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 first thirteen week accounting Commission File
period ended March 2, 1997 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 905,144 shares of common stock, par value $.01 a share, issued
and outstanding as of April 10, 1997.
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PART I FINANCIAL INFORMATION
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
March 2, December 1,
1997 1996
(Unaudited) (Audited)
(Thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 3,841 $ 3,088
Accounts receivable, less allowances
(1997--$1,081; 1996--$1,043) ................. 21,041 19,085
Inventories:
Finished products ............................ 4,437 3,735
Work-in-process .............................. 4,970 4,321
Raw materials ................................ 4,035 3,488
-------- --------
13,442 11,544
Other current assets ........................... 3,010 2,806
-------- --------
Total current assets ............................... 41,334 36,523
Property, plant and equipment:
Cost ........................................... 43,057 41,963
Accumulated depreciation ....................... (25,085) (24,239)
-------- --------
17,972 17,724
Other assets:
Intangible assets, less accumulated
amortization (1997--$7,141; 1996--$6,911) .... 12,383 12,613
Prepaid pension costs .......................... 7,732 7,595
Other .......................................... 4,073 265
-------- --------
24,188 20,473
-------- --------
$ 83,494 $ 74,720
======== ========
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<TABLE>
March 2, December 1,
1997 1996
(Unaudited) (Audited)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable ....................................... $ 7,131 $ 6,662
Accrued expenses ....................................... 10,759 11,227
-------- --------
Total current liabilities .................................. 17,890 17,889
Long-term debt ............................................. 56,807 47,388
Other noncurrent liabilities ............................... 5,997 5,952
Redeemable preferred and common stock ...................... 4,748 2,955
Stockholders' equity (deficit):
Junior preferred stock, par value
$.01 per share-authorized:
470,000 shares; issued
(1997-360,964 shares;
1996-319,528 shares)
including treasury stock
(1997-80,436 shares;
1996-none) and excluding
redeemable stock (1997-39,000
shares; 1996-80,436 shares) .......................... 4 3
Common stock, par value
$.01 per share - authorized:
1,100,000 shares; issued
(1997-973,212 shares;
1996-987,294 shares)
including treasury stock
(1997-146,970 shares;
1996-82,150 shares) and
excluding redeemable stock
(1997-126,788 shares;
1996-112,706 shares) ................................. 10 10
Additional paid-in capital ............................. 3,716 3,370
Retained earnings ...................................... 11,625 12,486
Cost of treasury stock (deduct) ........................ (3,195) (1,225)
Deficit arising from restructuring transactions (deduct) (14,108) (14,108)
-------- --------
(1,948) 536
-------- --------
$ 83,494 $ 74,720
======== ========
See accompanying notes to consolidated condensed financial statements.
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<TABLE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Unaudited)
Thirteen weeks ended
March 2, March 3,
1997 1996
(Thousands of dollars,
except per share data)
<S> <C> <C>
Net sales .................................. $ 39,035 $ 38,124
Cost of products sold ...................... 24,574 24,853
-------- --------
Gross margin ............................... 14,461 13,271
Selling, administrative and general expenses 11,080 10,374
-------- --------
Operating income ........................... 3,381 2,897
Other expense (income):
Interest expense ....................... 1,293 1,611
Other .................................. (56) (3)
-------- --------
1,237 1,608
-------- --------
Earnings before income taxes ............... 2,144 1,289
Income taxes ............................... 865 530
-------- --------
Net earnings ............................... $ 1,279 $ 759
======== ========
Net earnings per share ..................... $ 1.34 $ .64
======== ========
See accompanying notes to consolidated condensed financial statements.
