SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended November 30, 1997
[ ] Transaction Report Pursuant to Section 13 or 15(d)
of the Securities Act of 1934
Commission File No. 1-9440
HARROW INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1499075
(State of Incorporation) (I.R.S. Employer Identification No.)
2627 East Beltline, S.E., Grand Rapids, MI 49546
Registrant's telephone number, including area code
(616) 942-1440
Securities registered pursuant to Section 12(b) of the Act:
$65,000,000 12-3/8% Senior Subordinated Debentures due 2002
Securities registered pursuant to Section 12(g) of the Act:
None
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 with the Commission and (2) has been subject
to such filing requirements for the past 90 days. Yes _X_ No ___
<PAGE>
ITEM 1. BUSINESS
General
Through its subsidiaries and divisions, Harrow Industries, Inc. ("Harrow",
or the "Company") designs, manufactures and markets a wide variety of products
primarily for the consumer, home remodeling, commercial retrofit, new
residential and commercial construction, access control, and time and attendance
markets. The Company's major products include professional and consumer pruning
and harvesting hand tools, consumer and architectural hardware, electronic
locking systems, biometric identification devices, custom residential cabinetry
and water source heat pumps. Subsequent to November 30, 1997, the Company sold
its custom cabinetry division (see Note L to the Consolidated Financial
Statements.)
Harrow's business is affected by various general economic conditions,
including the rate of new construction, which is related to the availability and
cost of financing and other economic conditions. Management's strategy has been
to limit Harrow's sensitivity to changes in the economy by maintaining a
diversified product base and emphasizing the development of products marketed to
the commercial security and home remodeling and do-it-yourself markets, which
management believes have historically been less sensitive to economic downturns.
There can be no assurances, however, that a significant decline in the rate of
new construction would not have a material adverse effect on Harrow's business.
Some of Harrow's operations have seasonal characteristics. This generally
produces lower results in Harrow's first and third fiscal quarters than in the
second and fourth quarters. Since most of its operations are driven by orders
received throughout the year, backlog is not a significant factor to Harrow's
overall business. The largest customer of Harrow, served by two unrelated
divisions, accounts for approximately 10% of consolidated net sales. No other
customer accounts for 5% or more of consolidated sales.
Segment Information
Harrow operates in three industry segments: (1) security products, (2)
hardware and tools, and (3) other building products.
Information concerning sales, operating income, identifiable assets and
certain other information by industry segment is found in Note O to the
Consolidated Financial Statements.
In accordance with management's philosophy that Harrow's operations be
decentralized and its subsidiaries and divisions be granted significant
autonomy, most aspects of the operations, including purchasing, engineering,
manufacturing and marketing are conducted locally. Management believes that this
philosophy permits its various businesses to respond more quickly to, and
operate more effectively in, the markets they serve. Following is a description
of the businesses operating in each of the three industry segments.
<PAGE>
Security Products Group
Locknetics Security Engineering
Locknetics Security Engineering ("LSE") located in Forestville,
Connecticut, designs, manufactures and distributes electronic locking systems
including electromagnetic and electromechanical security products and systems
primarily for security system wholesalers, contract hardware, locksmith dealers,
alarm wholesalers and automatic door operator manufacturers.
LSE products are sold through its own sales force and manufacturers'
representatives.
Recognition Systems, Inc.
Recognition Systems, Inc. ("RSI"), acquired as of the beginning of fiscal
1995, is located in Campbell, California and was founded in 1986 with a charter
to develop, manufacture and market biometric identification devices based upon
the measurement of three dimensional hand geometry by using a sophisticated
combination of infrared cameras, electronic circuitry and associated algorithms.
RSI sells its products into three markets - access control, time and
attendance and personal identification - through a nationwide network of sales
representative agencies. International sales are typically made to authorized
country distributors who resell within their territories.
Hardware and Tools Group
H.B. Ives
H.B. Ives ("Ives"), Harrow's largest operation, is headquartered in
Wallingford, Connecticut with manufacturing and distribution facilities in New
Haven, Connecticut, Michigan City, Indiana, and Olathe, Kansas, and a
distribution center in Los Angeles, California. A significant increase or
decrease in Ives' operating performance could have a material effect on Harrow's
overall performance.
Ives manufactures a broad line of commercial and consumer hardware
including entry sets, door coordinators, exterior door hardware, door stops,
surface bolts, and cabinet and bath hardware. Through separate operations, Ives
also manufactures wire products and storage hooks as well as decorative brass
hardware and plumbing fittings.
Sales to the consumer residential hardware market are direct in the case of
some large customers, and through independent wholesalers to other customers who
are serviced by manufacturers' representatives. Ives sells to the contractor
hardware and plumbing markets through distributors serviced by its own sales
force.
<PAGE>
Corona Clipper
Corona Clipper ("Corona"), located in Corona, California, designs,
manufactures and distributes pruning and harvesting tools, shears, saws and
other hand-held gardening tools for homeowners and nurseries. A line of high
quality professional pruning and harvesting tools is sold for agricultural
applications in the grape, citrus, avocado and apple industries as well as to
distributors that service professional landscapers.
Corona sells to the retail market through a combination of in-house
salespeople and manufacturers' representatives. Its customers include mass
merchandisers, home improvement centers, hardware chains and various lawn and
garden distributors. The professional market for pruning tools is served through
a combination of in-house salespeople and manufacturers' representatives.
Other Building Products Group
Rutt
Rutt, located in Goodville, Pennsylvania, is a leading manufacturer of high
quality custom kitchens, bath and other cabinetry primarily to the home
renovation markets. Rutt is perceived to be the quality leader in the custom
residential cabinet market.
Rutt's cabinetry is made to order and is of such high quality that Rutt
receives, through the efforts of its own sales force, extensive representation
by dealers in affluent residential areas of the country. Rutt currently has
products on display in over 130 authorized dealer locations. Approximately 80%
of Rutt's sales are to the home renovation market. Subsequent to November 30,
1997, the Company sold its Rutt operation (see Note L to the Consolidated
Financial Statements).
FHP Manufacturing
FHP Manufacturing ("FHP"), located in Fort Lauderdale, Florida, is one of
the largest manufacturers of water source heat pumps in the United States. These
units are sold throughout North America under the trade name Florida Heat Pump.
FHP is a leader in heating and cooling technology that uses the energy
available in natural water supplies. Tests show that FHP units are significantly
more energy efficient than conventional units, which offsets the higher capital
and installation costs of FHP equipment for customers with certain levels of
heating and cooling requirements.
FHP sells through manufacturers' representatives to large mechanical
contractors and through multi-branch stocking distributors who in turn sell to
smaller dealers. FHP acts as its own distributor in parts of southern Florida.
<PAGE>
Employees
As of January 1, 1998, Harrow employed 984 employees, including 744 in
production (management and hourly), 96 in marketing and sales and 144 in finance
and administration. During the year, hourly production employees can increase by
as many as 50 employees, depending on seasonal workloads in some Harrow plants.
ITEM 2. PROPERTIES
The following table sets forth the facilities of Harrow, excluding public
warehouse space, by location and operation. Each location (except the facilities
designated as warehouses and sales showrooms) include administrative offices:
<TABLE>
Location of Owned Leased
Division/Subsidiary (Square Ft.) (Square Ft.) Use
<S> <C> <C> <C>
Grand Rapids, MI -- 4,264(1) Corporate Offices.
Coopersville, MI -- 6,660(1) Management Information Services
New Haven, CT 100,000 -- Manufacture of builder and consumer
(H.B. Ives) hardware, warehouse and shipping
facilities.
Wallingford, CT -- 46,700(1) Sales office and warehouse and shipping
(H.B. Ives) facilities.
Michigan City, IN 69,000 -- Manufacture of wire hardware,
(H.B. Ives) warehouse and shipping facilities.
Olathe, KS 61,916 -- Manufacture of plumbing fixtures and
(H.B. Ives) brass hardware, warehouse and shipping
facilities.
Forestville, CT -- 54,470(1) Manufacture of electronic locking
(LSE) systems and accessories, warehouse and
shipping facilities.
Goodville, PA 174,843 -- Manufacture of custom cabinetry,
(Rutt) warehouse and shipping facilities.
Los Angeles, CA -- 2,668(1) Sales showroom sublet to independent
(Rutt) dealer.
Atlanta, GA -- 1,958(1) Sales showroom sublet to independent
(Rutt) dealer.
Chicago, IL -- 3,451(1) Sales showroom sublet to independent
(Rutt) dealer.
<PAGE>
Fort Lauderdale, FL 93,600 -- Manufacture of heat pumps, warehouse
(FHP) and shipping facilities.
Corona, CA 73,000 -- Manufacture of pruning tools and other
(Corona Clipper) forged products, warehouse and shipping
facilities.
Campbell, CA -- 13,694(1) Manufacture of biometric identification
(RSI) devices, warehouse and shipping
facilities.
</TABLE>
(1) Lease Terms:
Grand Rapids, MI--Annual Rental $54,366--expiration September 30, 1998.
Coopersville, MI--Annual Rental $84,585--expiration February 5, 1999.
Wallingford, CT--Annual Rental $316,180--expiration December 31, 2002.
Forestville, CT--Annual Rental $333,188--expiration May 31, 2008. Los
Angeles, CA--Annual Rental $72,481--expiration March 31, 2005;
Sub-lease Rental $72,481--expiration March 31, 2005.
Atlanta, GA--Annual Rental $42,321--expiration April 30, 2000;
Sub-lease Rental $42,321--expiration April 30, 2000.
Chicago, IL--Annual Rental $85,861--expiration November 30, 2005;
Sub-lease Rental $85,861--expiration November 30, 2005.
Campbell, CA--Annual Rental $128,176--expiration September 30, 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in proceedings with respect to environmental
matters including sites where the Company has been identified as a potentially
responsible party under federal and state environmental laws and regulations.
While it is not possible to quantify with certainty the potential impact of
actions regarding environmental matters, particularly any future remediation and
other compliance efforts, in the opinion of management, compliance with the
present environmental protection laws will not have a material adverse effect on
the financial condition or competitive position of the Company. However, the
Company's efforts to comply with increasingly stringent environmental
regulations may have an adverse effect on the Company's future earnings.
Provisions of $45,000 in 1997, $453,000 in 1996 and $428,000 in 1995 were
recorded to cover the costs of remedial actions expected to be taken with
respect to the cleanup of these sites. As of November 30, 1997, the remaining
recorded liability related to these issues totaled $739,000, of which $400,000
was provided to cover estimated remediation costs of a former plant site. Annual
remediation costs for this site currently approximate $75,000, and remediation
is expected to be completed in as few as three years or as many as twenty years.
The Company is also subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position of the Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not registered nor is it publicly traded. See
Item 12 for information concerning the distribution of ownership of the
Company's common stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Fiscal Year Ended (1)
November 30, December 1, December 3, November 27, November 28,
1997 1996 1995 1994 1993
------------ ----------- ----------- ------------ ------------
(Thousands of Dollars, Except Per Share Data and Ratios)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales (2) ............... $ 160,906 $ 148,327 $ 131,730 $ 136,898 $ 126,449
Net earnings (loss) ......... 7,402 5,315 3,403 1,615 (226)
Net earnings (loss) per
share of common stock (3) 8.17 4.76 2.91 1.29 (.41)
Ratio of earnings to fixed
charges (4) .............. 2.95x 2.24x 1.63x 1.37x 1.03x
Balance sheet data:
Total assets ................ $ 82,948 $ 74,720 $ 68,989 $ 61,378 $ 58,622
Long-term debt and other
noncurrent liabilities (5) 65,431 56,295 52,510 50,337 50,088
Stockholders' equity
(deficit) (6) ............ (3,695) 536 (399) (3,730) (5,122)
</TABLE>
(1) Fiscal 1995 includes 53 weeks; all other fiscal years shown include 52
weeks.
(2) Net sales have been restated for fiscal 1993 through 1996 to reflect the
reclassification of volume rebates and outbound freight expense as
deductions from net sales rather than as elements of selling,
administrative and general expenses as previously reported.
(3) Earnings per share of common stock are calculated based on weighted
average outstanding shares of 892,685 in 1997, 1,074,046 in 1996,
1,100,000 in 1995, 1,096,671 in 1994 and 1,043,340 in 1993.
(4) Earnings used in computing the ratio of earnings to fixed charges consist
of pretax earnings before fixed charges. Fixed charges consist of interest
expense, amortization of deferred financing costs and the interest portion
of rental expense.
(5) Includes long-term debt, deferred income taxes, deferred compensation and
redeemable preferred and common stock.
(6) Includes the effects of the restructuring transactions which occurred in
1987, as described in Note M to the Consolidated Financial Statements.
<PAGE>
ITEM 7. 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, the purchase of property, plant and equipment, business
acquisition opportunities, the servicing of 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 debt under a revolving
credit agreement.
