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 1, 1998 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 716,026 shares of common stock, par value $.01 a share, issued
and outstanding as of April 13, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
<TABLE>
March 1, November 30,
1998 1997
(Unaudited) (Audited)
(Thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 216 $ 337
Accounts receivable, less allowances
(1998 - $841; 1997 - $1,372) 22,462 23,016
Inventories:
Finished products 5,638 4,223
Work-in-process 5,893 5,638
Raw materials 4,959 4,460
------- --------
16,490 14,321
Other current assets 2,935 3,347
-------- --------
Total current assets 42,103 41,021
Property, plant and equipment:
Cost 40,505 49,033
Less accumulated depreciation 23,020 27,349
-------- --------
17,485 21,684
Other assets:
Intangible assets, less accumulated
amortization (1998 - $8,030; 1997 - $7,803) 11,494 11,721
Prepaid pension costs 10,177 8,251
Other 270 271
-------- --------
21,941 20,243
-------- --------
$81,529 $82,948
======= =======
</TABLE>
<PAGE>
<TABLE>
March 1, November 30,
1998 1997
(Unaudited) (Audited)
(Thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable $ 8,089 $ 7,327
Accrued expenses 13,409 13,885
-------- --------
Total current liabilities 21,498 21,212
Long-term debt 51,695 51,539
Other noncurrent liabilities 6,390 6,066
Redeemable preferred and common stock 7,826
Stockholders' equity (deficit):
Junior preferred stock, par value $.01 per share -
authorized: 470,000 shares; issued: 399,964 shares,
including 119,436 shares of treasury stock 4 4
Common stock, par value $.01 per share - authorized and issued:
1,100,000 shares; including treasury stock (1998 - 383,974
shares; 1997 - 267,853 shares) 11 11
Additional paid-in capital 4,063 4,063
Retained earnings 27,706 22,065
Cost of treasury stock (deduct) (15,730) (7,904)
Deficit arising from restructuring transactions (deduct) (14,108) (14,108)
Redeemable stock reclassified (deduct) (7,826)
--------- ----------
1,946 (3,695)
--------- ----------
$81,529 $82,948
======= =======
</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
March 1, March 2,
1998 1997
(Thousands of dollars,
except per share data)
<S> <C> <C>
Net sales $36,941 $38,069
Cost of products sold 23,632 24,574
-------- --------
Gross margin 13,309 13,495
Selling, administrative and general expenses 9,833 10,114
--------- --------
Operating income 3,476 3,381
Other expense (income):
Interest expense 1,426 1,293
Gain on sale of business (6,986)
Other (31) (56)
--------- ---------
5,591 1,237
--------- ---------
Earnings before income taxes 9,067 2,144
Income taxes 3,426 865
--------- ---------
Net earnings $ 5,641 $ 1,279
======== =======
Net earnings per share:
Basic $7.42 $1.34
Diluted 7.33 1.33
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
<TABLE>
Thirteen weeks ended
March 1, March 2,
1998 1997
------------ ---------
(Thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 5,641 $ 1,279
Adjustments necessary to reconcile
net earnings to net cash
used in operating activities:
Depreciation and amortization 947 1,075
Gain on sale of business (6,986)
Other 684 (61)
Changes in operating assets and liabilities:
Accounts receivable (2,704) (1,956)
Inventories (2,805) (1,898)
Other current assets (205) (234)
Accounts payable and accrued expenses 2,650 1
--------- ---------
Net cash used in operating activities (2,778) (1,794)
INVESTING ACTIVITIES
Additions to property, plant and equipment (532) (1,093)
Sale of business 10,859
Purchase of business (3,808)
Other 1
--------- ---------
Net cash from (used in) investing activities 10,328 (4,901)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 1,184 9,418
Payments on long-term debt (1,029)
Purchase of preferred and common stock for treasury (7,826) (1,970)
--------- ---------
Net cash provided by (used in) financing activities (7,671) 7,448
--------- ---------
Increase (decrease) in cash and cash equivalents (121) 753
Cash and cash equivalents at beginning of year 337 3,088
--------- ---------
Cash and cash equivalents at end of period $ 216 $ 3,841
========= =========
</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
March 1, 1998
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 - Sale of Business
On December 5, 1997, the Company sold substantially all the assets of its Rutt
Division ("Rutt") for cash, net of expenses, of $10,859,000. The Company also
received $700,000 in subordinated notes receivable from certain major Rutt
dealers as part of the sale. The sale resulted in the recognition of a gain
after related income taxes of approximately $4,400,000 in the first quarter of
fiscal 1998. Rutt manufactures high quality kitchen, bath and other cabinetry
that is sold through an extensive dealer network to the home renovation and new
home construction markets. Consolidated net sales in first quarter of fiscal
1997 included $5,430,000 related to the Rutt business, and operating income of
the business for the same quarter was $285,000.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (continued)
March 1, 1998
Note C - Net Earnings Per Share
A summary of the computation of net earnings per share is as follows:
<TABLE>
Thirteen weeks ended
March 1, March 2,
1998 1997
(Thousands of dollars, except shares
outstanding and per share data)
Basic:
<S> <C> <C>
Weighted average shares outstanding 755,584 953,030
Net earnings $5,641 $1,279
Dividend requirements of junior preferred stock (deduct) (35)
------- -------
Net earnings applicable to common stock $5,606 $1,279
====== ======
Net earnings per share $7.42 $1.34
===== =====
Diluted:
Weighted average shares outstanding 755,584 953,030
Incremental shares from assumed
exercised of stock options 9,605 9,350
--------- ---------
Shares used in the computation 765,189 962,380
Net earnings applicable to common stock $5,606 $1,279
====== ======
Net earnings per share $7.33 $1.33
===== =====
</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 $2.8 million in the 1998 period
as compared to $1.8 million in the 1997 period. The use of cash during the first
quarter of both fiscal 1998 and 1997 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 1998 and 1997
reflect both the higher current level of business activity and, for most
operations, anticipated increases in sales during subsequent quarters. Working
capital at March 1, 1998 was $20.6 million compared to $19.8 million at November
30, 1997. The Company's current ratio of 1.9 to 1 at March 1, 1998 remained
unchanged from its current ratio at November 30, 1997.
