
September 27, 1996, there were no disagreements between Registrant and
Deloitte on any matter of accounting principles or practices, financial
statement disclosure or auditing scope of procedures.
On June 25, 1996, Deloitte informed the audit committee of the Registrant
that if certain conditions were not met regarding which of the Registrant's
management personnel would be responsible for the Registrant's financial
statements, it would be unwilling to rely on management's representations
regarding the Registrant's
6
<PAGE>
financial statements. In connection with its resignation of September 27,
1996, Deloitte informed the Registrant and the chairman of the Registrant's
audit committee that it had determined that the conditions previously
communicated had not been met, that it was no longer willing to rely on
management's representations and that it was unwilling to be associated with
the financial statements prepared by management.
Deloitte has also advised the Registrant that the financial statements for
the interim periods ended December 31, 1995 and March 31, 1996 should be
restated for a correction of an error relating the Company's miscalculation of
the amount of gold inventories. As a result of such errors, the recorded
amount of inventories was overstated by $825,000 and 217,000 for the six month
period ended December 31, 1995 and for the nine month period ended March 31,
1996, respectively. The Registrant has revised operating results for the
quarters ended December 31, 1995 and March 31, 1996 caused by a miscalculation
of leased gold. The effect of the revisions are to change previously reported
profits of $128,000 or $0.03 per share for the three months ended December 31,
1995 to a loss of $697,000 or ($0.15) per share. The loss for the six months
ended December 31, 1995 was revised from $762,000 or ($0.16) per share to a
loss of $1,587,000 or ($0.33) per share. For the three months ended March 31,
1996, the effect of the revisions was to decrease the loss of $6,640,000 or
($1.40) per share to a loss of $6,032,000 or ($1.27) per share. For the nine
months then ended, the loss was then revised to $7,619,000 or ($1.60) per
share from the previously reported $7,402,000 or ($1.56 per share).
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 14A.
7
<PAGE>
HARLYN PRODUCTS, INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
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<S> <C>
(a)The following documents are filed as part of this report:
(1)Consolidated Financial Statements:
Report on Independent Auditors......................................... 9
Consolidated Balance Sheets, June 30, 1996 and 1995.................... 10
Consolidated Statements of Operations for the Years Ended June 30,
1996, 1995 and 1994................................................... 11
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1996, 1995
and 1994.............................................................. 12
Consolidated Statements of Cash Flows for the Years Ended June 30,
1996, 1995 and 1994................................................... 13-14
Notes to Consolidated Financial Statements............................. 15-22
(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.
(b)Report on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered.
</TABLE>
8
<PAGE>
REPORT ON INDEPENDENT AUDITORS
AND
UNAUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
The financial statements for the year ended June 30, 1996, are unaudited and
have not yet been audited by any independent public accountant. The financial
statements for the two fiscal years ended June 30, 1995, had previously been
audited by Deloitte & Touche LLP but, as explained in Item 9 of Part II,
"Change In And Disagreements With Accountants on Accounting and Financial
Disclosure" included in this Form 10-K, Deloitte & Touche LLP has resigned as
auditors for the Company prior to issuing any report on the financial
statements for the fiscal year ended June 30, 1996. While the Company has
obtained new auditors who have been engaged to audit the fiscal year ended
June 30, 1996, no report has yet been issued and it may be a substantial
period of time before audit opinion, if any, may be rendered.
The Company's unaudited financial statements contain all adjustments which
Management believes are necessary for fair presentation of such financial
statements. Nevertheless, changes may be made in such financial statements if
and when audited financial statements are available. Thus, no assurances can
be given that the financial statements for the year ended June 30, 1996, when
and if audited, will not change from the information contained herein.
Finally, the financial statements contained herewith may be restated to
reflect the pending sale of the Company's Thailand operations if such sale is
consummated.