Cash provided by operating activities totaled $9.0 million in 1997 as
compared to $5.7 million in 1996 and $6.4 million in 1995. Cash provided by
operating activities before considering changes in working capital totaled $10.9
million in 1997, $8.2 million in 1996 and $5.2 million in 1995 reflecting a
continuous improvement in net earnings. Increased investments in accounts
receivable and inventories were required in each year as a result of growth in
the Company's businesses. These investments were partially funded in 1997 and
1996 by related increases in accounts payable and accrued expenses. Similar
accounts payable increases in 1995 were more than adequate to fund the 1995
increase in accounts receivable and inventories. Working capital at November 30,
1997 was $19.8 million compared to $18.6 million at the end of fiscal 1996. The
Company's current ratio of 1.9 to 1 at the end of 1997 declined slightly from
2.0 to 1 at the end of 1996.
Capital expenditures were $5.2 million in 1997, $3.1 million in 1996 and
$3.6 million in 1995. The expenditures were primarily for capacity expansion,
new products, replacement and cost reduction. Capital additions for 1998 are
expected to approximate $5.8 million and will be primarily for capacity
expansion, new products and replacement.
On February 28, 1997, the Company purchased substantially all of the assets
of Broadway Industries, Inc. for cash, including related expenses, of $3.9
million under a transaction approved by a bankruptcy court on February 14, 1997.
Broadway manufactures and markets high quality decorative plumbing fixtrues and
bath and cabinet hardware.
Under the terms of a revolving credit agreement, the Company may borrow up
to $37 million under a formula which includes an amount based on qualified
accounts receivable and inventories, plus a term loan amount initially
established at $15 million. As of November 30, 1997, the available unused credit
under the agreement approximated $9 million. The agreement also provides for a
standby credit facility of $8 million to finance possible future acquisitions or
other specified transactions.
The Company's Senior Subordinated Debentures require annual sinking fund
payments; however, as a result of prior year repurchases of debentures, no
principal maturities are due until 2001, when $6.5 million is due.
<PAGE>
During fiscal 1997, the Company acquired 119,436 shares of its junior
preferred stock and 191,608 shares of its common stock for $6.8 million.
Subsequent to November 30, 1997, the Company acquired an additional 116,121
shares of its common stock for $7.8 million by utilizing $5.0 million of its
standby credit facility and $2.8 million of the formula-based revolving credit
facility.
Effects of Inflation
The Company believes inflation has not had a material overall effect on its
operations during the past three years.
Results of Operations - 1997 Compared to 1996
Consolidated net sales increased by 8.5% from $148.3 million in 1996 to
$160.9 million in 1997. Net sales of the security products segment increased by
30.1% from $23.2 million in 1996 to $30.1 million in 1997. Significant sales
increases were realized for both biometric identification devices (hand readers)
and electronic and electromagnetic security products and systems. Increased
penetration into the time and attendance market resulted in exceptional revenue
growth for hand readers. Net sales of the hardware and tools segment increased
by 5.6% from $80.8 million in 1996 to $85.3 million in 1997. Sales increases of
consumer, building and architectural hardware were partially offset by decreased
sales of pruning and harvesting tools resulting from the elimination of certain
low margin business. Sales of plumbing fixtures as a result of the acquisition
of Broadway added approximately $3 million to net sales. Net sales for the other
building products segment increased by 2.4% from $44.4 million in 1996 to $45.4
million in 1997. Both product lines in this segment (custom cabinetry and water
source heat pumps) experienced small sales increases.
Gross margin increased by 12.7% from $52.1 million in 1996 to $58.8 million
in 1997. As a percentage of net sales, gross margin increased from 35.2% in 1996
to 36.5% in 1997. The improvement in gross margin percentage was due to the more
rapid sales growth of the higher margin security businesses, selective price
increases, lower healthcare costs, favorable material costs and labor
productivity improvements.
Selling, administrative and general expenses increased 10.9% from $37.0
million in 1996 to $41.0 million in 1997. As a percentage of net sales, selling,
administrative and general expenses increased from 24.9% in 1996 to 25.5% in
1997. Engineering and product development costs, 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.
Operating income increased $2.6 million from $15.1 million in 1996 to $17.7
million in 1997. Operating income as a percentage of net sales improved to 11.0%
in 1997 compared to 10.2% in 1996.
<PAGE>
Interest expense decreased from $6.4 million in 1996 to $5.6 million in
1997 due to the full year impact of lower average interest rates resulting from
the 1996 redemption of subordinated debentures and renegotiation of the
Company's revolving credit agreement.
Earnings before income taxes increased to $12.2 million in 1997 from $8.8
million in 1996 due to increased operating income resulting from higher sales
and the impact of refinancing debt at a lower interest rate.
The 1997 and 1996 provisions for income taxes exceed the amount expected
using the statutory rate of 34% due primarily to state income taxes and the tax
effect of nondeductible goodwill amortization.
Net earnings were $7.4 million ($8.17 per share) in 1997 compared to $5.3
million ($4.76 per share) in 1996.
Results of Operations - 1996 Compared to 1995
Consolidated net sales increased by 12.6% from $131.7 million in 1995 to
$148.3 million in 1996. Net sales of the security products segment increased by
14.4% from $20.2 million in 1995 to $23.2 million in 1996 due primarily to
increased sales of electronic and electromagnetic security products and systems.
Net sales of the hardware and tools segment increased by 12.1% from $72.0
million in 1995 to $80.8 million in 1996. Both major product lines experienced
sales gains, however, the percentage increase in sales of consumer, building and
architectural hardware was more modest than the increase for consumer and
professional pruning and harvesting tools. Net sales for the other building
products segment increased by 12.5% from $39.4 million in 1995 to $44.4 million
in 1996. Both product lines in this segment experienced sales increases although
the percentage for custom cabinetry was somewhat greater than that of water
source heat pumps.
Gross margin increased from $46.0 million in 1995 to $52.1 million in 1996.
As a percentage of net sales, gross margin increased slightly from 35.0% in 1995
to 35.2% in 1996. Higher sales volume, a favorable workers' compensation
insurance experience adjustment, and improved manufacturing efficiencies
contributed to the gross margin improvement. Offsetting these factors were lower
margins on sales of certain consumer pruning tools and higher warranty costs
which affected custom cabinetry gross margins.
Selling, administrative and general expenses increased 5.5% from $35.1
million in 1995 to $37.0 million in 1996. Commission and other volume related
costs comprise a significant portion of the increase. Engineering and product
development costs 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
include provisions of $1.0 million in 1995 and $500,000 in 1996 to provide for
estimated postemployment benefits and certain other costs related to the
Company's president and chief executive officer. As a percentage of net sales,
selling, administrative and general expenses decreased from 26.6% in 1995 to
24.9% in 1996.
<PAGE>
Operating income increased $4.1 million from $11.0 million in 1995 to $15.1
million in 1996. Operating income as a percentage of net sales improved to 10.2%
in 1996 compared to 8.3% in 1995.
Interest expense decreased from $6.6 million in 1995 to $6.4 million in
1996 due primarily to lower average interest rates resulting from the redemption
of subordinated debentures and the renegotiation of the Company's revolving
credit agreement.
A gain from the sale of the Leigh businesses of $270,000 is included in
other income in 1995.
Earnings before income taxes increased by 92.5% to $8.8 million in 1996
compared to $4.6 million in 1995 due primarily to increased sales and resulting
operating income.
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 were $5.3 million ($4.76 per share) in 1996 compared to $3.4
million ($2.91 per share) in 1995.
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time- sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Harrow has been addressing the year 2000 problem since early 1990.
Standards and procedures were put in place to establish a methodology for
creating century compliant software. As a normal function of the Company's
application development methodology, all new programs were created compliant and
over time, as normal program maintenance is accomplished, most existing
applications and programs were converted to be year 2000 compliant.
During the fourth quarter fiscal 1997, a formal year 2000 assessment was
made to identify remaining areas requiring updates. As of January 31, 1998,
approximately 75% of the Company's software portfolio was year 2000 compliant.
The year 2000 assesment also included a detailed work plan to correct the
remaining programs prior to mid-1999.
<PAGE>
During the fourth quarter 1998, the Company will initiate formal
communications with all of its significant suppliers and customers to determine
to what extent the Company's data interfaces are vulnerable to third party
failure to remedy their own year 2000 issues. There is no guarantee that the
systems of other companies on which Harrow business units rely will be timely
converted and will not have any adverse effect on Harrow's systems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of Harrow Industries, Inc. and subsidiaries
as of November 30, 1997 and December 1, 1996, and the related consolidated
statements of stockholders' equity (deficit), operations and cash flows for each
of the three fiscal years in the period ended November 30, 1997, and the notes
thereto, are included with the financial statement schedules in a separate
section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers and directors of the Company. Officers serve at the pleasure of the
Board of Directors. Directors serve until the election and qualification of
their successors.
Name Age Position
Donald G. Calder (1) 60 Chairman, Chief Executive Officer and
Director
James S. Dahlke 47 President, Chief Operating Officer and
Director
George L. Ohrstrom, Jr. (1) 70 Vice President and Director
John S. Hogan 43 Vice President, Chief Financial Officer
and Treasurer
Gary L. Humphreys 55 Vice President and Corporate Controller
Donald D. Fenstermacher 56 Vice President of Management Information
Services
Betsy F. Raymond 39 Vice President of Human Resources and
Secretary
Robert A. Hoagland 59 President of H.B. Ives
Clifford A. Young, Jr. 55 President of FHP Manufacturing
James J. Scott 45 President of Locknetics Security
Engineering
James C. McGovern 55 President of Corona Clipper
William W. Wilson 72 President of Recognition Systems, Inc.
W. Lawrence Banks (1) (2) 59 Director
David H. Benson 60 Director
Derrick N. Key 50 Director
George F. Ohrstrom (1) (2) 44 Director
Georg Graf Schall-Riaucour (3) 57 Director
Eriberto R. Scocimara 61 Director
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Chairman of Audit Committee.
<PAGE>
Donald G. Calder has been a Director of the Company since 1972 and a Vice
President of Harrow or its predecessor from 1972 through August 1989. On January
30, 1997, Mr. Calder was appointed Chairman and Chief Executive Officer of the
Company. Mr. Calder is President of G.L. Ohrstrom & Co., Inc. and was a partner
of its predecessor, G.L. Ohrstrom & Co. from 1970 to October 1996. Mr. Calder
devotes a substantial amount of his time in connection with his duties at G.L.
Ohrstrom & Co. He is a Director of Carlisle Companies Incorporated, Central
Securities Corporation, Brown-Forman Corporation, Roper Industries, Inc. and
several privately held companies.
James S. Dahlke was appointed President and Chief Operating Officer of the
Company on June 17, 1996 and was appointed as a Director of the Company on
January 30, 1997. Prior to joining Harrow, Mr. Dahlke served as President, Chief
Executive Officer and Director of Medalist Industries, Inc. from 1995 to 1996,
and was President of the Waukesha Fluid Handling unit of United Dominion
Industries from 1988 to 1995.
George L. Ohrstrom, Jr. has been a director and a Vice President of Harrow
or its predecessor since 1962. Mr. Ohrstrom is Chairman and Chief Executive
Officer of G.L. Ohrstrom & Co., Inc., and was managing partner of its
predecessor, G.L. Ohrstrom & Co., from 1960 to October 1996. He is a director of
Carlisle Companies Incorporated and Roper Industries, Inc. Mr. Ohrstrom is the
father of George F. Ohrstrom.
John S. Hogan was appointed Vice President and Chief Financial Officer in
January 1990 and has been Treasurer of Harrow since January 1987. From 1979 to
January 1987 he was Corporate Accounting Manager of Harrow or its predecessor.
Prior to joining Harrow he had been on the audit staff of Ernst & Young LLP, the
Company's independent auditors.
Gary L. Humphreys joined Harrow in October 1994 as Vice President and
Corporate Controller. Mr. Humphreys was a partner of Ernst & Young LLP, the
Company's independent auditors, from October 1976 to September 1994.
Donald D. Fenstermacher joined Harrow in 1984 as Director of Management
Information Services. He was elected Vice President effective May 1, 1990.
Betsy F. Raymond joined Harrow in 1991 as Vice President of Human Resources
and Assistant Corporate Secretary and was elected Corporate Secretary effective
February 1, 1992.
Robert A. Hoagland has been President of H.B. Ives since 1991.
Clifford A. Young, Jr. has been President of FHP since 1971.
James J. Scott has been President of Locknetics Security Engineering since
1989.
James C. McGovern has been President of Corona Clipper since 1992.
<PAGE>
William W. Wilson was named President of the Company's Recognition Systems,
Inc. subsidiary in October of 1996. He served as RSI's Vice President of Sales
and Marketing from 1990 to June 1995 and provided business development services
to RSI as a consultant from July of 1995 until his appointment as President.
W. Lawrence Banks has been a Director of the Company since 1980. Mr. Banks
has been a director of Robert Fleming & Co., Limited, an English merchant
banking firm, for more than five years and is a Deputy Chairman thereof, and he
is Chairman of Robert Fleming, Inc., its U.S. investment banking subsidiary. Mr.
