FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the second thirteen week accounting Commission File
period ended September 1, 1996 Number 1-9440
HARROW INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1499045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2627 East Beltline S.E., Grand Rapids, Michigan 49546
(Address of principal executive offices) (Zip Code)
(616) 942-1440
(Registrant's telephone number
including area code)
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 twelve (12) months and; (2) has been subject to
such filing requirements for the past ninety (90) days.
Yes X No
The Company has 1,017,850 shares of common stock, par value $.01 a share,
issued and outstanding as of October 7, 1996.
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PART I FINANCIAL INFORMATION
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
September 1, December 3,
1996 1995
(Unaudited) (Audited)
(Thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,439 $ 676
Accounts receivable, less allowances
(1996--$883; 1995--$824) 18,761 16,453
Inventories:
Finished products 4,265 3,524
Work-in-process 4,821 3,956
Raw materials 2,581 2,926
------ ------
11,667 10,406
Other current assets 2,778 2,621
------ ------
Total current assets 36,645 30,156
Property, plant and equipment:
Cost 41,367 39,230
Accumulated depreciation (deduct) (23,726) (21,662)
------ ------
17,641 17,568
Other assets:
Intangible assets, less accumulated
amortization (1996--$6,732; 1995--$5,797) 13,013 13,892
Prepaid pension costs 7,415 6,875
Other 267 498
------ ------
20,695 21,265
------ ------
$74,981 $68,989
====== ======
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September 1, December 3,
1996 1995
(Unaudited) (Audited)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $17,498 $16,878
Long-term debt 49,138 46,365
Other noncurrent liabilities 6,249 6,145
Stockholders' equity (deficit):
Junior preferred stock,
par value $.01 a share--470,000 shares
authorized, 399,964 shares issued
and outstanding 4 4
Common stock, par value $.01 a share--
1,100,000 shares authorized and issued
including treasury shares 11 11
Additional paid-in capital 4,006 4,006
Retained earnings 13,409 9,688
Cost of common stock held in treasury
(82,150 shares at September 1, 1996) (1,226)
Deficit arising from restructuring
transactions (deduct) (14,108) (14,108)
------ ------
2,096 (399)
------ ------
$74,981 $68,989
====== ======
See accompanying notes to consolidated condensed financial statements.
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<CAPTION>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
September 1, August 27, September 1, August 27,
1996 1995 1996 1995
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales $36,947 $31,641 $114,226 $97,528
Cost of products sold 22,908 19,601 72,872 62,220
------ ------ ------- ------
Gross margin 14,039 12,040 41,354 35,308
Selling, administrative
and general expense 9,973 9,232 29,817 27,331
------ ------ ------- ------
Operating income 4,066 2,808 11,537 7,977
Other expense (income):
Interest expense 1,828 1,651 5,100 5,027
Other (27) 318 (56) (497)
------ ------ ------- ------
1,801 1,969 5,044 4,530
------ ------ ------- ------
Earnings before income taxes 2,265 839 6,493 3,447
Income taxes 895 166 2,572 879
------ ------ ------- ------
Net earnings $ 1,370 $ 673 $ 3,921 $ 2,568
====== ====== ======= ======
Net earnings per share $1.22 .57 $3.45 $2.20
====== ====== ======= ======
See accompanying notes to consolidated condensed financial statements.
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<CAPTION>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
Thirty-nine weeks ended
September 1, August 27,
1996 1995
(Thousands of dollars)
OPERATING ACTIVITIES
<S> <C> <C>
Net earnings $ 3,921 $ 2,568
Adjustments necessary to reconcile
net earnings to net cash
used in operating activities:
Depreciation and amortization 3,195 2,812
Gain on sale of business (500)
Other (648) (650)
Changes in operating assets and liabilities:
Accounts receivable (2,308) (434)
Inventories (1,261) (1,948)
Other current assets 79 (404)
Accounts payable and accrued expenses 620 1,989
------ ------
Net cash provided by operating activities 3,598 3,433
INVESTING ACTIVITIES
Additions to property, plant and equipment (2,353) (2,447)
Purchase of business (9,556)
Proceeds from sale of business 5,650
Other 229 (261)
------ ------
Net cash used in investing activities (2,124) (6,614)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 14,310 12,442
Payments of long-term debt (11,639) (9,877)
Purchase of common stock for treasury (1,226)
Cash dividends paid on preferred stock (200) (200)
Other (56)
------ ------
Net cash provided by financing activities 1,289 2,365
------ ------
Increase (decrease) in cash and cash equivalents 2,763 (816)
Cash and cash equivalents at beginning of year 676 919
------ ------
Cash and cash equivalents at end of period $ 3,439 $ 103
====== ======
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated condensed financial statements.