9
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS (NOTES 6, 7 AND 13)
Current assets: Cash and cash equivalents (Note 2).. $ 314,000 $ 265,000
Accounts receivable - trade, less allowance for
doubtful accounts and sales returns of $1,269,000
and $725,000 in 1996 and 1995, respectively
(Notes 6 and 7).................................... 4,135,000 12,648,000
Inventories, less product line termination allowance
of $7,350,000 in 1996 and $1,555,000 in 1995 (Notes
1, 2, 3, 6 and 7).................................. 10,134,000 15,965,000
Prepaid expenses and other current assets (Note 5).. 91,000 1,051,000
----------- -----------
Total current assets.............................. 14,674,000 29,929,000
Property, plant and equipment, net (Notes 2, 4, 6 and
7)................................................... 4,307,000 5,451,000
Other assets (Notes 6 and 9).......................... 173,000 1,467,000
----------- -----------
Total................................................. $19,154,000 $36,847,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit (Note 6)........................ $11,678,000 $10,953,000
Current portion of long-term debt (Notes 7 and 9)... 263,000 4,239,000
Accounts payable.................................... 3,176,000 2,887,000
Accrued liabilities................................. 1,056,000 752,000
----------- -----------
Total current liabilities......................... 16,173,000 18,831,000
----------- -----------
Long-term debt (Notes 7 and 9)........................ 741,000 1,240,000
----------- -----------
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 1996 and 4,484,533
shares in 1995 issued and outstanding.............. 475,000 475,000
Additional paid-in capital.......................... 2,413,000 2,413,000
Retained earnings deficit........................... (648,000) 13,888,000
----------- -----------
Total shareholders' equity........................ 2,240,000 16,776,000
----------- -----------
Total................................................. $19,154,000 $36,847,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net sales (Notes 2 and 14).............. $ 25,915,000 $36,009,000 $33,483,000
Cost of sales (Note 5).................. 27,544,000 25,475,000 20,552,000
------------ ----------- -----------
Gross (loss)............................ (1,629,000) 10,534,000 12,931,000
Selling, general and administrative
expenses (Notes 5 and 9)................ 11,244,000 10,494,000 9,484,000
------------ ----------- -----------
Income (loss) from operations........... (12,872,000) 40,000 3,447,000
Interest expense (Notes 6 and 7)........ 1,958,000 1,789,000 1,434,000
------------ ----------- -----------
(Loss) Income before income taxes....... (14,830,000) (1,749,000) 2,013,000
Provision for income taxes.............. (295,000) 124,000 537,000
------------ ----------- -----------
Net (loss) income....................... $(14,535,000) $(1,873,000) $ 1,476,000
============ =========== ===========
(Loss) earnings per common share and
common share
equivalent (Notes 2 and 12)............ $ (3.06) $ (0.39) $ 0.32
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS/
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Net loss............... (14,536,000) (14,536,000)
--------- -------- ---------- ------------ ------------
Balance, June 30, 1996.. 4,753,284 $475,000 $2,413,000 $ (648,000) $ 2,240,000
========= ======== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................... $(14,536,000) $(1,873,000) $ 1,476,000
Adjustments to reconcile net (loss)
income to net cash
(used in) provided by operating
activities:
Provision for losses on accounts
receivable......................... 691,000 581,000 211,000
Provision for product line
terminations....................... 6,700,000 1,555,000
Depreciation and amortization....... 1,344,000 1,559,000 1,900,000
Other............................... 96,000 14,000
Deferred income taxes............... 399,000 (125,000)
Changes in operating assets and
liabilities:
Accounts receivable............... 7,822,000 (1,930,000) (2,404,000)
Inventories....................... (869,000) (1,213,000) (4,867,000)
Prepaid expenses and other current
assets........................... 960,000 (23,000) 2,000
Accounts payable.................. 289,000 (56,000) 1,602,000
Accrued liabilities............... 304,000 (224,000) (6,000)
------------ ----------- -----------
Net cash (used in) provided by
operating activities........... 2,705,000 (1,129,000) (2,197,000)
------------ ----------- -----------
Cash flows from investing activities:
(Additions to) property, plant and
equipment............................ (200,000) (2,260,000) (2,197,000)
Other assets.......................... 1,294,000 (35,000) (45,000)
------------ ----------- -----------
Net cash (used in) provided by
investing activities............... 1,094,000 (2,295,000) (2,242,000)
------------ ----------- -----------
Cash flows from financing activities:
Net short-term borrowings
(repayments)......................... (3,251,000) 4,142,000 (1,118,000)
Additions to long-term debt........... 7,182,000
Repayments of long-term debt.......... (499,000) (1,689,000) (1,462,000)
Proceeds from exercise of options and
warrants............................. 715,000 266,000
------------ ----------- -----------
Net cash provided by (used in)
financing activities............... $ (3,750,000) $ 3,168,000 $ 4,868,000
============ =========== ===========
Net change in cash and cash equivalents. $ 49,000 $ (256,000) $ 429,000
Cash and cash equivalents--beginning of
period................................. 265,000 521,000 92,000
------------ ----------- -----------
Cash and cash equivalents--end of
period................................. $ 314,000 $ 265,000 $ 521,000
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
HARLYN PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest................................. $1,958,000 $1,724,000 $1,397,000
Income taxes............................. $ 4,000 $ 216,000 $ 906,000
</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). During the year ended June 30, 1996, the remaining
amount of this asset was written off.