Banks is also a director of Roper Industries, Inc.
David H. Benson has served as a Director of Harrow since 1980. He is a
merchant banker at Kleinwort Benson Limited, an English merchant banking firm.
Derrick N. Key has been a Director of the Company since February 1996. Mr.
Key has been a director and Chief Executive Officer of Roper Industries, Inc.
since December 1991. He is also a director of two private companies.
George F. Ohrstrom has been a Director of Harrow since 1986. Mr. Ohrstrom
is Vice-Chairman of G.L. Ohrstrom & Co., Inc. and was a partner of its
predecessor, G.L. Ohrstorm & Co. from 1987 to October 1996.
Georg Graf Schall-Riaucour was appointed to the Board of Directors on
January 25, 1995. He has been general manager of Wittelsbacher Ausgleichsfonds
since May 1994, prior to which, since 1971 he was senior partner of the Munich,
Germany law firm of Stever & Belten. Mr. Graf Schall-Riacour is Director of
Roper Industries, Inc. and several privately held U.S. companies.
Eriberto R. Scocimara has been a director of Harrow or its predecessor
since 1972. Mr. Scocimara has been President and Chief Executive Officer of the
Hungarian-American Enterprise Fund, a privately-managed investment company,
since April 1994, and he has been the President of Scocimara & Company, Inc., an
investment management company, since 1984. Mr. Scocimara was a partner of G.L.
Ohrstrom & Co. from 1969 to 1984. Mr. Scocimara is a director of Carlisle
Companies, Incorporated, Roper Industries, Inc., Quaker Fabric Corporation,
Cofinec S.A., Evronet Services, Inc. and several privately owned companies.
<PAGE>
ITEM 11. SUMMARY COMPENSATION TABLE
The following table sets forth cash compensation earned during the fiscal
year ended November 30, 1997 for the chief executive officer and the other four
most highly compensated executive officers whose aggregate cash compensation
exceeded $100,000.
<TABLE>
Annual Compensation Long-Term
Name and Principal Fiscal Year Salary Bonus Compensation*
Position Ended $ $ $
- ------------------------------------------ ------------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Donald G. Calder 1997 149,000 -
Chairman and CEO 1996 149,000 -
James S. Dahlke 1997 250,000 250,000
President and COO 1996 115,385 62,500
Robert A. Hoagland 1997 177,320 148,417
President of H.B. Ives 1996 170,500 130,092
1995 165,500 102,362
Clifford A. Young, Jr. 1997 161,200 124,769
President of FHP 1996 155,000 131,750 58,022
1995 149,700 127,245 12,280
John S. Hogan 1997 150,000 127,500
Vice President & CFO 1996 144,500 122,825 28,485
1995 140,300 100,525 20,743
James J. Scott 1997 135,044 114,787
President of Locknetics 1996 127,100 108,290 14,888
1995 123,100 104,327
</TABLE>
*Payments from Long-Term Growth Account were for the purchase of performance
shares under the prior bonus plan. Performance shares were last awarded for
fiscal 1990. Final payments under the prior plan were made in February 1996.
All directors are compensated at $15,000 per annum in their capacity as
directors of the Company. Directors may elect to receive one-half of this
compensation in company common stock. The number of shares of common stock to be
paid to the directors as compensation is based on a valuation of such common
stock using the then most recent sales price, or if greater the quarterly
valuation determined by Dresdner Kleinwort Benson plc. Mr. Banks is compensated
an additional $7,500 for his involvement in various committees. Members of the
Audit Committee receive $500 per meeting. The Chairman of the Audit Committee
receives $750 per meeting.
<PAGE>
Donald G. Calder was acting Chairman from October 8, 1996 until January 30,
1997 when he was elected Chairman and CEO.
James S. Dahlke was granted options in 1996 to purchase an aggregate of
20,000 shares of common stock, 4,000 shares of which were immediately vested and
exercisable, and 16,000 shares which vest and become exercisable ratably from
1997 through 2000 at 4,000 shares per year. During 1997, Mr. Dahlke exercised
options to purchase 5,000 shares of common stock.
Compensation Plans
Bonus Plan
Harrow maintains an Executive/Middle Management Performance Program (the
"Bonus Plan") in which officers (with the exception of George L. Ohrstrom, Jr.
and Donald G. Calder) and presidents of divisions and subsidiaries of Harrow
designated by the president of Harrow are eligible. An individual is eligible
only if he is a full-time employee for the full 12 months of the fiscal year
covered by the Bonus Plan.
The Bonus Plan includes an annual (the "Annual Plan") component and a
long-term (the "Long-Term Plan") component. Under the Annual Plan, participants
may earn a cash bonus of up to 55% of base salary, based upon a comparison of
actual results with financial and nonfinancial goals established for the year.
The incentive to be earned ranges from 16% to 55% of salary, if results equal
85% of established goals to 110% or more of goals.
The Long-Term Plan provides incentive compensation for achievement of three
year objectives. Under the Long-Term Plan participants may earn a cash bonus of
up to 30% of base salary based upon aggregate profitability (60% of total) and
individual nonfinancial strategic objectives (40% of total). The financial
portion of the bonus is based upon a comparison of three year actual results
with operating income targets.
Retirement Plans
Harrow Products, Inc., an indirect subsidiary of the Company, maintains a
retirement plan, the Retirement Plan for the Employees of Harrow Products, Inc.,
("the HPI Retirement Plan") in which all eligible employees participate. It is a
non-contributory, defined benefit pension plan, under which a participant with a
vested benefit receives a benefit at age 65 equal to 1.075% of Final Average
Salary up to covered compensation, plus 1.7% of Final Average Salary in excess
of covered compensation, times credited service (maximum of 30 years.) "Covered
Compensation" is the average of 35 years of Social Security wage bases ending in
the year of Social Security Retirement age. "Final Average Salary" means salary
excluding bonuses, overtime or any other additional or non-recurring
compensation and is computed using the highest 60 of the last 120 months of
service prior to retirement, or age 65, whichever is earlier. Credited Service
starts at age 21 and Vesting Service at age 18. Employees retiring after age 55,
but before age 65 receive reduced annual benefits. Benefits under the HPI
Retirement Plan vest after five years of Vesting Service.
<PAGE>
The table below shows the approximate annual retirement benefits payable to
executive officers for life from normal retirement date (age 65) pursuant to the
Retirement Plan. For purposes of determining the pension benefits payable under
the HPI Retirement Plan, estimated years of Credited Service at age 65 under the
HPI Retirement Plan for the individuals named in the compensation table are as
follows: Mr. Calder, 29 years; Mr. Dahlke, 19 years; Mr. Hoagland, 13 years; Mr.
Hogan, 30 years; Mr. Scott, 28 years; Mr. Young, 30 years.
<TABLE>
Final
Average Years of Service
Earnings* 10 15 20 25 30
- -------- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000 $15,200 $22,800 $30,400 $38,000 $ 45,600
125,000 19,400 29,100 38,800 48,600 58,300
150,000 23,700 35,500 47,400 59,200 71,000
175,000 26,800 40,700 54,700 68,700 82,600
200,000 29,700 45,800 61,900 78,000 94,100
225,000 32,000 49,700 67,500 85,200 102,900
250,000 32,000 49,700 67,500 85,200 102,900
275,000 32,000 49,700 67,500 85,200 102,900
300,000 32,000 49,700 67,500 85,200 102,900
</TABLE>
*Earnings used to calculate benefits are capped by the limit described in
Section 401(a)(17) of the Internal Revenue Code; the limit for 1997 is $160,000.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the number of
shares of Harrow common stock beneficially owned as of the date of this report
by each stockholder known to Harrow to own beneficially more than 5% of the
outstanding shares for such common stock, by each director and by all officers
and directors as a group. Except as otherwise indicated, each of the
stockholders named below has sole voting and investment power with respect to
the shares of common stock beneficially owned by him.
<TABLE>
Company Common Stock
Number of Shares
Name and Address of Beneficial Owner Beneficially Owned Percentage
<S> <C> <C>
Blackburn Fund, Ltd. 52,643 7.35%
P.O. Box 10654
Tampa, FL 33674
Citicorp Venture Capital, Ltd. 57,429 8.02%
153 East 53rd Street
New York, NY 10043
Wittelsbacher Ausgleichsfonds 51,992 (1) 7.26%
Schumannstrasse 10
D81679 Munchen
Federal Republic of Germany
W. Lawrence Banks 1,181 *
David H. Benson 1,521 *
Donald G. Calder 22,632 (2) 3.16%
James S. Dahlke 5,181 *
Gary L. Humphreys 5,000 *
John S. Hogan 26,000 3.63%
Derrick N. Key 181 *
George F. Ohrstrom 7,761 1.08%
George L. Ohrstrom, Jr. 29,914 (3) 4.18%
Betsy F. Raymond 8,392 1.17%
Georg Graf Schall-Riaucour 181 (1) *
<PAGE>
Eriberto R. Scocimara 28,607 (4) 4.00%
All Directors and Officers as a group 154,051 (5) 21.51%
</TABLE>
*Less than 1%.
(1) Georg Graf Schall-Riaucour, a director of the Company, is the general
director of Wittelsbacher Ausgleichsfonds, and as such, is authorized to vote
and dispose of such shares. Mr. Graf Schall-Riaucour disclaims any beneficial
interest in the shares.
(2) Does not include total of 28,511 shares owned by his wife and his wife as
custodian for minor children and in which he disclaims any beneficial ownership.
(3) Includes 631 shares held in a trust of which he is a co-fiduciary sharing
voting and investment powers and in which he disclaims any beneficial interest.
(4) Does not include 10,500 shares owned by his wife, and in which he disclaims
any beneficial ownership.
(5) Does not include disclaimed shares referred to in Notes (1), (2) or (4).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) 1 and 2. List of Financial Statements and Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report.
3. Exhibit Index:
Reference is made to the Exhibit Index which is found as a
separate section of this report.
<PAGE>
b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the fourth quarter
of the fiscal year ended November 30, 1997.
The registrant filed a Form 8-K on December 19, 1997 disclosing
the sale of substantially all of the assets of its Rutt Division
effective as of December 1, 1997.
c) Exhibits:
Exhibits pertaining to this Form 10-K are submitted as a
separate section of this report.
d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 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, on the 27th of February, 1998.
HARROW INDUSTRIES, INC.
(Registrant)
By /s/Donald G. Calder
Donald G. Calder
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities indicated on
the 27th day of February, 1998:
Signature Title
/s/ Donald G. Calder Chairman of the Board
Donald G. Calder (Chief Executive Officer)
/s/ James S. Dahlke President and Director
James S. Dahlke
/s/ John S. Hogan Treasurer
John S. Hogan (Chief Financial Officer)
/s/ Gary L. Humphreys Controller
Gary L. Humphreys (Chief Accounting Officer)
/s/ W. Lawrence Banks Director
W. Lawrence Banks
Director
David H. Benson
<PAGE>
/s/ George F. Ohrstrom Director
George F. Ohrstrom
/s/ George L. Ohrstorm, Jr. Director
George L. Ohrstrom, Jr.
/s/ Eriberto R. Scocimara Director
Eriberto R. Scocimara
/s/ Georg Graf Schall-Riaucour Director
Georg Graf Schall-Riaucour
/s/ Derrick N. Key Director
Derrick N. Key
<PAGE>
(THIS PAGE LEFT BLANK INTENTIONALLY.)
<PAGE>
Exhibit Index
Page
*3.1 Certificate of Incorporation .....................................
**3.2 Bylaws............................................................
**4.1 Indenture with United States Trust Company of New York............
**** 4.3 Loan and Security Agreement with Fleet Capital Corporation........
**10.1 Securities Purchase Agreement.....................................
***10.3 Harrow Industries, Inc. Executive/Middle Management Performance
Plan.........................................................
**10.4 Harrow Products, Inc. Retirement Plan.............................
**10.6 Deferred Compensation Agreement between Harrow Products, Inc.
and Stanley B. O'Kane........................................
****10.8 Employment Agreement with James S. Dahlke.........................
10.16 Option Agreement, dated October 15, 1997 and Amendments dated
November 14, 1997 and December 9, 1997, between Robert
Fleming & Co. Limited and Harrow Industries, Inc.............
10.17 Economic Value Added Executive Incentive Plan effective
beginning in fiscal 1998.....................................
11 Computation of earnings per share.................................
12 Computation of ratio of earnings to fixed charges.................
*****21 List of Subsidiaries..............................................
*Incorporated herein by reference to Form 10-K for year ended November 27, 1987.
**Incorporated herein by reference to Harrow Industries, Inc. Registration
Statement (No. 33-12266) on Form S-1 filed April 16, 1987.
***Incorporated herein by reference to Form 10-K for the fiscal year ended
December 1, 1991.
****Incorporated herein by reference to Form 10-K for fiscal year ended December
1, 1996.
*****Incorporated herein by reference to Form 10-K for the fiscal year ended
December 3, 1995.