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
September 1, 1996
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included in the consolidated condensed
financial statements. For further information, refer to the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K
filed by the Company with the Securities and Exchange Commission.
Note B - Purchase of Business
On January 4, 1995, pursuant to a definitive purchase agreement entered
into on November 30, 1994, the Company acquired all of the common stock
of Recognition Systems, Inc. (RSI) for a cash purchase price (net of cash
acquired) of $9,556,000. RSI manufactures and markets biometric
identification devices and had net sales of $3,300,000 in 1994. Operating
results of RSI have been included in the Company's consolidated results
beginning December 1, 1994. Goodwill and other intangible assets recognized
in connection with the purchase approximated $9,734,000.
Note C - Sale of Business
On February 6, 1995, the Company completed the sale of substantially all of
the net assets of its Leigh Products Division and all of the capital stock of
its Canadian subsidiary, Leigh Metal Products, Ltd. Results of operations of
the Leigh businesses for the 1995 period prior to the sale are included in
other income as a part of the gain of $800,000 recognized in the first quarter
of 1995. This gain was revised downward to $500,000 in the third quarter of
fiscal 1995 and to $270,000 in the fourth quarter of fiscal 1995.
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
September 1, 1996
Note D - Stock Repurchase Agreement
On August 28, 1996, Robert Fleming & Co. Limited ("Flemings") acquired 80,436
shares of the Company's Junior Preferred stock and 112,706 shares of its
common stock from the Company's former chairman and other related parties
for $2,800,000 and simultaneously entered into an agreement with the Company
whereby Flemings has an option to sell such shares to the Company ("put
option") and the Company has the option to acquire such shares from Flemings
("call option") under certain conditions. The call and put options are
exercisable in three equal portions at prices ranging from $985,000 if
exercisable prior to December 31, 1996 to $1,274,000 at December 31, 1999 when
the options expire provided the Company shall have an equity of $2,275,000
at time of each exercise. The Company has interest bearing deposits of
$2,800,000 with Flemings in support of the agreement. The deposits are
refundable ratably as the options are exercised. W. Lawrence Banks, a
director of the Company, is also a director of Flemings.
Note E - Net Earnings Per Share
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A summary of the computation of net earnings per share is as follows:
Thirteen weeks ended Thirty-nine weeks ended
September 1, August 27, September 1, August 27,
1996 1995 1996 1995
(Thousands of dollars, except shares
outstanding and per share data)
<S> <C> <C> <C> <C>
Weighted average
shares outstanding 1,078,334 1,100,000 1,092,778 1,100,000
Net earnings $1,370 $ 673 $3,921 $2,569
Dividend requirements of
junior preferred stock (50) (50) (150) (150)
------- ------- ------- -------
Net earnings applicable
to common stock $1,320 $ 623 $3,771 $2,419
======= ======= ======= =======
Net earnings per share $1.22 $.57 $3.45 $2.20
===== ==== ===== =====
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company's cash requirements relate primarily to the financing
of working capital, purchase of property, plant and equipment, business
acquisition opportunities, servicing outstanding debt and cash dividends.
Cash provided by operating activities continues to be the major source of
the Company's funds and is expected to satisfy a substantial portion of future
cash needs. These funds have been augmented by long-term borrowings under a
revolving credit agreement.
Cash provided by operating activities totaled $3.6 million in the
1996 year-to-date period as compared to $3.4 million in the 1995 period. Cash
provided by operating activities, exclusive of working capital changes,
increased from $4.2 million in the 1995 period to $6.5 million in 1996 due
primarily to improved net earnings. Additional working capital investments
approximated $2.9 million in the 1996 year-to-date period compared to $797,000
in 1995. Increases in accounts receivable and inventories during both 1994
and 1995, partially offset by related increases in accounts payable and
accrued expenses, reflect a general acceleration in business activity during
both years. Working capital at September 1, 1996 was $19.1 million compared
to $13.3 million at December 3, 1995. The Company's current ratio of 2.1
to 1 at September 1, 1996 improved from the current ratio of 1.8 to 1 at
December 3, 1995.