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.
14
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
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 $14,536,000 net loss for the year ended June 30,
1996. The loss was caused by the following factors: decline in sales volume
resulting in under-absorption of overhead, price concessions given to
customers on the close-out of discontinued product lines, losses incurred in
melting unsaleable inventory to recover gold and stones, reduction to net
realizable value of slow moving inventory, competitive price pressures, and
increases in certain operating expenses, including professional services.
As discussed in Notes 6 and 13, the Company's agreements with its United
States bank which provides a revolving line of credit and a term loan expires
on October 1, 1996. The Company's gold consignment agreement expired on
January 31, 1996, but the gold consignor has continued extending
accommodations to the Company. If the lending bank or gold lessor were to
discontinue their arrangements and if the Company were unable to enter into
other arrangements, the Company could not continue to operate.
Management has continued plans to reduce overhead and certain administrative
costs. These plans consist principally of a decrease in personnel and certain
marketing and promotional programs. Management will continue its discussions
with its bank and gold consignor to extend their arrangements.
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"); and
Harlyn International Limited ("International"). All significant intercompany
balances and transactions have been eliminated in consolidation.
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
authorization 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.
15
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective July 1, 1993. SFAS 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, 1996 and 1995 was not significant.
Deferred income taxes, discussed in Note 8 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 avenues 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 and Losses per Common Share and Common Share Equivalent
Earnings and losses 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. No
customer accounted for 10% of sales in 1996. 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% of
sales in 1994. 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 year's financial
statements to conform with the current year presentation.
3. INVENTORIES
At June 30, 1996 and 1995, inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Raw materials........................................... $2,404,000 $3,508,000
Work-in-progress........................................ 3,235,000 3,010,000
Finished goods.......................................... 4,495,000 9,447,000
----------- -----------
Total................................................... $10,134,000 $15,965,000
=========== ===========
</TABLE>
16
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
At June 30, 1996 and 1995, property, plant and equipment consisted of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Land........................................... $ 450,000 $ 468,000
Machinery and equipment........................ 5 2,479,000 2,016,000
Building and improvements...................... 5-20 4,212,000 4,161,000
Furniture and fixtures......................... 5 2,245,000 2,732,000
Product displays and samples................... 3-5 7,950,000 7,554,000
Construction in progress....................... -0- 227,000
---------- ----------
Total........................................ 17,339,000 17,158,000
Less accumulated depreciation and amortization. 13,032,000 11,707,000
---------- ----------
Property, plant and equipment, net........... $4,307,000 $5,451,000
========== ==========
</TABLE>
Depreciation expense for the years ended June 30, 1996, 1995 and 1994 was,
$1,344,000, $1,559,000 and $1,900,000, 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 $295,000 in 1996 and $324,000 in 1995
and 1994.
During 1996, 1995 and 1994, the Company incurred printing expenses of
$263,000, $618,000 and $533,000, respectively, from companies controlled by
the Chairman.