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<TABLE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
Thirteen weeks ended
March 2, March 3,
1997 1996
-------- ---------
(Thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings ...................................... $ 1,279 $ 759
Adjustments necessary to reconcile
net earnings to net cash
used in operating activities:
Depreciation and amortization ............... 1,075 1,038
Other ....................................... (61) (76)
Changes in operating assets and liabilities:
Accounts receivable ....................... (1,956) (4,745)
Inventories ............................... (1,898) (2,216)
Other current assets ...................... (234) (351)
Accounts payable and accrued expenses ..... 1 1,967
------- -------
Net cash used in operating activities ............. (1,794) (3,624)
INVESTING ACTIVITIES
Additions to property, plant and equipment ........ (1,093) (643)
Purchase of business .............................. 3,808
------- -------
Net cash used in investing activities ............. (4,901) (643)
FINANCING ACTIVITIES
Proceeds from long-term borrowings ................ 9,418 4,313
Purchase of preferred and common stock for treasury (1,970)
------- -------
Net cash provided by financing activities ......... 7,448 4,313
------- -------
Increase in cash and cash equivalents ............. 753 46
Cash and cash equivalents at beginning of year .... 3,088 676
------- -------
Cash and cash equivalents at end of period ........ $ 3,841 $ 722
======= =======
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
March 2, 1997
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 February 28, 1997, the Company purchased all of the assets of Broadway
Industries, Inc. ("Broadway") for cash including related expenses of
approximately $4,000,000 under a transaction approved by a bankruptcy court on
February 14, 1997. Broadway manufactures and markets high quality decorative
plumbing fixtures and bath and cabinet hardware. The acquisition, which will be
accounted for under the purchase method, was financed principally through
borrowings under the Company's revolving credit facility. Broadway had net sales
of approximately $9,500,000 in 1996. Pro forma consolidated net earnings for
1996, and 1997, assuming the acquisition had occurred as of the beginning of the
fiscal 1996, would not have varied significantly from the amount reported.
The portion of purchase price paid as of March 2, 1997 ($3,808,000) is included
in the accompanying balance sheet in other noncurrent assets and will be
allocated to the specific assets acquired and liabilities assumed effective as
of the beginning of the Company's second quarter.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
March 2, 1997
Note C - Net Earnings Per Share
A summary of the computation of net earnings per share is as follows:
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Thirteen weeks ended
March 2, March 3,
1997 1996
(Thousands of dollars, except shares
outstanding and per share data)
<S> <C> <C>
Weighted average shares outstanding ........... 953,030 1,100,000
Net earnings .................................. $ 1,279 $ 759
Dividend requirements of junior preferred stock (50)
---------- ----------
Net earnings applicable to common stock ....... $ 1,279 $ 709
========== ==========
Net earnings per share ........................ $ 1.34 .64
========== ==========
</TABLE>
<PAGE>
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 seasonal 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 used in operating activities totaled $1.8 million in the 1997 period
as compared to $3.6 million in the 1996 period. The use of cash during the first
quarter of both fiscal 1997 and 1996 results from increases in accounts
receivable and inventories and follows the normal seasonal pattern of business
activity. Accounts receivable increases are due primarily to the seasonal sales
of pruning and harvesting tools. Inventory increases in fiscal 1997 and 1996
reflect both the higher current level of business activity and, for most
operations, anticipated increases in sales during subsequent quarters. Working
capital at March 2, 1997 was $23.4 million compared to $18.6 million at December
1, 1996. The Company's current ratio of 2.3 to 1 at March 2, 1997 improved from
the current ratio of 2.0 to 1 at December 1, 1996.
Capital expenditures were $1.1 million in the 1997 period and $643,000 in
the 1996 period. Total capital expenditures for 1997 are expected to approximate
$8.2 million and will be primarily for capacity expansion, new products, profit
improvement and replacement.
The Company acquired the net assets of Broadway Industries, Inc. effective
as of the end of the first quarter for a total purchase price of approximately
$4.0 million (see Note B to the accompanying Consolidated Condensed Financial
Statements).