Capital expenditures were $2.4 million in both the 1996 and 1995
periods. Total capital expenditures for 1996 are expected to approximate
$4.6 million and will be primarily for plant expansion, new products, profit
improvement and replacement.
On June 14, 1996, the Company redeemed its 14% Junior Subordinated
Debentures in the amount of $7 million from proceeds available under its
revolving credit facility. Under the terms of the revolving credit agreement,
which was renegotiated during the quarter, the Company can borrow up to $30
million under a formula which includes a term loan amount initially
established at $15 million and reducing thereafter at a rate of $145,833
monthly plus an amount based on qualified accounts receivables and
inventories. As of September 1, 1996, the balance outstanding under the
agreement was $11.2 million and the available unused credit under the
limitation formula approximated $7.0 million. Borrowings under the agreement
are collateralized by accounts receivable, inventories, general intangible
assets and certain real estate are due on August 8, 2001, and bear interest
beginning on September 30, 1996 at libor (5.4% at September 1, 1996) plus a
variable amount (1.5% at September 1, 1996) based upon the Company's ratio
of debt to earnings. The Company is required to pay an annual fee equal to
0.375% of the total unused credit under the agreement. The agreement also
provides for a standby credit facility of $15 million to finance possible
future acquisitions. The Company is required to pay an annual fee equal to
0.25% of the unused credit available under this portion of the agreement.
The Senior Subordinated Debentures require annual sinking fund
payments; however, as a result of the repurchase of debentures in 1990 and
1991, no principal maturities are due until 1999. Subsequent to the end of
the third quarter, the Company utilized available borrowings under its new
revolving credit agreement to redeem an additional $11.8 million of Senior
Subordinated Debentures which eliminated substantially all principal
maturities otherwise due in 1999 and 2000.
<PAGE>
Results of Operations - Thirteen weeks ended September 1, 1996 compared to
thirteen weeks ended August 27, 1995.
Consolidated net sales increased by $5.3 million (16.8%) from
$31.6 million in the 1995 period to $36.9 million in the 1996 period. All
product lines experienced increases, however, sales for the 1996 quarter were
particularly strong in custom cabinetry, builder and consumer hardware, and
commercial security products and systems.
Gross margin increased $2.0 million (16.6%) from $12.0 million in
the 1995 period to $14.0 million in the 1996 period. As a percentage of net
sales, gross margin decreased slightly from 38.1% in the 1995 period to 38.0%
in the 1996 period. Modest improvements in percentage gross margins for most
product lines were offset by reduced margins on pruning and harvesting tools
and biometric identification devices, and the effect of increased sales of
lower margin custom cabinetry. Favorable workers compensation insurance
experience adjustments benefited gross margins in both the 1996 and 1995
periods.
Selling, administrative and general expenses increased by $741,000
(8.0%) from $9.2 million in the 1995 period to $10.0 million in the 1996
period. Commissions and other volume related items comprise a significant
portion of the increase. Engineering costs also increased reflecting added
emphasis on new product development. Selling, administrative and general
expenses as a percentage of net sales decreased from 29.2% in the 1995 period
to 27.0% in the 1996 period.
Interest expense increased from $1.7 million in the 1995 period
to $1.8 million in the 1996 period due to the write-off of unamortized
deferred loan issue costs associated with debt that was either retired
or refinanced during the third quarter offset partially by the effect of
lower average interest rates resulting from the debt restructuring.
Other expense in the 1995 period includes a $300,000 downward
adjustment in the estimated gain of the 1995 first quarter sale of the
Company's Leigh business.
The 1996 provision for income taxes exceeded the amount expected
using the statutory rate of 34% due primarily to state income taxes and the
tax effect of nondeductible goodwill amortization. The 1995 provision for
income taxes was less than the expected amount due to an adjustment to reduce
prior years' estimated liabilities as a result of the expiration of the
statute of limitations for fiscal 1991.