6. BANK LINE OF CREDIT
At June 30, 1996, the Company had a credit agreement with a bank that
expires on October 1, 1996 and included a revolving line of credit and a
$4,000,000 term loan (see Note 7). At June 30, 1996, the line of credit
agreement provided for maximum borrowings of $10,500,000 subject to a
borrowing base of 60% of eligible accounts receivable plus the lesser of 30%
of inventory or $4,000,000. As of July 1, 1996, the line of credit was reduced
to $8,500,000 and the term loan was reduced to $2,833,000. As of August 14,
1996, the line of credit was further reduced to $8,000,000. Outstanding
borrowings under the line of credit and term loan were $8,199,000 and
$2,917,000, respectively, as of June 30, 1996. 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 (8.25% at June 30, 1996)
plus 1.5%. The line of credit agreement provides for Borrowing Base
Limitations of 60% of eligible accounts receivable plus the lesser of 30% of
eligible inventory or $4,000,000. Since the Company exceeded the Borrowing
Base Limitations, the bank provided an overadvance feature which provided
$3,250,000 from June 24, 1996 to August 14, 1996 and $3,000,000 after August
14, 1996 in excess of the receivable and inventory borrowing bases discussed
above. The term loan requires monthly principal payments of $83,000 plus
interest. Borrowings bear interest at the bank's prime rate (8.25% at June 30,
1996) 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 referred to in Note 13 to the extent of the consigned gold on hand.
17
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company also has credit agreements with two banks in Thailand that
provide revolving lines of credit and a term loan. The lines of credit provide
for maximum borrrowings of 70,000,000 Thai Baht (approximately $2,800,000).
Outstanding borrowings under the lines of credit at June 30, 1996 totaled
38,000,000 Thai Baht (approximately $1,528,000 at June 30, 1996) and bear
interest at 14 to 15%. The credit agreement does not contain any restrictive
covenants and is collateralized by the manufacturing facility and land in
Thailand. The term loan provides for maximum borrowing of 30,000,000 Thai Baht
(approximately $1,200,000) and requires monthly payments of $22,000 plus
interest of 14.25%. Borrowings under the term loan were 19,500,000 Thai Baht
(approximately $780,000) at June 30, 1996.
7. LONG-TERM DEBT
At June 30, 1995 and 1994, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Term loan payable to bank, due in monthly principal
payments of $83,000 plus interest at the bank's prime
rate (8.25% at June 30, 1996) plus 1.5% through October
1, 1996 (See Note 6).................................... $2,917,000 $3,917,000
Term loan payable to a foreign bank, due in monthly
principal payments of $22,000 plus interest at the
bank's minimum lending rate (13.25% at June 30, 1996)
plus 1.0% through May 1999 (See Note 6)................. 1,004,000 1,060,000
Loan from irrevocable trusts bearing interest at 7.25%
annually (See Note 9)................................... -0- 410,000
Other.................................................... -0- 92,000
---------- ----------
Total.................................................. 3,921,000 5,479,000
Less current portion..................................... 3,180,000 4,239,000
---------- ----------
Long-term debt......................................... $ 741,000 $1,240,000
========== ==========
</TABLE>
8. INCOME TAXES
The Company has filed its fiscal 1996 Federal tax return, and a Form 1139,
"Corporation Application for Tentative Refund", applicable to fiscal years
ended June 30, 1984, 1985 and 1986. On September 18, 1996, the Company
received $548,000 of the Form 1139 refund claimed. These refund claims have
been made under Section 172(f) of the Internal Revenue Code, an area of the
tax law without significant precedent, and there may be substantial opposition
by the IRS to the Company's refund claims. Accordingly, since no assurances
can be made to the Company's entitlement to such refunds, the amount of the
claims has not been reflected on the Company's financial statements as at and
for the year ended June 30, 1996.
The provision for income taxes consisted of the following for the years
ended June 30:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current:
Federal.................................................. $(295,000) $(168,000)
State.................................................... -- (4,000)
Foreign.................................................. -- (103,000)
--------- ---------
Total current............................................. (295,000) (275,000)
Deferred.................................................. -- 399,000
--------- ---------
Provision for income taxes................................ $(295,000) $ 124,000
========= =========
</TABLE>
18
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. 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 had a $1,201,000 net deferred tax
assets, 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
----------
<S> <C>
Difference in book and tax depreciation............................ $ (157,000)
Provision for product line terminations............................ 673,000
Accruals for bad debts and sales returns........................... 230,000
Profit in intercompany inventory................................... 38,000
Accrued and deferred compensation.................................. 186,000
Tax credit carryforwards........................................... 203,000
Foreign organizational costs....................................... 45,000
State income taxes................................................. (73,000)
Other.............................................................. 56,000
Valuation allowance................................................ (1,201,000)
----------
Total............................................................ $ --
==========
</TABLE>
At June 30, 1996, the Company had an approximate $15,000,000 net operating
loss carryforward for federal tax purposes that expires on June 30, 2011.
