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 third thirteen week accounting Commission File
period ended August 31, 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 832,147 shares of common stock, par value $.01 a share, issued
and outstanding as of October 3, 1997.
<PAGE>
PART I FINANCIAL INFORMATION
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
<TABLE>
August 31, December 1,
1997 1996
(Unaudited) (Audited)
(Thousands of dollars)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 111 $ 3,088
Accounts receivable, less allowances
(1997--$1,183; 1996--$1,043) ................. 20,433 19,085
Inventories:
Finished products ............................ 4,793 3,735
Work-in-process .............................. 7,458 4,321
Raw materials ................................ 4,980 3,488
-------- --------
17,231 11,544
Other current assets ........................... 3,192 2,806
-------- --------
Total current assets ............................... 40,967 36,523
Property, plant and equipment:
Cost ........................................... 47,844 41,963
Accumulated depreciation (deduct) .............. (26,796) (24,239)
-------- --------
21,048 17,724
Other assets:
Intangible assets, less accumulated
amortization (1997--$7,600; 1996--$6,911) .... 11,923 12,613
Prepaid pension costs .......................... 8,087 7,595
Other .......................................... 263 265
-------- --------
20,273 20,473
-------- --------
$ 82,288 $ 74,720
======== ========
</TABLE>
<PAGE>
<TABLE>
August 31, December 1,
1997 1996
(Unaudited) (Audited)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable ........................................................... $ 6,547 $ 6,662
Accrued expenses ........................................................... 14,260 11,227
-------- --------
Total current liabilities ...................................................... 20,807 17,889
Long-term debt ................................................................. 53,108 47,388
Other noncurrent liabilities ................................................... 6,088 5,952
Redeemable preferred and common stock .......................................... 1,175 2,955
Stockholders' equity (deficit):
Junior preferred stock, par value $.01 per share - authorized: 470,000 shares;
issued (1997 - 399,964 shares; 1996 - 319,528 shares)
including 119,436 shares of treasury stock in 1997 and excluding
80,436 shares redeemable stock in 1996 ................................... 4 3
Common stock, par value $.01 per share - authorized:
1,100,000 shares; issued (1997 - 1,073,700 shares; 1996-987,294 shares)
including treasury stock (1997 - 241,553 shares; 1996 - 82,150 shares) and
excluding redeemable stock (1997 - 26,300 shares;
1996 - 112,706 shares) ................................................... 11 10
Additional paid-in capital ................................................. 4,006 3,370
Retained earnings .......................................................... 17,870 12,486
Cost of treasury stock (deduct) ............................................ (6,673) (1,225)
Deficit arising from restructuring transactions (deduct) ................... (14,108) (14,108)
-------- --------
1,110 536
-------- --------
$ 82,288 $ 74,720
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Unaudited)
<TABLE>
Thirteen weeks ended Thirty-nine weeks ended
August 31, September 1, August 31, September 1,
1997 1996 1997 1996
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales ................................. $ 40,232 $ 36,947 $ 121,516 $ 114,226
Cost of products sold ..................... 25,025 22,908 75,814 72,872
--------- --------- --------- ---------
Gross margin .............................. 15,207 14,039 45,702 41,354
Selling, administrative and general expense 11,408 9,973 34,259 29,817
--------- --------- --------- ---------
Operating income .......................... 3,799 4,066 11,443 11,537
Other expense (income):
Interest expense ...................... 1,414 1,828 4,183 5,100
Other ................................. 95 (27) (42) (56)
--------- --------- --------- ---------
1,509 1,801 4,141 5,044
--------- --------- --------- ---------
Earnings before income taxes .............. 2,290 2,265 7,302 6,493
Income taxes .............................. 914 895 2,919 2,572
--------- --------- --------- ---------
Net earnings .............................. $ 1,376 $ 1,370 $ 4,383 $ 3,921
========= ========= ========= =========
Net earnings per share .................... $ 1.54 $ 1.22 $ 4.74 $ 3.45
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
<TABLE>
Thirty-nine weeks ended
August 31, September 1,
1997 1996
-------------- ------------
(Thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings ...................................... $ 4,383 $ 3,921
Adjustments necessary to reconcile
net earnings to net cash provided by
operating activities:
Depreciation and amortization ............... 3,255 3,195
Other ....................................... (262) (648)
Changes in operating assets and liabilities:
Accounts receivable ....................... (341) (2,308)
Inventories ............................... (3,052) (1,261)
Other current assets ...................... (476) 79
Accounts payable and accrued expenses ..... 1,243 620
-------- --------
Net cash provided by operating activities ......... 4,750 3,598
INVESTING ACTIVITIES
Additions to property, plant and equipment ........ (3,891) (2,353)
Purchase of Company ............................... (3,967)
Other ............................................. 2 229
-------- --------
Net cash used in investing activities ............. (7,856) (2,124)
FINANCING ACTIVITIES