Net earnings of $1.4 million ($1.22 per share) in the 1996 period
compares to net earnings of $673,000 ($.57 per share) in the 1995 period.
Results of Operations - Thirty-nine weeks ended September 1, 1996 compared
to thirty-nine weeks ended August 27, 1995.
Consolidated net sales increased by $16.7 million (17.1%) from
$97.5 million in the 1995 period to $114.2 million in the 1996 period. All
product lines experienced increases, however, sales were particularly strong
in pruning and harvesting tools, custom cabinetry, commercial security
products and systems, and water source heat pumps.
<PAGE>
Gross margin increased $6.1 million (17.1%) from $35.3 million in
the 1995 period to $41.4 million in the 1996 period. As a percentage of net
sales, gross margin was 36.2% in both the 1996 and 1995 periods. Modest
improvements in percentage gross margins for most product lines were offset
by increased warranty costs and labor inefficiencies at custom cabinetry
operations, reduced margins on biometric identification devices, and the
effect of increased sales of lower margin consumer pruning tools. Favorable
workers' compensation insurance experience adjustments benefited gross margins
in both the 1996 and 1995 periods.
Selling, administrative and general expenses increased by $2.5
million (9.1%) from $27.3 million in the 1995 period to $29.8 million in the
1996 period. Higher commission and other volume related expenses comprised
a significant portion of the increase. Engineering and product development
costs and an additional provision related to post employment benefits for the
Company's former president and chief executive and its former chairman also
contributed to the increase. These increases were reduced by $500,000 to
reflect an insurance recovery of prior period environmental remediation and
related costs. Selling, administrative and general expenses as a percentage
of net sales decreased from 28.1% in the 1995 period to 26.1% in the 1996
period.
Interest expense increased slightly from $5.0 million in the 1995
period to $5.1 million in the 1996 period due to the write-off of unamortized
deferred loan issue costs associated with debt that was either retired
or refinanced during the third quarter offset partially by the effect of
lower average interest rates resulting from the debt restructuring.
Other income in the 1995 period included a gain of $500,000 on the
sale of the Company's Leigh business. This gain was revised downward to
$270,000 in the fourth quarter of fiscal 1995.
The 1996 provision for income taxes exceeds the amount expected
using the statutory rate of 34% due primarily to state income taxes and the
tax effect of nondeductible goodwill amortization. The 1995 provision for
income taxes was less than the expected amount due to a tax benefit from
the sale of the Leigh businesses and an adjustment to reduce prior years'
estimated liabilities as a result of the expiration of the statute of
limitations for fiscal 1991.
Net earnings of $3.9 million ($3.45 per share) in the 1996 period
compares to net earnings of $2.6 million ($2.20 per share) in the 1995 period.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Pursuant to Item 601(c) of Regulation SK, a financial data schedule
is being submitted as an exhibit to this Form 10-Q.
Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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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.
HARROW INDUSTRIES, INC.
Date: October 7, 1996 By: /s/ John S. Hogan
John S. Hogan
Vice President and Chief Financial Officer
Date: October 7, 1996 By: /s/ Gary L. Humphreys
Gary L. Humphreys
Vice President, Corporate Controller and
Chief Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-01-1996
<PERIOD-START> DEC-04-1995
<PERIOD-END> SEP-01-1996
<CASH> 3,439
<SECURITIES> 0
<RECEIVABLES> 18,761
<ALLOWANCES> 883
<INVENTORY> 11,667
<CURRENT-ASSETS> 36,645
<PP&E> 41,367
<DEPRECIATION> 23,726
<TOTAL-ASSETS> 74,981
<CURRENT-LIABILITIES> 17,498
<BONDS> 49,138
0
4
<COMMON> 11
<OTHER-SE> 2,081
<TOTAL-LIABILITY-AND-EQUITY> 74,981
<SALES> 114,226
<TOTAL-REVENUES> 114,226
<CGS> 72,872
<TOTAL-COSTS> 72,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,100
<INCOME-PRETAX> 6,493
<INCOME-TAX> 2,572
<INCOME-CONTINUING> 3,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,921
<EPS-PRIMARY> 3.45
<EPS-DILUTED> 3.45
</TABLE>