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
--------- --------
<S> <C> <C>
Tax computed on income at federal statutory rate.......... $(595,000) $684,000
State franchise tax, net of federal tax benefit........... (160,000) 65,000
Decreases in taxes resulting from foreign income subject
to tax at other than federal statutory rate.............. (405,000) (116,000)
Benefit of tax credit carryforwards....................... (87,000)
Other..................................................... 83,000 (9,000)
Valuation allowance....................................... 1,201,000
--------- --------
Actual provision for income taxes......................... $ 124,000 $537,000
========= ========
</TABLE>
The Company intends to invest the undistributed earnings of its foreign
subsidiary indefinitely. At June 30, 1996, the cumulative amount of
undistributed earnings on which the Company has not recognized United States
income taxes is approximately $4,655,000.
9. OTHER ASSETS
At June 30, 1995, Other Assets of $1,567,000 consisted principally of
advances to a retirement trust for the benefit of certain executive officers
and employees in the amount of $561,000 and barter credits of $603,000. During
the year ended June 30, 1996, the retirement trust was terminated and the
Company received payment for the advances, net of borrowings it had made
against the cash surrender value of related life insurance policies. Also
during the year ended June 30, 1996, the Company wrote off the remaining
unused barter credits, which amounted to substantially all of the balance as
at June 30, 1995.
19
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SHAREHOLDERS' EQUITY
At June 30, 1996, 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.
The following is a summary of activity in the plan for the three years ended
June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
--------- ------------
<S> <C> <C>
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
Granted.................................................. 45,000 1.19-1.25
Canceled................................................. (30,750)
-------
Outstanding--June 30, 1996............................... 336,875
=======
</TABLE>
At June 30, 1996, 160,750 options were exercisable at prices ranging from
$1.19 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, 1996. Weighted average common
shares and common share equivalents outstanding were computed as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Average of common shares outstanding.......... 4,753,000 4,727,000 4,409,000
Average of dilutive options and warrants
outstanding.................................. 345,000 354,000 681,000
Shares assumed to be repurchased under the
treasury stock method........................ (260,000) (252,000) (487,000)
--------- --------- ---------
Average of common shares and common share
equivalents outstanding...................... 4,838,000 4,829,000 4,603,000
========= ========= =========
</TABLE>
20
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 1996, 1995 and 1994.
Consignment Inventory
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 the 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 17,450 and
22,000 ounces of gold on consignment with fair market values of approximately
$6,666,000 and $8,515,000 at June 30, 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. 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.
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: 1997,
$24,000; 1998, $16,000; and 1999, $7,000.
Rent expense relating to noncancelable operating leases was $47,000, $51,000
and $82,000 in 1996, 1995 and 1994, 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.