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FISCAL YEAR ENDED NOVEMBER 30, 1997
HARROW INDUSTRIES, INC. AND SUBSIDIARIES
GRAND RAPIDS, MICHIGAN
<PAGE>
FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
Harrow Industries, Inc. and Subsidiaries
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Harrow Industries, Inc. and
subsidiaries are included in Item 8:
o Consolidated balance sheets-November 30, 1997 and December 1, 1996
o Consolidated statements of stockholders' equity (deficit)- Fiscal
years ended November 30, 1997, December 1, 1996 and December 3, 1995
o Consolidated statements of operations-Fiscal years ended November 30,
1997, December 1, 1996 and December 3, 1995
o Consolidated statements of cash flows-Fiscal years ended November 30,
1997, December 1, 1996 and December 3, 1995
o Notes to consolidated financial statements-November 30, 1997,
December 1, 1996 and December 3, 1995
The following consolidated financial statement schedule of Harrow Industries,
Inc. and subsidiaries is included in Item 14(d):
o Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
<PAGE>
Report of Independent Auditors
Board of Directors
Harrow Industries, Inc.
We have audited the accompanying consolidated balance sheets of Harrow
Industries, Inc. and subsidiaries as of November 30, 1997 and December 1, 1996,
and the related consolidated statements of stockholders' equity (deficit),
operations and cash flows for each of the three fiscal years in the period ended
November 30, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Harrow
Industries, Inc. and subsidiaries at November 30, 1997 and December 1, 1996, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended November 30, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
Grand Rapids, Michigan
January 9, 1998
<PAGE>
<TABLE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
November 30, 1997 December 1, 1996
================== ================
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 337,000 $ 3,088,000
Accounts receivable, less allowances
(1997--$1,372,000; 1996--$1,043,000) 23,016,000 19,085,000
Inventories:
Finished products 4,223,000 3,735,000
Work in process 5,638,000 4,321,000
Raw materials 4,460,000 3,488,000
=========== ============
14,321,000 11,544,000
Deferred income taxes 2,320,000 2,175,000
Other current assets 1,027,000 631,000
=========== ============
Total current assets 41,021,000 36,523,000
Property, plant and equipment:
Land 2,513,000 2,312,000
Buildings 14,085,000 11,105,000
Machinery and equipment 32,435,000 28,546,000
=========== ===========
49,033,000 41,963,000
Less accumulated depreciation 27,349,000 24,239,000
=========== ===========
21,684,000 17,724,000
Other assets:
Intangible assets, less accumulated
amortization (1997--$7,803,000; 1996--$6,911,000) 11,721,000 12,613,000
Prepaid pension costs 8,251,000 7,595,000
Other 271,000 265,000
=========== ===========
20,243,000 20,473,000
----------- -----------
$82,948,000 $74,720,000
=========== ===========
</TABLE>
<PAGE>
<TABLE>
November 30, 1997 December 1, 1996
================== ================
<S> <C> <C>
Liabilities and stockholdersO equity (deficit) Current liabilities:
Accounts payable ............................................... $ 7,327,000 $ 6,662,000
Accrued compensation ........................................... 5,943,000 5,057,000
Income taxes ................................................... 911,000 615,000
Other accrued expenses ......................................... 7,031,000 5,555,000
Total current liabilities ......................................... 21,212,000 17,889,000
Long-term debt .................................................... 51,539,000 47,388,000
Other noncurrent liabilities:
Deferred income taxes .......................................... 5,585,000 5,405,000
Deferred compensation .......................................... 481,000 547,000
6,066,000 5,952,000
Redeemable junior preferred and common stock ...................... 7,826,000 2,955,000
Stockholders' equity (deficit):
Junior preferred stock, par value $0.01 per share--
authorized: 470,000 shares; issued: 399,964 shares,
including 119,436 shares of treasury stock in 1997
4,000 4,000
Common stock, par value $0.01 per share--
authorized and issued: 1,100,000 shares,
including treasury stock (1997--267,853
shares; 1996--82,150 shares)
11,000 11,000
Additional paid-in capital ................................... 4,063,000 4,006,000
Retained earnings ............................................ 22,065,000 14,803,000
Cost of treasury stock (deduct) .............................. (7,904,000) (1,225,000)
Deficit arising from restructuring transactions .............. (14,108,000) (14,108,000)
Redeemable stock reclassified (deduct) ....................... (7,826,000) (2,955,000)
------------ -----------
(3,695,000) 536,000
------------ -----------
$ 82,948,000 $ 74,720,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Statements of StockholdersO Equity (Deficit)
<TABLE>
Fiscal year ended
========================================================
November 30, 1997 December 1, 1996 December 3, 1995
================== ================== =================
<S> <C> <C> <C>
Junior preferred stock
Balance at beginning and end of year ..................... $ 4,000 $ 4,000 $ 4,000
Common stock
Balance at beginning and end of year ..................... 11,000 11,000 11,000
Additional paid-in capital
Balance at beginning of year ............................. 4,006,000 4,006,000 4,006,000
Issuance of treasury stock ............................... 57,000
------------ ----------- ----------
Balance at end of year ................................... 4,063,000 4,006,000 4,006,000
Retained earnings
Balance at beginning of year ............................. 14,803,000 9,688,000 6,485,000
Net earnings ............................................. 7,402,000 5,315,000 3,403,000
Cash dividends on junior preferred stock ($0.50 per share) (140,000) (200,000) (200,000)
------------ ----------- ----------
Balance at end of year ................................... 22,065,000 14,803,000 9,688,000
Accumulated translation adjustments
Balance at beginning of year ............................. (128,000)
Sale of foreign subsidiary ............................... 128,000
Balance at end of year ................................... -0-
Cost of treasury stock
Balance at beginning of year ............................. (1,225,000)
Redeemable stock purchased for treasury
(1997--119,436 shares of junior
preferred stock and 191,608 shares of common
stock; 1996--82,150 shares of common stock) ............ (6,768,000) (1,225,000)
Treasury stock issued upon exercise of stock
options (5,000 shares .................................. 75,000
Treasury stock issued (905 shares) ....................... 14,000
------------ ------------
Balance at end of year ................................... (7,904,000) (1,225,000)
Deficit arising from restructuring transactions
Balance at beginning and end of year ..................... (14,108,000) (14,108,000) (14,108,000)
Redeemable stock reclassified
Balance at beginning of year ............................. (2,955,000)
Increase in stock subject to mandatory redemption
(1997--39,000 shares of junior preferred stock
and 195,023 shares of common
stock; 1996--80,436 shares of junior preferred
stock and 194,856 shares of common stock) .............. (11,639,000) (4,180,000)
Redeemable stock purchased for treasury
(1997--119,436 shares of junior preferred stock
and 191,608 shares of common stock;
1996--82,150 shares of common stock) .................... 6,768,000 1,225,000
------------ -----------
Balance at end of year ................................... (7,826,000) (2,955,000)
StockholdersO equity (deficit) at end of year ............ $ (3,695,000) $ 536,000 $ (399,000)
============ =========== ===========
</TABLE>
( ) Denotes deduction.
See accompanying notes to consolidated financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
Fiscal year ended
==========================================================
November 30, 1997 December 1, 1996 December 3, 1995
=================== ================== ==================
<S> <C> <C> <C>
Net sales $160,906,000 $148,327,000 $131,730,000
Cost of products sold 102,139,000 96,190,000 85,681,000
============ ============ ============
Gross margin 58,767,000 52,137,000 46,049,000
Selling, administrative and
general expenses 41,048,000 36,995,000 35,060,000
============ ============ ============
Operating income 17,719,000 15,142,000 10,989,000
Other expenses (income):
Interest expense 5,561,000 6,398,000 6,617,000
Interest income (158,000) (31,000) (20,000)
Other 114,000 (70,000) (203,000)
============ ============ ============
5,517,000 6,297,000 6,394,000
============ ============ ============
Earnings before income taxes 12,202,000 8,845,000 4,595,000
Income taxes 4,800,000 3,530,000 1,192,000
============ ============ ============
Net earnings $ 7,402,000 $ 5,315,000 $ 3,403,000
============ ============ ============
Earnings attributable to common stock $ 7,296,000 $ 5,115,000 $ 3,203,000
============ ============ ============
Net earnings per share $8.17 $4.76 $2.91
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
Fiscal year ended
=========================================================
November 30, 1997 December 1, 1996 December 3, 1995
================== ================== ==================
<S> <C> <C> <C>
Operating activities
Net earnings $ 7,402,000 $ 5,315,000 $ 3,403,000
Adjustments necessary to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 4,104,000 4,224,000 3,437,000
Pension income (656,000) (720,000) (590,000)
Deferred income taxes (credit) 35,000 (520,000) (799,000)
Other (16,000) (58,000) (278,000)
Changes in operating assets and liabilities:
Accounts receivable (2,948,000) (2,632,000) (974,000)
Inventories (1,898,000) (1,138,000) (995,000)
Other current assets (396,000) 200,000 (290,000)
Accounts payable and accrued expenses 3,324,000 1,011,000 3,452,000
Net cash provided by operating activities 8,951,000 5,682,000 6,366,000
Investing activities
Additions to property, plant and equipment (5,217,000) (3,059,000) (3,612,000)
Purchase of business, less cash acquired (3,863,000) (9,556,000)
Sale of business 5,351,000
Other (7,000) 184,000 53,000
========== ============ ===========
Net cash used in investing activities (9,087,000) (2,875,000) (7,764,000)
Financing activities
Proceeds from long-term borrowings 11,580,000 26,102,000 12,442,000
Payments of long-term debt (7,433,000) (25,072,000) (11,087,000)
Cash dividends on preferred stock (140,000) (200,000) (200,000)
Redeemable stock purchased, net of treasury
stock issued (6,622,000) (1,225,000)
========== ============ ============
Net cash provided by (used in) financing activities (2,615,000) (395,000) 1,155,000
Increase (decrease) in cash and cash equivalents (2,751,000) 2,412,000 (243,000)
Cash and cash equivalents at beginning of year 3,088,000 676,000 919,000
Cash and cash equivalents at end of year $ 337,000 $ 3,088,000 $ 676,000
========== =========== ===========
Other cash flow information
Interest payments $ 5,397,000 $ 6,324,000 $ 6,320,000
Income tax payments 4,469,000 3,906,000 1,798,000
</TABLE>
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated financial statements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 30, 1997, December 1, 1996 and December 3, 1995
Note A-Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Harrow Industries,
Inc. ("the Company") and its wholly owned subsidiaries. Upon consolidation, all
intercompany accounts, transactions and profits are eliminated.
Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the Sunday
nearest the end of November. Fiscal 1997 and 1996 included 52 weeks; fiscal 1995
included 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and amounts due from banks
that mature within 90 days of purchase.
Inventories
The majority of inventories are stated at the lower of last-in, first-out (LIFO)
cost or market. The remainder of inventories are valued using the lower of
first-in, first-out (FIFO) cost or market.
Property, Plant and Equipment
Property, plant and equipment are recorded on the basis of cost and include
expenditures for new facilities, major renewals and betterments. Normal repairs
and maintenance are expensed as incurred.
Depreciation of plant and equipment is computed using the straight-line method
over the estimated useful lives of the respective assets.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note A-Summary of Significant Accounting Policies (continued)
Amortization of Intangible Assets
Goodwill (the excess of purchase price over net tangible assets of businesses
acquired) is amortized principally over 20 years using the straight-line method.
Deferred loan issue costs are amortized using the effective interest method.
Other intangible assets are amortized over periods ranging from 5 to 17 years
using the straight-line method.
Advertising Costs
Advertising costs are expensed as incurred and approximated 2% of net sales.
Income Taxes
The provision for income taxes is based on earnings reported in the consolidated
financial statements. A deferred income tax asset or liability is determined by
applying currently enacted tax laws and rates to the cumulative temporary
differences between the carrying value of assets and liabilities for financial
statement and income tax purposes. Deferred income tax expense (credit) is
measured by the change in the net deferred income tax asset or liability during
the year.
Stock Options
The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
employee stock options. Under APB Opinion No. 25, compensation expense is
recognized to the extent that the estimated market value of the underlying stock
exceeds the exercise price of the stock options at the date of grant.
Earnings Per Share
Earnings per share are computed based on the weighted average number of shares
of common stock outstanding (1997--892,685 shares; 1996--1,074,046 shares;
1995--1,100,000 shares). Net earnings are reduced in the computation by
preferred stock dividend requirements.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note A--Summary of Significant Accounting Policies (continued)
Earnings Per Share (continued)
In February 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
SFAS No. 128 requires dual presentation of basic and diluted earnings per share
on the face of the statement of operations. Basic earnings per share are
computed by dividing net earnings attributable to common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflect the potential dilution from the exercise or conversion of
securities into common stock, such as stock options. SFAS No. 128 will be
effective for the Company for the first quarter of 1998 and requires restatement
of prior periods. The Company does not expect the new standard to have a
material effect on earnings per share amounts reported.