Proceeds from long-term borrowings ................ 13,028 14,310
Payments of long-term debt ........................ (7,311) (11,539)
Purchase of capital stock for treasury - net ...... (5,448) (1,226)
Cash dividends paid on preferred stock ............ (140) (200)
Other ............................................. (56)
-------- --------
Net cash provided by financing activities ......... 129 1,289
-------- --------
Decrease in cash and cash equivalents ............. (2,977) 2,763
Cash and cash equivalents at beginning of year .... 3,088 676
-------- --------
Cash and cash equivalents at end of period ........ $ 111 $ 3,439
======== ========
</TABLE>
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
August 31, 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 substantially 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 we
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 amounts reported.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
August 31, 1997
Note C - Net Earnings Per Share
A summary of the computation of net earnings per share is as follows:
<TABLE>
Thirteen weeks ended Thirty-nine weeks ended
August 31, September 1, August 31, September 1,
1997 1996 1997 1996
(Thousands of dollars, except shares
outstanding and per share data)
<S> <C> <C> <C> <C>
Weighted average shares outstanding 873,194 1,078,334 910,456 1,092,778
Net earnings $1,376 $1,370 $4,383 $3,921
Dividend requirements of
junior preferred stock (35) (50) (70) (150)
---------- --------- --------- --------
Net earnings applicable to common stock $1,341 $1,320 $4,313 $3,771
====== ====== ====== ======
Net earnings per share $1.54 $1.22 $4.74 $3.45
===== ===== ===== =====
</TABLE>
In February 1997, the Financial Accounting Standards Board issued FASB Statement
No. 128, "Earning per Share", ("SFAS No 128"). SFAS No. 128 requires dual
presentation of basic and diluted earnings per share ("EPS") on the face of the
income statment. Basic EPS is computed by dividing net income by the weighted
averge number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of securities
into common stock, such as stock options. SFAS 128 is effective for periods
beginning after December 15, 1997 and will require restatement of prior periods.
Earlier application is not permitted. The Company does not expect the new
standard will have a material impact on the amounts reported for either its
basic or diluted earnings per share.
<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 provided by operating activities totaled $4.8 million in the 1997
period as compared to $3.6 million in the 1996 period. The period to period
change in cash provided by operating activities resulted from improved 1997
earnings combined with the somewhat slower 1997 growth rate which necessitated a
lower investment in working capital. Working capital at August 31, 1997 was
$20.2 million compared to $18.6 million at December 1, 1996. Working capital
management performance measures including the accounts receivable collection
period and inventory turnover rates deteriorated slightly from the prior year.
The Company's current ratio of 2.0 to 1 at August 31, 1997 remained unchanged
from the current ratio at December 1, 1996.
Capital expenditures were $3.9 million in the 1997 period and $2.4 million
in the 1996 period. Total capital expenditures for 1997 are expected to
approximate $6.0 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 August 31, 1997 consists of approximately $26.0 million
of 12 3/8% Senior Subordinated Debentures and $27.1 million of borrowings under
a revolving credit facility with interest principally at LIBOR (5.75% at August
31, 1997) plus a variable amount (1.5% at August 31, 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 August 31, 1997, the
available unused credit under the asset-based limitation formula of the
revolving credit facility approximated $5.8 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
common stock. During the quarter ended August 31, 1997, the Company exercised
options to purchase 52,602 shares of common stock for approximately $2.3
million. Options to purchase an additional 26,300 shares of common stock were
outstanding at August 31, 1997 and were exercised on September 25, 1997 for
approximately $1.2 million.
<PAGE>
Results of Operations - Thirteen weeks ended August 31, 1997 compared to
thirteen weeks ended September 1, 1996.
Consolidated net sales increased by 8.9% from $36.9 million in the 1996
period to $40.2 million in the 1997 period. Security businesses experienced
particularly strong increases in sales in 1997 versus the comparable 1996
period. Smaller percentage sales increases were realized in builder and consumer
hardware, pruning and harvesting tools, and water source heat pumps. The
acquisition of Broadway contributed approximately $1.0 million to the 1997 third
quarter sales increase. Sales of custom cabinetry declined from the
exceptionally strong sales activity during the third quarter of fiscal 1996.
Gross margin increased by 8.3% from $14.0 million in the 1996 period to
$15.2 million in the 1997 period. As a percentage of net sales, gross margin
declined to 37.8% in the 1997 period compared to 38.0% in the 1996 period. The
slight decline in gross margin percentage was due to lower favorable workers
compensation insurance experience adjustments, higher rework and certain
shut-down costs associated with restructuring the production of biometric
identification devices. Offsetting these factors were selective price increases,
favorable material costs, labor productivity improvements and the continued
impact of more rapid sales growth of the higher margin security businesses.