21
<PAGE>
HARLYN PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. GEOGRAPHIC INFORMATION
The following summarizes the Company's domestic and foreign operations and
identifiable assets for each of the three years ended June 30, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
UNITED
STATES THAILAND ELIMINATIONS CONSOLIDATED
1996 ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales to
unaffiliated customers. $ 16,852,000 $ 9,068,000 $ 25,915,000
Intercompany sales...... 3,937,000 $ (3,937,000)
------------ ----------- ------------ ------------
Net sales............... $ 16,852,000 $13,000,000 $ (3,937,000) $ 25,915,000
============ =========== ============ ============
(Loss) income before
income taxes........... $(13,842,000) $ (65,000) $ (629,000) $(14,536,000)
============ =========== ============ ============
Identifiable assets..... $ 20,456,000 $29,599,000 $(30,901,000) $ 19,154,000
============ =========== ============ ============
<CAPTION>
1995
<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 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
============ =========== ============ ============
<CAPTION>
1994
<S> <C> <C> <C> <C>
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 before income
taxes.................. $ 1,066,000 $ 456,000 $ 491,000 $ 2,013,000
============ =========== ============ ============
Identifiable assets..... $ 32,536,000 $15,655,000 $(12,496,000) $ 36,847,000
============ =========== ============ ============
</TABLE>
15. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
FISCAL 1996 ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................... $5,061,000 $10,889,000 $ 4,592,000 $ 5,373,000
Gross profit (loss)......... $1,870,000 $ 2,665,000 $ 811,000 $(6,975,000)
Net (loss).................. $ (890,000) $ (697,000) $(6,032,000) $(6,916,000)
(Loss) per share............ $ (0.19) $ (0.15) $ (1.27) $ (1.45)
<CAPTION>
FISCAL 1995
<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)
</TABLE>
22
<PAGE>
HARLYN PRODUCTS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<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,
1996................. $725,000 $888,000 $(344,000) $1,269,000
======== ======== === ========= ==========
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
======== ======== === ========= ==========
</TABLE>
- --------
(a) Write-off of uncollectible accounts, net of recoveries.
23
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE 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)
By
_____________________________________
Harold Weisbrod
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman of the Board, Chief
____________________________________ Executive Officer
Harold Weisbrod
President, Chief Operating
____________________________________ Officer, and Director
Edward Dudziak
Director
____________________________________
Roger Kuppinger
Director
____________________________________
Barbara Rodriguez
Vice Chairman and Director
____________________________________
William Hood
Vice President and Chief
____________________________________ Financial Officer
Daniel V. Goodstein, CPA
Director November 12, 1996
____________________________________
James Freedman
</TABLE>
24
<PAGE>
DIRECTORS AND OFFICERS
Harold Weisbrod, Chairman of the Board of Directors and Chief Executive
Officer
William Hood, Vice Chairman of the Board of Directors
Edward Dudziak, President, Chief Operating Officer and Director
Roger Kuppinger, Director President, the Kuppinger Company
Barbara Rodriguez, Director President, Sleepy Hollow Construction
James B. Freedman, Director Managing Director, Barrington Associates
Daniel V. Goodstein, CPA Vice President and Chief Financial Officer
Peter Artzt, Vice President of Marketing
Vahe Kizirian, Vice President of International Sales
Thip Nakornratana, Vice President and Managing DirectorHarlyn (Thailand) Co.,
Ltd. & Harlyn International Co., Ltd.
FORM 10-K
A copy of the Company's current annual report filed with the Securities and
Exchange Commission (SEC) on Form 10-K may be obtained from the Company,
without charge, by writing to Daniel V. Goodstein, Chief Financial Officer,
Harlyn Products, Inc., 1515 South Main Street, Los Angeles, California 90015.
CORPORATE INFORMATION
CORPORATE OFFICES
Harlyn Products, Inc.
1515 South Main Street
Los Angeles, California 90015
(213) 746-0745
Fax (213) 742-6701
DIVISIONS AND SUBSIDIARIES
The Palomar Company
Paramount Wedding Ring Company
Del Conte Manufacturing Company
George Hoffman Jewelry Mfg. Inc.
Wilshire International, Inc.
Hazlyn (Thailand) Co., Ltd.
Harlyn International Co., Ltd.
REGISTRAR AND TRANSFER AGENT
U.S. Stock Transfer Corp.
1745 Gardena Avenue
Glendale, California 91402
GENERAL COUNSEL
Jeffer, Mangels, Butler & Marmaro
2121 Avenue of The Stars
Los Angeles, California 90067
CERTIFICED PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017
INVESTOR RELATIONS
Daniel V. Goodstein
c/o Harlyn Products, Inc.
1515 South Main Street
Los Angeles, California 90015
(213) 746-0745
STOCK LISTING
American Stock Exchange
TRADING SYMBOL
HRN
STOCKHOLDER REPORTS
Stockholders or investors who wish to receive quarterly stockholder reports
from the Company, may do so by writing or calling Daniel V. Goodstein, Chief
Financial Officer, at the corporate offices listed above.