Industry Segments
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 significantly changes the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas of operation and major customers. SFAS
No. 131 will be effective for the Company in fiscal 1999 and for subsequent
interim periods. Management has not yet evaluated the effect of the new rules on
its reported segment disclosures.
Financial Instruments and Risk Management
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt. The Company's estimate
of the fair value of these financial instruments approximates their carrying
amounts at November 30, 1997. Fair value was determined using discounted cash
flow analyses and current interest rates for similar instruments. The Company
does not hold or issue financial instruments for trading purposes.
The Company does not generally require collateral or other security on trade
accounts receivable.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note A--Summary of Significant Accounting Policies (continued)
Reclassifications
Certain amounts reported in 1996 and 1995 have been reclassified to conform with
the presentation used in 1997.
Note B-Inventories
Inventories of $12,787,000 at November 30, 1997 and $10,953,000 at December 1,
1996 are stated at cost, determined by the LIFO method. If the FIFO method had
been used, the amounts would have been $3,113,000 and $3,004,000 higher than
reported at November 30, 1997 and December 1, 1996, respectively.
Note C-Intangible Assets
Intangible assets consist of the following at November 30, 1997 and December 1,
1996:
<TABLE>
Accumulated
Cost Amortization
=================================== ===================================
1997 1996 1997 1996
=================================== ===================================
<S> <C> <C> <C> <C>
Goodwill $11,784,000 $11,784,000 $2,457,000 $1,966,000
Patents 2,106,000 2,106,000 689,000 492,000
Deferred loan issue costs 3,064,000 3,064,000 2,408,000 2,301,000
Other 2,570,000 2,570,000 2,249,000 2,152,000
=================================== ===================================
$19,524,000 $19,524,000 $7,803,000 $6,911,000
=================================== ===================================
</TABLE>
Note D-Long-term Debt
Long-term debt consists of the following obligations:
<TABLE>
November 30, 1997 December 1, 1996
================== ==================
<S> <C> <C>
Senior subordinated debentures, less unaccreted discount $25,961,000 $25,951,000
Revolving credit obligation 25,578,000 21,437,000
$51,539,000 $47,388,000
================== ==================
</TABLE>
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note D-Long-term Debt (continued)
The senior subordinated debentures in the face amount of $25,984,000 bear
interest at 12.375%, mature on April 15, 2002 and may be redeemed at the option
of the Company, in whole or in part, at any time at par plus accrued interest to
the date of redemption. The debentures require annual sinking fund payments of
$6,500,000. Sinking fund payments may be deferred to the extent that debentures
purchased on the open market are tendered for cancellation. As a result of prior
year repurchases of debentures, no principal maturities are due until 2001, when
a net amount of $6,484,000 is due. The indenture governing the debentures
restricts, among other things, the incurrence of additional senior indebtedness
by both the Company and its subsidiaries, the sale of substantially all assets
to another corporation, the payment of dividends on common stock and the
redemption of capital stock until such time as consolidated stockholders' equity
exceeds $1,000,000.
The revolving credit agreement allows for borrowings of up to $37,000,000 under
a formula that includes an amount based on qualified accounts receivable and
inventories, plus a term loan amount initially established at $15,000,000 on
July 31, 1996 and reducing thereafter at a rate of $146,000 monthly. Amounts
available are also subject to various reserve requirements, as established by
the lender. As of November 30, 1997, the available unused credit under the
agreement approximated $9,000,000. Borrowings under the agreement are
collateralized by accounts receivable, inventories, general intangible assets
and certain real estate, are due on July 31, 2001, and bear interest principally
at LIBOR (5.75% at November 30, 1997) plus a variable amount (1.25% at November
30, 1997) 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
$8,000,000 to finance possible future acquisitions or other specified
transactions. Subsequent to November 30, 1997, the Company utilized $5,000,000
of this standby facility to acquire certain shares of its common stock. The
Company is required to pay an annual fee equal to 0.25% of the unused credit
available under this portion of the agreement. At the expiration date, the
Company and the lender may agree to extend the agreement for successive one-year
terms. The terms of the credit agreement require the Company, amon other things,
to maintain certain financial ratios and minimum levels of working capital, cash
flow and net worth. The agreement also restricts the Company's ability to merge
or consolidate, issue additional debt or purchase its common stock. In addition,
the agreement restricts leases, acquisitions, dispositions and capital
expenditures.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note E-Leases
Certain office, warehouse and showroom space, machinery, motor vehicles and data
processing equipment are leased under various operating lease agreements which
expire at various dates through 2008. The Company is required to pay real estate
taxes and other occupancy costs under the facility leases.
Future minimum rental payments due under noncancelable operating leases at
November 30, 1997 are as follows: 1998-$1,507,000; 1999-$1,199,000;
2000-$943,000; 2001--$662,000; thereafter-$2,457,000.
Rent expense was $2,069,000 in 1997, $2,270,000 in 1996 and $2,126,000 in 1995.
Contingent rentals were not significant in any of these years.
Note F-Retirement Plans
The Company has a noncontributory, defined benefit pension plan covering
substantially all of its employees. The plan provides benefits that are based on
the employee's years of service and final average earnings (as defined). The
Company intends to annually contribute amounts deemed necessary, if any, to
maintain the plan on a sound actuarial basis.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note F-Retirement Plans (continued)
The following summarizes the status of the CompanyOs pension assets and related
obligations:
<TABLE>
November 30, 1997 December 1, 1996
================== ==================
<S> <C> <C>
Pension assets at fair value $44,167,000 $39,555,000
Actuarial present value of accumulated plan benefits:
Vested 25,020,000 24,126,000
Nonvested 510,000 641,000
=========== ===========
25,530,000 24,767,000
Effect of estimated future increases in compensation 5,876,000 5,120,000
=========== ===========
Projected benefit obligation on service rendered to date 31,406,000 29,887,000
=========== ===========
Net pension assets $12,761,000 $ 9,668,000
=========== ===========
Components of net pension assets:
Prepaid pension costs recognized in other assets $ 8,251,000 $ 7,595,000
Unrecognized amounts, net of amortization:
Transition assets 1,114,000 1,458,000
Prior service costs (63,000) (68,000)
Net actuarial gains 3,459,000 683,000
=========== ===========
$12,761,000 $ 9,668,000
=========== ===========
</TABLE>
The assumed discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.25% at November 30, 1997 and December 1,
1996. The assumed rate of increase in future compensation used in the
computations was 4% for both 1997 and 1996.
At November 30, 1997, plan assets were invested in equity securities (58%),
fixed income funds (33%), real estate investments (8%) and cash and cash
equivalents (1%). The expected long-term return on pension assets was 9.5% for
1995 through 1997.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note F--Retirement Plans (continued)
The following is a summary of net pension income recognized by the Company:
<TABLE>
1997 1996 1995
=====================================================
<S> <C> <C> <C>
Service cost pertaining to benefits
earned during the year $1,142,000 $1,057,000 $ 840,000
Interest cost on projected benefit obligation 2,113,000 1,949,000 1,832,000
Actual net investment income (6,215,000) (5,626,000) (6,704,000)
Net amortization and deferral 2,304,000 1,900,000 3,442,000
=====================================================
Net pension income $ (656,000) $ (720,000) $ (590,000)
=====================================================
</TABLE>
The Company established a Section 401(k) plan in 1996 for substantially all of
its employees. Employees may make voluntary contributions to the plan up to
certain limits. The Company does not currently match employee contributions.
Note G-Junior Preferred Stock
The junior preferred stock is nonvoting and may be redeemed at the option of the
Company for $10 per share provided that, so long as any senior subordinated
debentures are outstanding, such redemption may only be made with the proceeds
received by the Company from the issuance of equity securities of the Company,
from indebtedness that is junior in right of payment to the senior subordinated
debentures or if, after giving effect to such redemptions, consolidated
stockholders' equity exceeds $1,000,000. Annual noncumulative dividends on the
junior preferred stock are $0.50 per share.
Note H--Stock Repurchase and Option Agreements
Robert Fleming & Co. Limited ("Flemings") acquired a total of 119,436 shares of
the Company's junior preferred stock and 389,879 shares of its common stock in
three separate transactions during 1997 and 1996, and simultaneously entered
into agreements with the Company whereby Flemings received options to sell such
shares to the Company ("put options") and the Company received options to
acquire such shares from Flemings ("call options") under certain conditions. A
director of the Company is also a director of Flemings.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note H--Stock Repurchase and Option Agreements (continued)
During 1997 and 1996, the Company acquired all of the junior preferred shares
and a total of 273,758 shares of common stock subject to put and call options
agreements. The remaining 116,121 shares of common stock subject to option
arrangements are classified as redeemable stock in the accompanying consolidated
balance sheet at November 30, 1997. The shares were acquired by the Company on
December 31, 1997 for cash of $7,826,000, including related transaction
expenses. Funds used to acquire these shares were provided from the Company's
revolving credit facility.
The Company granted options in 1996 to a key employee to purchase an aggregate
of 20,000 shares of common stock, 4,000 shares of which were immediately vested
and exercisable and 16,000 shares of which vest and become exercisable ratably
from 1997 through 2000 at 4,000 shares per year. The exercise price of the
options approximates the market price of the underlying shares at the date of
grant and, therefore, no compensation expense has been recognized. Options for
5,000 shares were exercised in 1997.
Note I-Income Taxes
The provisions for income taxes consist of the following:
<TABLE>
1997 1996 1995
=====================================================
<S> <C> <C> <C>
Currently payable:
Federal $4,165,000 $3,600,000 $1,690,000
State 600,000 450,000 240,000
Canadian 61,000
=====================================================
4,765,000 4,050,000 1,991,000
Deferred (credit):
Federal 35,000 (460,000) (748,000)
State (60,000) 6,000
Canadian (57,000)
=====================================================
35,000 (520,000) (799,000)
$4,800,000 $3,530,000 $1,192,000
=====================================================
</TABLE>
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note I-Income Taxes (continued)
A reconciliation of the Company's total income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% to earnings
before income taxes is as follows:
<TABLE>
1997 1996 1995
================================================
<S> <C> <C> <C>
Income taxes at statutory rate $4,149,000 $3,007,000 $1,562,000
State income taxes, net of federal income
tax reduction 396,000 257,000 162,000
Excess basis in stock of Canadian
subsidiary sold (292,000)
Foreign tax credits realized (60,000) (60,000) (104,000)
Nondeductible goodwill amortization 167,000 233,000 100,000
Elimination of excess taxes provided in
prior years (205,000)
Other 148,000 93,000 (31,000)
$4,800,000 $3,530,000 $1,192,000
================================================
</TABLE>
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note I-Income Taxes (continued)
Significant components of the Company's deferred income tax liabilities and
assets are as follows:
<TABLE>
November 30, December 1,
1997 1996
================== ==================
<S> <C> <C>
Deferred income tax liabilities:
Excess tax depreciation $2,269,000 $2,321,000
Prepaid pension costs 3,077,000 2,833,000
Patents 469,000 534,000
Other 11,000 7,000
========== ===========
Total deferred income tax liabilities 5,826,000 5,695,000
Deferred income tax assets:
Accounts receivable and inventory
valuation allowances 977,000 739,000
Accrued liabilities 1,346,000 1,437,000
Deferred compensation accruals 206,000 228,000
Foreign tax credit carryforwards 49,000 652,000
Other 32,000 61,000
Total deferred income tax assets 2,610,000 3,117,000
Valuation allowance for deferred income tax assets (49,000) (652,000)
Net deferred income tax assets 2,561,000 2,465,000
Net deferred income tax liabilities $3,265,000 $3,230,000
========== ===========
</TABLE>
At November 30, 1997, the Company has foreign tax credit carryforwards of
$49,000 that are available to reduce U.S. income taxes on certain foreign source
income through 2000. For financial reporting purposes, a valuation allowance has
been recognized to offset the deferred income tax asset related to this
carryforward due to the uncertainty of the Company's ability to realize these
benefits in the future.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note J-Contingencies
The Company is involved in proceedings with respect to environmental matters,
including sites where the Company has been identified as a potentially
responsible party under federal and state environmental laws and regulations.
While it is not possible to quantify with certainty the potential impact of
actions regarding environmental matters, particularly any future remediation and
other compliance efforts, in the opinion of management, compliance with the
present environmental protection laws will not hav a material adverse effect on
the financial condition or competitive position of the Company. However, the
Company's efforts to comply with increasingly stringent environmental
regulations may have an adverse effect on the Company's future earnings.
The Company is also subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position of the Company.
Note K-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
$3,863,000 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 was 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 1997 and 1996,
assuming the acquisition had occurred as of the beginning of fiscal 1996, would
not have varied significantly from the amounts reported.