Selling, administrative and general expenses increased by 14.4% from $10.0
million in the 1996 period to $11.4 million in the 1997 period. As a percentage
of net sales, selling, administrative and general expenses increased from 27.0%
in the 1996 period to 28.3% in the 1997 period. Engineering and product
development costs, additional customer rebates, higher commissions and other
volume related expenses and high initial expenses related to the Broadway
acquisition comprised a significant portion of the increase. The increase in
expenses as a percentage of sales is also impacted by the more rapid growth of
security businesses which have comparably higher percentage selling and
administrative expenses.
Interest expense decreased from $1.8 million in the 1996 period to $1.4
million in the 1997 period due to lower average borrowing rates resulting from
the 1996 renegotiation of the Company's revolving credit agreement and the
redemption of its 14% Junior Subordinated Debentures and $12.0 million of its 12
3/8% Senior Subordinated Debentures.
The effective income tax rate for the 1997 quarter was 39.9% compared to
39.5% for the 1996 period. These rates exceed the statutory federal income tax
rate of 34% due primarily to state income taxes and the tax effect of
nondeductible goodwill amortization.
Net earnings of $1.4 million ($1.54 per share) in the 1997 period compares
to net earnings of $1.4 million ($1.22 per share) in the 1996 period. Net
earnings per share are based on an average of 873,194 shares outstanding in the
1997 quarter compared to 1,078,334 for the 1996 quarter.
<PAGE>
Results of Operations - Thirty-nine weeks ended August 31, 1997 compared to
thirty-nine weeks ended September 1, 1996.
Consolidated net sales increased by 6.4% from $114.2 million in the 1996
period to $121.5 million in the 1997 period. Security businesses experienced
particularly strong increases in sales in 1997 versus the comparable 1996
period. Smaller percentage sales increases were realized in builder and consumer
hardware and custom cabinetry. Sales of water source heat pumps and pruning and
harvesting tools declined modestly from the exceptionally strong sales activity
during the first half of fiscal 1996. Approximately $2.0 million in sales were
the result of the acquisition of Broadway Industries, Inc.
Gross margin increased by 10.5% from $41.4 million in the 1996 period to
$45.7 million in the 1997 period. As a percentage of net sales, gross margin
improved from 36.2% in the 1996 period to 37.6% in the 1997 period. The
improvement in gross margin percentage was due to the more rapid sales growth of
the higher margin security businesses, selective price increases, favorable
material costs and labor productivity improvements.
Selling, administrative and general expenses increased by 14.9% from $29.8
million in the 1996 period to $34.3 million in the 1997 period. As a percentage
of net sales, selling, administrative and general expenses increased from 26.1%
in the 1996 period to 28.2% in the 1997 period. Engineering and product
development costs, additional customer rebates, higher commissions and other
volume related expenses and high initial expenses related to the Broadway
acquisition comprised a significant portion of the increase. The increase in
expenses as a percentage of sales is also impacted by the more rapid growth of
security businesses which have comparably higher percentage selling and
administrative expenses.
Interest expense decreased from $5.1 million in the 1996 period to $4.2
million in the 1997 period due to lower average borrowing rates resulting from
the 1996 renegotiation of the Company's revolving credit agreement and the
redemption of its 14% Junior Subordinated Debentures and $12.0 million of its 12
3/8% Senior Subordinated Debentures.
The effective income tax rate for the 1997 year-to-date period was 40.0%
compared to 39.6% for the 1996 period. These rates exceed the statutory federal
income tax rate of 34% due primarily to state income taxes and the tax effect of
nondeductible goodwill amortization.
Net earnings of $4.4 million ($4.74 per share) in the 1997 period compares
to net earnings of $3.9 million ($3.45 per share) in the 1996 period. Net
earnings per share are based on an average of 910,456 shares for the 1997
year-to-date period compared to 1,092,778 shares for the similar 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: October 6, 1997 By: /s/ John S. Hogan
John S. Hogan
Vice President and Chief Financial Officer
Date: October 6, 1997 By: /s/ Gary L. Humphreys
Gary L. Humphreys
Vice President, Corporate Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-02-1996
<PERIOD-END> AUG-31-1997
<CASH> 111
<SECURITIES> 0
<RECEIVABLES> 21,616
<ALLOWANCES> 1,183
<INVENTORY> 17,231
<CURRENT-ASSETS> 40,967
<PP&E> 47,844
<DEPRECIATION> 26,796
<TOTAL-ASSETS> 82,288
<CURRENT-LIABILITIES> 20,807
<BONDS> 53,108
1,175
4
<COMMON> 11
<OTHER-SE> 1,095
<TOTAL-LIABILITY-AND-EQUITY> 82,288
<SALES> 121,516
<TOTAL-REVENUES> 121,516
<CGS> 75,814
<TOTAL-COSTS> 75,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,183
<INCOME-PRETAX> 7,302
<INCOME-TAX> 2,919
<INCOME-CONTINUING> 4,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,383
<EPS-PRIMARY> 4.74
<EPS-DILUTED> 4.74
</TABLE>