Long-term debt at March 2, 1997 consists of approximately $26.0 million of
12 3/8% Senior Subordinated Debentures and $30.8 million of borrowings under a
revolving credit facility with interest principally at LIBOR (5.375% at March 2,
1997) plus a variable amount (1.25% at March 2, 1997) based upon the Company's
ratio of debt to earnings. The Senior Subordinated Debentures are due $6.5
million in 2001 with the balance due in 2002. As of March 2, 1997, the available
unused credit under the asset-based limitation formula of the revolving credit
facility approximated $4.9 million. The revolving credit agreement also provides
for a standby credit facility of $8 million to finance possible future
acquisitions.
The Company is a party to various put and call options with respect to its
junior preferred and common stock. During the quarter ended March 2, 1997, the
Company exercised options to purchase 80,436 shares of junior preferred stock
and 64,820 shares of common stock for approximately $2.0 million. Options to
purchase an additional 39,000 shares of junior preferred stock and 126,788
shares of common stock were outstanding at March 2, 1997 and are expected to be
exercised prior to the end of fiscal 1997 for approximately $4.8 million.
<PAGE>
Results of Operations - Thirteen weeks ended March 2, 1997 compared to thirteen
weeks ended March 3, 1996.
Consolidated net sales increased by 2.4% from $38.1 million in the 1996
period to $39.0 million in the 1997 period. Sales of security products,
commercial and consumer hardware and custom cabinetry were particularly strong
during the quarter. These increases were partially offset by year-to-year
decreases in the sales of pruning tools and water source heat pumps..
Gross margin increased $1.2 million or 9.0% from $13.3 million in the 1996
period to $14.5 million in the 1997 period. As a percentage of net sales, gross
margin improved to 37.0% in the 1997 period compared to 34.8% in the 1996
period. The improvement is due to a favorable product mix, reduced warranty
costs, price increases, and favorable costs on certain parts and material.
Selling, administrative and general expenses increased by $700,000 (6.8%)
from $10.4 million in the 1996 period to $11.1 million in the 1997 period.
Higher commission, freight and other volume related expenses comprised a
significant portion of the increase. Engineering and product development costs,
and provisions for gain sharing and other incentive compensation also
contributed to the increase. Partially offsetting these increases was the
elimination of employee severance costs which adversely impacted the first
quarter of fiscal 1996. As a percentage of net sales, selling, administrative
and general expenses increased from 27.2% in the 1996 period to 28.4% in the
1997 period.
Interest expense decreased from $1.6 million in the 1996 period to $1.3
million in the 1997 period due to lower average borrowing rates resulting from
the renegotiation of the Company's revolving credit agreement and the 1996
redemption of the 14% Junior Subordinated Debentures and $12.0 million of the 12
3/8% Senior Subordinated Debentures..
The effective income tax rate for the 1997 quarter was 40.3% compared to
41.1% for the 1996 period. These rates exceed the statutory rate of 34% due
primarily to state income taxes and the tax effect of nondeductible goodwill
amortization.
Net earnings of $1.3 million ($1.34 per share) in the 1997 period compares
to net earnings of $759,000 ($.64 per share) in the 1996 period.
<PAGE>
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.
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: April 10, 1997 By: /s/ John S. Hogan
John S. Hogan
Vice President and Chief Financial Officer
Date: April 10, 1997 By: /s/ Gary L. Humphreys
Gary L. Humphreys
Vice President, Corporate Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-02-1996
<PERIOD-END> MAR-02-1997
<CASH> 3,841
<SECURITIES> 0
<RECEIVABLES> 22,122
<ALLOWANCES> 1,081
<INVENTORY> 13,442
<CURRENT-ASSETS> 41,334
<PP&E> 43,057
<DEPRECIATION> 25,085
<TOTAL-ASSETS> 83,494
<CURRENT-LIABILITIES> 17,890
<BONDS> 56,807
4,748
4
<COMMON> 10
<OTHER-SE> (1,962)
<TOTAL-LIABILITY-AND-EQUITY> 83,494
<SALES> 39,035
<TOTAL-REVENUES> 39,035
<CGS> 24,574
<TOTAL-COSTS> 24,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,293
<INCOME-PRETAX> 2,144
<INCOME-TAX> 865
<INCOME-CONTINUING> 1,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,279
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
</TABLE>