Note L-Subsequent Event
On December 5, 1997, the Company sold substantially all the assets of its Rutt
Division ("Rutt") for cash of $12,000,000. The Company also received $700,000 in
subordinated notes receivable from certain major Rutt dealers as part of the
sale. The sale will result in the recognition of a gain of approximately
$4,800,000 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 included $22,033,000 in 1997, $21,547,000 in 1996 and $18,299,000 in
1995 related to the Rutt business, and operating income of the business was
$1,717,000 in 1997, $1,405,000 in 1996 and $1,031,000 in 1995.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note M-Restructuring Transactions
In connection with a series of mutually dependent transactions completed in 1987
to acquire the common stock of Harrow Corporation, a subsidiary of the Company
was merged with and into Harrow Corporation. As a result of the merger, the
existing stockholders of Harrow Corporation received cash and equity securities
that exceeded the book value of their interest in its net assets by $14,108,000.
This excess is reflected as a reduction of stockholdersO equity in the
consolidated balance sheets. The consolidated financial statements of the
Company have been prepared on a historical cost basis.
Note N-Quarterly Results of Operations (unaudited)
The following is a tabulation of the quarterly results of operations:
<TABLE>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Year ended November 30, 1997:
Net sales $38,070,000 $41,206,000 $39,072,000 $42,558,000
Gross margin 13,496,000 14,991,000 14,047,000 16,233,000
Net earnings 1,279,000 1,728,000 1,376,000 3,019,000
Net earnings per share 1.34 1.87 1.54 3.56
Year ended December 1, 1996:
Net sales $37,390,000 $38,356,000 $36,095,000 $36,486,000
Gross margin 12,537,000 13,245,000 13,187,000 13,168,000
Net earnings 759,000 1,792,000 1,370,000 1,394,000
Net earnings per share 0.64 1.59 1.22 1.32
</TABLE>
Quarterly net earnings per share for fiscal 1997 and 1996 do not equal the
annual amount due to changes in average common stock outstanding. Net sales and
gross margins for fiscal 1996 and the first three quarters of fiscal 1997 have
been restated from that previously reported in Form 10-Q to reflect the
reclassification of volume rebates and outbound freight as deductions from net
sales rather than as elements of selling, administrative and general expenses.
Net earnings are unchanged from amounts previously reported.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note O-Industry Segments
The Company operates in three industry segments that are described below:
Security Products Group
This segment includes the design, manufacture and distribution of electronic and
electromagnetic security products and systems and biometric identification
devices to the nonresidential access control market. Biometric identification
devices are also distributed to the time and attendance and personal
identification markets. Sales are made through a combination of in-house sales
personnel and manufacturers' representatives.
Hardware and Tools Group
This segment includes the manufacture and distribution of a diversified line of
brass and aluminum architectural, builder and consumer hardware, wire hardware
products and storage hooks and a broad line of forged pruning and harvesting
tools, shears, saws and other hand-held garden tools. A significant portion of
this segment's sales are to consumers that are served through a retail network
that includes a number of major home centers. Architectural and builder hardware
products are also sold through distributors to the contractor hardware market. A
line of professional pruning and harvesting tools are sold through distributors
for agricultural applications and professional landscaping. Wire hardware
products are also marketed to certain industrial customers.
Other Building Products
This segment includes the manufacture and distribution of water source heat
pumps and custom kitchen, bath and other cabinetry. Heat pumps are sold through
manufacturers' representatives to large mechanical contractors and through
multi-branch stocking distributors who in turn sell to smaller dealers. Custom
cabinetry is sold through an extensive dealer network to the home renovation and
new home construction markets.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note O-Industry Segments (continued)
The following is a summary of sales and operating income by industry segment:
<TABLE>
1997 1996 1995
=====================================================
<S> <C> <C> <C>
Sales to unaffiliated customers:
Security products $ 30,137,000 $ 23,165,000 $ 20,247,000
Hardware and tools 85,330,000 80,782,000 72,040,000
Other building products 45,439,000 44,380,000 39,443,000
$160,906,000 $148,327,000 $131,730,000
=====================================================
Operating income:
Security products $ 5,315,000 $ 3,742,000 $ 4,192,000
Hardware and tools 9,871,000 9,475,000 8,169,000
Other building products 6,787,000 6,277,000 5,115,000
21,973,000 19,494,000 17,476,000
Corporate:
Interest expense (5,561,000) (6,398,000) (6,617,000)
Interest income 158,000 31,000 20,000
Nonoperating income (expense) (114,000) 70,000 203,000
General expenses (4,254,000) (4,352,000) (6,487,000)
Earnings before income taxes 12,202,000 8,845,000 4,595,000
Income taxes 4,800,000 3,530,000 1,192,000
Net earnings $ 7,402,000 $ 5,315,000 $ 3,403,000
=====================================================
</TABLE>
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note O-Industry Segments (continued)
Other industry segment information is as follows:
<TABLE>
1997 1996 1995
=====================================================
<S> <C> <C> <C>
Identifiable assets:
Security products $17,826,000 $14,721,000 $13,988,000
Hardware and tools 36,146,000 30,496,000 30,338,000
Other building products 16,736,000 15,270,000 13,535,000
Corporate 12,240,000 14,233,000 11,128,000
$82,948,000 $74,720,000 $68,989,000
=====================================================
Depreciation and amortization:
Security products $ 1,102,000 $ 1,173,000 $ 716,000
Hardware and tools 1,837,000 1,829,000 1,716,000
Other building products 966,000 855,000 688,000
Corporate 199,000 367,000 317,000
$ 4,104,000 $ 4,224,000 $ 3,437,000
=====================================================
Capital additions:
Security products $ 1,257,000 $ 644,000 $ 505,000
Hardware and tools 2,213,000 1,481,000 1,879,000
Other building products 1,706,000 925,000 1,120,000
Corporate 41,000 9,000 108,000
$ 5,217,000 $ 3,059,000 $ 3,612,000
=====================================================
</TABLE>
Corporate assets include cash and cash equivalents, deferred income taxes,
prepaid pension costs, deferred loan issue expenses and other general corporate
assets.
Intersegment sales and export sales were not significant for the fiscal years
presented. Sales to one major home center approximated 10% of consolidated net
sales. No other single customer accounts for more than 10% of the consolidated
net sales.
<PAGE>
Harrow Industries, Inc. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
<TABLE>
Column A Column B Column C Column D Column E
================================ ===================== ======================================== =========== =============
Additions
========================================
(1) (2)
Balance at Charged to Costs Charged to Other Deductions- Balance at
Description Beginning of Period and Expenses Accounts-Describe Describe End of Period
================================ ==================== ================== ==================== =========== =============
<S> <C> <C> <C> <C> <C>
Fiscal year ended
November 30, 1997:
Allowance for
doubtful accounts $1,043,000 $510,000 $181,000 (A) $1,372,000
Allowance for excess
and obsolete inventory 753,000 348,000 1,101,000
Fiscal year ended
December 1, 1996:
Allowance for
doubtful accounts 824,000 247,000 28,000 (A) 1,043,000
Allowance for excess
and obsolete inventory 660,000 93,000 753,000
Fiscal year ended
December 3, 1995:
Allowance for
doubtful accounts 674,000 381,000 231,000 (A) 824,000
Allowance for excess
and obsolete inventory 576,000 253,000 169,000 (B) 660,000
A-Accounts charged off, net of recoveries.
B-Excess and obsolete inventory disposed of.
</TABLE>
<PAGE>
EXHIBIT 10.16
HARROW INDUSTRIES, INC.
2627 East Beltline, S.E.
Grand Rapids, Michigan 49546
October 15, 1997
Robert Fleming & Co. Limited
25 Copthall Avenue
London EC2R 7DR
ENGLAND
Gentlemen:
Reference is made to that certain Outline Heads Terms (the "Heads of
Terms"), a copy of which is annexed hereto as Exhibit A, executed July 11, 1997,
by Harrow Industries, Inc. ("Harrow") relating to the agreement between Robert
Fleming & Co. Limited ("Flemings") and Harrow with respect to the purchase by
Flemings or its agent, such number of shares of Common Stock, par value $0.01
per share (the "Common Stock"), of Harrow, a Delaware corporation, as proposed
in Heads of Terms, structured as a "dutch auction" or other tender offer for
Common Stock at a price per share not in excess of $60 per share nor less than
$50 per share, for a total purchase price not to exceed US$5,000,000. The shares
of Common Stock so purchased by or on behalf of Flemings (as the same may be
adjusted, split, combined, reclassified or otherwise changed) are hereinafter
referred to as the "Option Shares".
The manner of exercise of the Options, the number of Tranches and the
applicable Option Price (each as defined below) per Tranche set forth herein
have been determined by the parties based on an assumption of a purchase of
83,333 shares of Common Stock at $60 per Share. In the event that Flemings or
its agent does not purchase 83,333 shares of Common Stock at a per share price
of $60, the parties may agree to amend this Letter Agreement to accurately
reflect such change.
We have agreed that upon the terms and conditions set forth in this Letter
Agreement, Harrow shall have the option to purchase from Flemings, and Flemings
shall have the option to sell to Harrow, all of the Option Shares in the
tranches set forth below (each, a "Tranche") at the applicable Option Price (as
defined below) per Tranche. Our agreement is as follows:
1. Option of Harrow to Purchase Option Shares. Subject to the terms and
conditions of this Letter Agreement, if a Call Event (as hereinafter defined)
shall occur Harrow shall have the option (the "Call Option") to purchase from
Flemings (and, upon the exercise of
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 2
such option, Flemings shall sell to Harrow) all of the Option Shares comprising
one or more Tranche at the applicable Option Price (as hereinafter defined). The
Call Option shall be exercisable at any time after the occurrence of a Call
Event (the "Option Exercise Period"), but shall not be exercisable later than
5:00 p.m., London Time, on December 31, 2001.
2. Option of Flemings to Sell Option Shares. Subject to the terms and
conditions of this Letter Agreement, if a Call Event occurs, Flemings shall have
the option (the "Put Option") to sell to Harrow (and, upon the exercise of such
option, Harrow shall purchase from Flemings) all of the Option Shares comprising
one or more Tranche at the applicable Option Price. The Put Option shall be
exercisable for the Option Exercise Period, but shall not be exercisable later
than 5:00 p.m., London time, on December 31, 2001.
3. Manner of Exercise of Options.
(a) The Call Option and the Put Option (referred to hereinafter
collectively as the "Option" or "Options") with respect to any Tranche
shall be exercisable by giving to the other party, at the address and in
the manner contemplated by Section 11(i) hereof, written notice of the
exercise thereof. Such notice shall specify (i) the Tranche with respect to
which the Call Option or the Put Option, as the case may be, is being
exercised and (ii) a date (not earlier than ten (10) calendar days nor
later than thirty (30) calendar days from the date of such notice) for the
closing (the "Closing") of the purchase and sale of the Option Shares
comprising such Tranche pursuant to the exercise of such option. Each
Closing shall take place in London unless the parties otherwise agree. Upon
the mailing or facsimile transmission of notice duly exercising the Call
Option or the Put Option, as the case may be, such option shall be deemed
to have been exercised by the party giving such notice, irrespective of the
actual date of Closing. In the event that both the Call Option and the Put
Option with respect to a particular Tranche are exercised and the
respective notices of exercise shall specify different dates and/or places
for the Closing, then the notice bearing the earlier postmark or other time
identification mark shall control unless otherwise specifically agreed to
by the parties.
(b) Assuming the maximum number of shares of Common Stock are
purchased by or on behalf of Flemings, the Call Option and the Put Option
shall each be exercisable in Tranches, as set forth below. In the event
fewer shares of Common Stock are purchased, the number of Tranches and
shares in each Tranche shall be adjusted such that the Tranches contain an
equal number of shares (to the extent possible) and the Tranche Purchase
Price (as hereinafter defined) is approximately $1,000,000.
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 3
<TABLE>
Identification of Tranche Comprised Of:
<S> <C>
Tranche A 16,667 shares of Common Stock
Tranche B 16,667 shares of Common Stock
Tranche C 16,667 shares of Common Stock
Tranche D 16,666 shares of Common Stock
Tranche E 16,666 shares of Common Stock
</TABLE>
(c) The Call Option and the Put Option, as the case may be, may be
exercised, if at all, with respect to a single Tranche or multiple
Tranches, but in no event no later than 5:00 p.m., London time, on December
31, 2001.
(d) At the Closing, in consideration of the sale, assignment, transfer
and delivery of the Option Shares comprising the Tranche with respect to
which the Call Option or Put Option, as the case may be, was exercised and
against delivery to Harrow of certificates representing such Option Shares,
(i) Harrow shall deliver to Flemings an amount in cash or by electronic
transfer of immediately available funds (or such other means of payment as
the parties may agree in writing) equal to the Option Price, and (ii)
Flemings shall deliver to Harrow certificates representing the Option
Shares comprising the Tranche with respect to which the Option was
exercised, duly endorsed for transfer or accompanied by duly executed stock
powers.
4. Definitions.
Option Price. As used herein, the term "Option Price" per Tranche shall
mean the applicable price set forth in the table below. The Option Prices shown
assume a Tranche purchase price by Flemings (the "Tranche Purchase Price") of
$1,000,000; any variation in the Tranche Purchase Price shall result in a
pro-rata change in the Option Prices and the Call Event threshold amounts, set
forth below; provided that in no event shall the Call Event threshold amounts be
less than $1,000,000 plus the applicable Tranche Purchase Price.