Capital expenditures were $532,000 in the 1998 period and $1.1 million in
the 1997 period. Total capital expenditures for 1998 are expected to approximate
$5.0 million and will be primarily for capacity expansion, new products, profit
improvement, data processing equipment, and replacement.
On December 5, 1997, the Company sold substantially all the assets of its
Rutt Division ("Rutt") for cash of approximately $10.9 million (see Note B to
the accompanying Consolidated Condensed Financial Statements).
Long-term debt at March 1, 1998 consisted of approximately $26.0 million of
12 3/8% Senior Subordinated Debentures and $25.7 million of borrowings under a
combination revolving and term loan credit facility with interest principally at
LIBOR (5.75% at March 1, 1998) 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 1, 1998, the available unused credit under the asset-based limitation
formula of the revolving credit facility approximated $14.7 million. The credit
agreement also provides for a standby facility of $3 million to finance possible
future acquisitions.
On December 31, 1997, the Company exercised options to acquire 116,121
shares of its common stock for cash of approximately $7.8 million. 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. As of March 1, 1998, the Company has exercised all
available options to acquire its common and preferred stock.
<PAGE>
Results of Operations - Thirteen weeks ended March 1, 1998 compared to thirteen
weeks ended March 2, 1997.
The Company sold its Rutt Division effective as of the beginning of the
first quarter of fiscal 1998 for cash of approximately $10.9 million resulting
in a gain before income taxes of approximately $7.0 million ($4.4 million after
related income taxes).
Consolidated net sales for the quarter increased by 13.2% to $36.9 million
in 1998 from $32.6 million in 1997 after excluding sales of the Rutt Division
from 1997. Sales of security products and water source heat pumps were
particularly strong during the quarter. Sales of plumbing fixtures resulting
from the acquisition of Broadway Industries effective as of the beginning of the
second quarter of 1997 added approximately $1.0 million in revenue to the first
quarter of 1998.
Gross margin increased $1.2 million or 10.3% to $13.3 million in the first
quarter of 1998 compared to $12.1 million in the same period of 1997 (excluding
gross margin of the Rutt Division). As a percentage of net sales, gross margin
decreased from 37.0% in 1997 to 36.0% in 1998. The decrease is due to the
initial impact of added fixed costs associated with plant expansions, lower
margins on plumbing fixtures, selective price concessions and an increase in
certain high-volume, lower-margin business.
Selling, administrative and general expenses on a comparable basis
(excluding the Rutt Division from 1997 amounts) increased by 9.7% to $9.8
million in the first quarter of 1998 from $9.0 million in the same period of
1997. Higher commissions and other volume related costs comprise a significant
portion of the increase. Additional sales staff, increased advertising and
promotion costs, added engineering and product developments costs and the impact
of the Broadway acquisition also contributed to the increase. Selling,
administrative and general expenses as a percentage of net sales, decreased from
27.5% in 1997 to 26.5% in 1998.
Interest expense increased from $1.3 million in the first quarter of 1997
to $1.4 million in the first quarter of 1998 due primarily to higher borrowings
under the Company's revolving credit facility.
The effective income tax rate for the 1998 quarter was 37.8% compared to
40.3% for the 1997 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 $5.6 million ($7.42 per share) for the first quarter of
1998, which includes $4.4 million relating to the sale of Rutt Division,
compares to net earnings of $1.3 million ($1.34 per share) for the first quarter
of 1997.
<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:
The registrant filed a Form 8-K on December 19, 1997 disclosing the
sale of its Rutt Division effective as of December 1, 1997.
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 13, 1998 By: /s/ John S. Hogan
John S. Hogan
Vice President and Chief Financial Officer
Date: April 13, 1998 By: /s/ Gary L. Humphreys
Gary L. Humphreys
Vice President, Corporate Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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> 11
<OTHER-SE> (1,963)
<TOTAL-LIABILITY-AND-EQUITY> 83,494
<SALES> 38,069
<TOTAL-REVENUES> 38,069
<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> 1.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-START> DEC-01-1997
<PERIOD-END> MAR-01-1998
<CASH> 216
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<RECEIVABLES> 23,303
<ALLOWANCES> 841
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0
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</TABLE>