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 4
<TABLE>
If Put Option or Call Option is The Applicable Option Price for
exercised on or prior to: Tranches A, B, C, D or E shall be.
<S> <C>
December 31, 1997 $1,080,000
June 30, 1998 $1,150,000
December 31, 1998 $1,230,000
December 31, 1999 $1,400,000
December 31, 2000 $1,575,000
December 31, 2001 $1,750,000
</TABLE>
(a) Call Event. As used herein, a "Call Event" shall be deemed to
occur if the Consolidated Net Worth of Harrow (as reflected in the
consolidated financial statements of Harrow as at the end of any month,
which financial statements shall be prepared to the satisfaction of
Flemings) as at the end of any month shall exceed (i) for all periods on or
prior to December 31, 1997, $2,080,000, (ii) for all periods on or prior to
June 30, 1998, $2,150,000, (iii) for all periods on or prior to December
31, 1998, $2,230,000, (iv) for all periods on or prior to December 31,
1999, $2,400,000, (v) for all periods on or prior to December 31,
2000,$2,575,000, or (vi) for all periods on or prior to December 31, 2001,
$2,750,000. The date of the Call Event shall be deemed to be the date of
the end of the month for which the consolidated financial statements
referred to in this paragraph 4(b) are prepared. For the avoidance of
doubt, there may be more than one Call Event.
5. Fleming's Representations and Warranties.
Flemings represents and warrants to Harrow as follows:
(a) Flemings has the full power and authority to execute, deliver and
carry out the terms and provisions of this Letter Agreement and to
consummate the transactions contemplated hereby, and has taken all
necessary action to authorize the execution, delivery and performance of
this Letter Agreement;
(b) Flemings is duly organized, validly existing and in good standing
as a corporation under the laws of England;
(c) This Letter Agreement has been duly and validly authorized,
executed and delivered by Flemings and constitutes a valid and binding
obligation of Flemings, enforceable in accordance with its terms, subject
to applicable principles of equity, bankruptcy, reorganization, insolvency,
or other laws affecting the enforcement of creditors' rights generally;
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 5
(d) At the time that the Put Option or the Call Option with respect to
a particular Tranche is exercised, and at the Closing with respect thereto,
(i) Flemings shall have taken no action that would have caused the creation
of any liens, claims, options, proxies, voting, agreements, charges or
encumbrances of whatever nature against or with respect to the Option
Shares comprising such Tranche, and (ii) Flemings shall not (except as set
forth herein) have disposed of any interest in the Option Shares;
(e) The execution of this Letter Agreement by Flemings does not, and
the performance by Flemings of its obligations hereunder will not,
constitute a violation of, conflict with or result in a default under any
contract, commitment, agreement, understanding, arrangement or restriction
of any kind to which Flemings is a party or by which Flemings is bound or
any judgment, decree or order applicable to Flemings, nor is Flemings
required to obtain the approval of any third party or organization to enter
into and perform this Letter Agreement, except to the extent such
violation, conflict or default would not have a material adverse effect on
Flemings' ability to consummate the transactions contemplated by this
Letter Agreement in accordance with applicable law; and
(f) Neither the execution and delivery of this Letter Agreement nor
the performance by Flemings of its obligations hereunder will violate any
provisions of English law applicable to Flemings or require any consent or
approval of, or filing with or notice to any public body or authority under
any provision of English law applicable to Flemings, except to the extent
such violation or failure to obtain any consent or approval would not have
a material adverse effect on Flemings' ability to consummate the
transactions contemplated by this Letter Agreement in accordance with
applicable law.
6. Harrow's Representations and Warranties.
Harrow represents and warrants to Flemings as follows:
(a) Harrow is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. Harrow has the full power and
authority to execute, deliver and carry out the terms and provisions of
this Letter Agreement and consummate the transaction contemplated hereby,
and has taken all necessary action to authorize the execution, delivery,
and performance of this Letter Agreement;
(b) This Letter Agreement has been duly and validly authorized,
executed and delivered by Harrow and constitutes a valid and binding
agreement of Harrow, enforceable in accordance with its terms, subject to
applicable principles of equity, bankruptcy, reorganization insolvency or
other laws affecting the enforcement of creditors' rights generally;
(c) The execution of this Letter Agreement by Harrow does not, and the
performance by Harrow of its obligations hereunder will not, constitute a
violation of, conflict with or result in a default under any contract,
commitment, agreement, understanding, arrangement or restriction of any
kind to which Harrow is a party or by which Harrow is bound or any
judgment, decree or order applicable to Harrow, nor is Harrow required to
obtain the
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 6
approval of any person or organization to enter into and perform this
Letter Agreement other than those which shall have been obtained at the
time this Letter Agreement is performed;
(d) The Option Shares are duly authorized, validly issued, fully paid
and nonassessable; and
(e) Neither the execution and delivery of this Letter Agreement, nor
the performance by Harrow of its obligations hereunder will violate any
provision of law applicable to Harrow (including, without limitation,
applicable securities law and regulations) or require any consent or
approval of, or filing with or notice to any public body or authority under
any provision of law applicable to Harrow (except for such periodic
reporting requirements as may be applicable to Harrow under the United
States Securities Exchange Act of 1934 (the "Exchange Act") or the rules
and regulations promulgated thereunder).
(f) None of the information prepared or to be prepared by Harrow and
furnished to Flemings or its agent in connection with the tender offer with
respect to the Common Stock or disclosed or required to be disclosed,
pursuant to the Exchange Act or otherwise, by Harrow contains or will
contain any untrue statement of material fact or omits or will omit any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
7. Certain Covenants.
(a) In connection with entering into this Letter Agreement, Harrow is
establishing an account in its name to be maintained at Flemings in
accordance with its customary practices concerning the maintenance of cash
accounts of customers and bearing interest at an annual rate of five
percent (5%), compounded quarterly, and Harrow is depositing into such
account an amount equal to the aggregate of all the Tranche Purchase Prices
paid by Flemings, representing an equal amount in respect of each Tranche.
The amount so deposited in respect of a particular Tranche may be withdrawn
by Harrow if an Option in respect of that Tranche is exercised or, at
Harrow's option, may be applied towards the Option Price related to such
Tranche as is then exercised. Harrow agrees that if at any time Harrow
fails to pay any sums due to Flemings, Flemings may set off or transfer any
sum standing to the credit of any account Harrow may have with Flemings, or
any other sums that Flemings is holding on Harrow's behalf, in or towards
satisfaction of Harrow's monies, obligations and liabilities to Flemings
under any document or agreement whatsoever. Where such set-off or transfer
requires the conversion of one currency into another, such conversion shall
be calculated at Flemings' then prevailing spot rate of exchange for
purchasing the currency considered.
(b) Until such time as all of the Options in respect of all the
Tranches granted herein shall have been exercised or shall have expired or
otherwise lapsed, Harrow agrees to furnish Flemings with its consolidated
financial statements as at the end of each month (which need not be
audited), which financial statements shall be furnished within 30 days of
the end of the month to which they relate, together with appropriate
certification executed by a duly
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 7
authorized officer of Harrow attesting to the Consolidated Net Worth of
Harrow as at the end of each such month. The agreement to furnish such
financial statements may be satisfied by the delivery to Flemings of copies
of such filings, if any, as Harrow makes with the United States Securities
and Exchange Commission.
(c) At or prior to the commencement of the tender offer with respect
to the Common Stock, Harrow will furnish Flemings the legal opinion of
Curtis, Mallet-Prevost, Colt & Mosle, counsel to Harrow, with respect to
those matter set forth in Section 6 of this Letter Agreement.
(d) Harrow will provide Flemings with full disclosure of all relevant
information.
8. Indemnification. Harrow agrees that it will indemnify and hold harmless,
Flemings, its stockholders, employees, agents, affiliates and each person, if
any, that controls Flemings and its affiliates within the meaning of Section 20
of the Exchange Act and Section 15 of the Securities Act of 1933 (the "Act"),
each as amended (any and all of whom are referred to as an "Indemnified Party"),
from and against any and all losses, claims, damages or liabilities, and all
actions in respect thereof (including, but not limited to, all legal or other
expenses reasonably incurred by an Indemnified Party in connection with the
preparation for or defense of any claim, action or proceeding, whether or not
resulting in any liability), sustained or incurred by an Indemnified Party: (i)
arising, out of, or in connection with, any untrue statement or alleged untrue
statement of a material fact contained in any of the financial or other
information furnished to Flemings or its agent by Harrow in connection with the
Transactions including, without limitation, the Offer to Purchase, or the
omission (or alleged omission) therefrom of a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; or (ii) with respect to, caused by, or otherwise arising
out of any transaction contemplated by this Letter Agreement (including, without
limitation, the proposed offer to purchase) or Flemings performing the services
contemplated hereunder; provided, however, Harrow will not be liable under
clause (ii) hereof to the extent that any loss, claim, damage or liability is
found in a final judgment by a court of competent jurisdiction to have resulted
from Flemings' gross negligence or bad faith in performing such services or for
any losses or damages not related to the proposed transactions.
If the indemnification provided in this Section 8 is unavailable to an
Indemnified Party (including, for purposes of the remainder of this Section 8
Harrow and its stockholders, employees, agents and any person who controls
Harrow within the meaning of Section 20 of the Exchange Act or Section 15 of the
Act) under the preceding paragraph in respect of any losses, claims, damages or
liabilities referred to therein, such other party, in lieu of indemnifying such
Indemnified Party, shall contribute to any amounts paid or payable by such
Indemnified Party in such proportion as is appropriate and equitable under all
of the circumstances.
The foregoing indemnification and contribution provisions of this Section 8
are not in lieu of, but in addition to, any rights which any Indemnified Party
may have hereunder or otherwise.
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 8
Each party hereto agrees to notify the other promptly of the assertion
against it or any other person of any claim or the commencement of any action or
proceeding relating to any activity contemplated by this Letter Agreement;
provided, however, that the failure to so notify the other party shall not alter
either party's rights or obligations under this Letter Agreement except to the
extent such other party is actually prejudiced by such failure.
9. Specific Performance. Harrow and Flemings acknowledge and agree that in
the event of any breach of this Letter Agreement, the non breaching party would
be irreparably harmed and could not be made whole by monetary damages. It is
accordingly agreed that Harrow and Flemings, in addition to any other remedy to
which they may be entitled at law or in equity, shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and/or to compel specific performance of this Letter Agreement in any
action, which action may take place in a state court of New York, as provided in
Section 11(h) hereof.
10. Expenses. Upon the completion of the purchase of the Common Stock by
Flemings or its agent, Harrow will pay Flemings for its own account an
arrangement fee of $125,000. In addition, Harrow will reimburse Flemings for all
of Flemings's out-of-pocket expenses (including attorneys fees and expenses)
incurred in connection with the transactions contemplated hereby.
11. Miscellaneous.
(a) This Letter Agreement (including the Heads of Terms) and the
Engagement Letter dated October 15, 1997 between Flemings and Harrow,
together constitute that entire understanding of the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements
and understandings, whether oral or written, between the parties hereto
with respect to the subject matter hereof. This Letter Agreement may not be
amended orally, but only by an instrument in writing by each of the parties
to this Letter Agreement.
(b) This Letter Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns. This
Letter Agreement and the rights granted hereunder may not be transferred by
Harrow without the consent of Flemings, which consent shall not be
unreasonably withheld, provided, that (i) Flemings is provided with
evidence reasonably satisfactory to it that such a transfer is in full
compliance with all applicable laws and regulations (including, without
limitation, applicable securities law and regulations), and (ii)
arrangements reasonably satisfactory to Flemings shall have been made with
respect to the deposit referred to in Section 7(a) hereof. In the event any
such transfer occurs, Harrow shall give written notice thereof to Flemings
in accordance with the provisions of Section 11(i) hereof within thirty
(30) days of the effectuation of such transfer. Neither this Letter
Agreement or any rights hereunder may be assigned or otherwise transferred
by Flemings except to an affiliate thereof.
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 9
(c) Notwithstanding the foregoing, nothing in this Letter Agreement
shall be deemed to restrict Flemings, at any time after the Put Options and
Call Options granted hereunder lapse and become no longer exercisable with
respect to all Tranches in accordance with the terms hereof, from selling,
assigning, transferring, conveying or otherwise disposing of the Option
Shares at any time to any person, provided, that prior notice of any such
sale, assignment, transfer, conveyance or other disposition is given to
Harrow. In the event of any such sale, assignment, transfer, conveyance or
other disposition, unless there is at the relevant time a payment
obligation on the part of Harrow in respect of the exercise of the Put
Option or any indemnification obligation in respect of this Letter
Agreement, the rights and obligations of the parties hereunder shall cease
as to the Option Shares that are the subject thereof, and Harrow shall have
the right to close the account referred to in Section 7(a) hereof and to
withdraw all funds therefrom without penalty.
(d) Section headings contained in this Letter Agreement are for
reference purposes only and shall not affect the meaning or interpretation
of this Letter Agreement.
(e) All representations, warranties and agreements contained herein
shall survive the Closing related to any particular Tranche.
(f) This Letter Agreement may be executed in counterparts, each of
which shall, when executed, be an original and all of which shall be deemed
to be one and the same instrument.
(g) This Letter Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without
reference to the conflicts of law principles thereof.
(h) Harrow and Flemings hereby agree that any suit, claim, action or
proceeding, relating to or arising under this Letter Agreement may (without
prejudice to the ability of either party to commence proceedings in any
other jurisdiction) be brought in a state court of New York having
competent subject matter jurisdiction over the matters set forth in this
Letter Agreement or in a federal court sitting in New York (each a "New
York Court"). Each of Harrow and Flemings hereby consents to personal
jurisdiction in any such action brought in any such New York Court,
consents to service of process upon it in the matter set forth in Section
11(i) hereof, and waives any objection it may have to venue in any such New
York Court or to any claim that any such New York Court is an inconvenient
forum.
(i) All notices and other communications under this Letter Agreement
shall be in writing and delivery thereof shall be deemed to have been made
either (A) if mailed, when received, or (B) if transmitted by hand
delivery, telegram, telex, telecopier or facsimile transmission, when
transmitted to the party entitled to receive the same, at the addressee
indicated below or at such other address as such party shall have specified
by written notice to the other parties hereto given in accordance herewith:
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 10
(A) if to Flemings, addressed to:
Robert Fleming & Co. Limited
25 Copthall Avenue
London EC2R 7DR
England
Attention: Michael J.C. Watts
Facsimile: (+44) 171 256 5036
Telex: 297451
with copies to:
Baker & McKenzie
805 Third Avenue
New York, New York 10022
Attention: Richard L. Nevins, Esq.
Facsimile: (+1) 212 891 3819
(B) if to Harrow, addressed to:
Harrow Industries, Inc.
2627 East Beltline, S.E.
Grand Rapids, Michigan 49546
Attention: John S. Hogan
Facsimile: (+1) 616 942 2170
with copies to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, NY 10178
Attention: Eileen P. Matthews, Esq.
Facsimile: (+1) 212 697 1559
(j) Should any litigation or arbitration be commenced (including any
proceedings in a bankruptcy court) between the parties hereto or their
representatives concerning any provision of this Letter Agreement or the
rights and duties of any person or entity hereunder, the party prevailing
in such litigation or arbitration shall be entitled, in addition to such
other
<PAGE>
Robert Fleming & Co. Limited
October 15, 1997
Page 11
relief as may be granted, to reasonable attorneys' and arbitration fees and
the costs of litigation or arbitration.
(k) Any waiver by any party of a breach of any provision of this
Letter Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of
this Letter Agreement. The failure of a party to insist upon strict
adherence to any term of this Letter Agreement on one or more sections
shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Letter Agreement.
(1) No provision in this Letter Agreement shall constitute any person
a third party beneficiary.
(m) If any term, provision, covenant or restriction of this Letter
Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Letter Agreement shall
remain in full force and effect and shall in no way be affected, impaired
or invalidated; provided; however, that in the event the provisions of this
Letter Agreement dealing with the purchase and sale of the Option Shares is
held to be invalid then this entire Letter Agreement shall be invalidated.
If the foregoing correctly reflects the terms of our agreement, please
countersign the enclosed copy of this letter in the space provided below,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
HARROW INDUSTRIES, INC.
By: /s/ Donald G. Calder
Name: Donald G. Calder
Title: Chairman
Accepted and agreed to as of the date first above written:
ROBERT FLEMING & CO. LIMITED
By: /s/ J.M. Cole
Name: J. M. Cole
Title: Director
<PAGE>
HARROW INDUSTRIES, INC.
2627 East Beltline, S.E.
Grand Rapids, Michigan 49546
November 14, 1997
Robert Fleming & Co. Limited
25 Copthall Avenue
London EC2R 7DR
ENGLAND
Gentlemen:
This letter sets forth the final amended agreement between Robert Fleming &
Co. Limited ("Flemings") and Harrow Industries, Inc. ("Harrow") with respect to
the purchase by Flemings or its agent, of such number of shares of Common Stock,
par value $0.01 per share (the "Common Stock"), of Harrow, a Delaware
corporation, as proposed herein, structured as a "dutch auction" or other tender
offer for Common Stock at a price per share not in excess of $60 per share nor
less than $50 per share, for a total purchase price (the "Purchase Price") not
to exceed US$10,000,000. The tender offer, as amended, expired on December 1,
1997 and 116,121 shares of Common Stock were validly tendered and a per share
price of $60 per share will be paid therefore by purchaser, for a total Purchase
Price of $6,967,260. The parties desire to amend this put/call agreement to
reflect the actual number of shares of Common Stock purchased, the number of
shares of Common stock in each Tranche (as hereinafter define) and the
respective Tranche Purchase Prices. The shares of Common Stock so purchased by
or on behalf of Flemings (as the same may be adjusted, split, combined,
reclassified or otherwise changed) are hereinafter referred to as the "Option
Shares".
The manner of exercise of the Options, the number of Tranches and the
applicable Option Price (each as defined below) per Tranche set forth herein
have been determined by the parties based on 116,121 shares of Common Stock at
$60 per share.
We have agreed that upon the terms and conditions set forth in this Letter
Agreement, Harrow shall have the option to purchase from Flemings, and Flemings
shall have the option to sell to Harrow, all of the Option Shares in the as set
forth below (each, a "Tranche") at the applicable Option Price (as defined
below) per Tranche. Our agreement is as follows:
1. Option of Harrow to Purchase Option Shares. Subject to the terms and
conditions of this Letter Agreement, if a Call Event (as hereinafter defined)
shall occur Harrow shall have the option (the "Call Option") to purchase from
Flemings (and, upon the exercise of
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 2
such option, Flemings shall sell to Harrow) all of the Option Shares comprising
one or more Tranche at the applicable Option Price (as hereinafter defined). The
Call Option shall be exercisable at any time after the occurrence of a Call
Event (the "Option Exercise Period"), but shall not be exercisable later than
5:00 p.m., London Time, on December 31, 2005.
2. Option of Flemings to Sell Option Shares. Subject to the terms and
conditions of this Letter Agreement, if a Call Event occurs, Flemings shall have
the option (the "Put Option") to sell to Harrow (and, upon the exercise of such
option, Harrow shall purchase from Flemings) all of the Option Shares comprising
one or more Tranche at the applicable Option Price. The Put Option shall be
exercisable for the Option Exercise Period, but shall not be exercisable later
than 5:00 p.m., London time, on December 31, 2005.
3. Manner of Exercise of 0ptions.
(a) The Call Option and the Put Option (referred to hereinafter
collectively as the "Option" or "Options") with respect to any Tranche
shall be exercisable by giving to the other party, at the address and in
the manner contemplated by Section 11(i) hereof, written notice of the
exercise thereof. Such notice shall specify (i) the Tranche with respect to
which the Call Option or the Put Option, as the case may be, is being
exercised and (ii) a date (not earlier than ten (10) calendar days nor
later than thirty (30) calendar days from the date of such notice) for the
closing (the "Closing") of the purchase and sale of the Option Shares
comprising such Tranche pursuant to the exercise of such option. Each
Closing shall take place in London unless the parties otherwise agree. Upon
the mailing or facsimile transmission of notice duly exercising the Call
Option or the Put Option, as the case may be, such option shall be deemed
to have been exercised by the party giving such notice, irrespective of the
actual date of Closing. In the event that both the Call Option and the Put
Option with respect to a particular Tranche are exercised and the
respective notices of exercise shall specify different dates and/or places
for the Closing, then the notice bearing the earlier postmark or other time
identification mark shall control unless otherwise specifically agreed to
by the parties.
(b) Based upon the actual number of shares of Common Stock purchased,
the Call Option and the Put Option shall each be exercisable in Tranches,
as set forth below.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 3
<TABLE>
Identification of Tranche Comprised Of:
<S> <C>
Tranche A 16,589 shares of Common Stock
Tranche B 16,589 shares of Common Stock
Tranche C 16,589 shares of Common Stock
Tranche D 16,589 shares of Common Stock
Tranche E 16,589 shares of Common Stock
Tranche F 16,589 shares of Common Stock
Tranche G 16,587 shares of Common Stock
</TABLE>
(c) The Call Option and the Put Option, as the case may be, may be
exercised, if at all, with respect to a single Tranche or multiple
Tranches, but in no event no later than 5:00 p.m., London time, on December
31, 2005.
(d) At the Closing, in consideration of the sale, assignment, transfer
and delivery of the Option Shares comprising the Tranche with respect to
which the Call Option or Put Option, as the case may be, was exercised and
against delivery to Harrow of certificates representing such Option Shares,
(i) Harrow shall deliver to Flemings an amount in cash or by electronic
transfer of immediately available funds (or such other means of payment as
the parties may agree in writing) equal to the Option Price, and (ii)
Flemings shall deliver to Harrow certificates representing the Option
Shares comprising the Tranche with respect to which the Option was
exercised, duly endorsed for transfer or accompanied by duly executed stock
powers.
4. Definitions.
Option Price. As used herein, the term "Option Price" per Tranche (the
"Tranche Purchase Price") shall mean the applicable price set forth in the table
below.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 3
<TABLE>
If Put Option or Call Option is The Applicable Option Price for
exercised on or prior to: Tranches A, B, C, D, E, F and G
shall be.
<S> <C>
December 31, 1997 $1,074,949
June 30, 1998 $1,144,621
December 31, 1998 $1,224,247
December 31, 1999 $1,393,452
December 31, 2000 $1,567,634
December 31, 2001 $1,741,815
December 31, 2002 $1,990,646
December 31, 2003 $2,239,476
December 31, 2004 $2,488,307
December 31, 2005 $2,786,904
</TABLE>
(a) Call Event. As used herein, a "Call Event" shall be deemed to
occur if the Consolidated Net Worth of Harrow (as reflected in the
consolidated financial statements of Harrow as at the end of any month,
which financial statements shall be prepared to the satisfaction of
Flemings) as at the end of any month shall exceed (i) for all periods on or
prior to December 31, 1997, $2,080,000, (ii) for all periods on or prior to
June 30, 1998, $2,150,000, (iii) for all periods on or prior to December
31, 1998, $2,230,000, (iv) for all periods on or prior to December 31,
1999, $2,400,000, (v) for all periods on or prior to December 31, 2000,
$2,575,000, (vi) for all periods on or prior to December 31, 2001,
$2,750,000, (vii) for all periods on or prior to December 31, 2002,
$3,000,000, (viii) for all periods on or prior to December 31, 2003,
$3,250,000, (ix) for all periods on or prior to December 31, 2004,
$3,500,000, or (x) for all periods on or prior to December 31, 2005,
$3,800,000. The date of the Call Event shall be deemed to be the date of
the end of the month for which the consolidated financial statements
referred to in this paragraph 4(b) are prepared. For the avoidance of
doubt, there may be more than one Call Event.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 5
5. Flemings' Representations and Warranties.
Flemings represents and warrants to Harrow as follows:
(a) Flemings has the full power and authority to execute, deliver and
carry out the terms and provisions of this Letter Agreement and to
consummate the transactions contemplated hereby, and has taken all
necessary action to authorize the execution, delivery and performance of
this Letter Agreement;
(b) Flemings is duly organized, validly existing and in good standing
as a corporation under the laws of England;
(c) This Letter Agreement has been duly and validly authorized,
executed and delivered by Flemings and constitutes a valid and binding
obligation of Flemings, enforceable in accordance with its terms, subject
to applicable principles of equity, bankruptcy, reorganization, insolvency,
or other laws affecting the enforcement of creditors' rights generally;
(d) At the time that the Put Option or the Call Option with respect to
a particular Tranche is exercised, and at the Closing with respect thereto,
(i) Flemings shall have taken no action that would have caused the creation
of any liens, claims, options, proxies, voting agreements, charges or
encumbrances of whatever nature against or with respect to the Option
Shares comprising such Tranche, and (ii) Flemings shall not (except as set
forth herein) have disposed of any interest in the Option Shares;
(e) The execution of this Letter Agreement by Flemings does not, and
the performance by Flemings of its obligations hereunder will not,
constitute a violation of, conflict with or result in a default under any
contract, commitment, agreement, understanding, arrangement or restriction
of any kind to which Flemings is a party or by which Flemings is bound or
any judgment, decree or order applicable to Flemings, nor is Flemings
required to obtain the approval of any third party or organization to enter
into and perform this Letter Agreement, except to the extent such
violation, conflict or default would not have a material adverse effect on
Flemings's ability to consummate the transactions contemplated by this
Letter Agreement in accordance with applicable law; and
(f) Neither the execution and delivery of this Letter Agreement nor
the performance by Flemings of its obligations hereunder will violate any
provisions of English law applicable to Flemings or require any consent or
approval of, or filing with or notice to any public body or authority under
any provision of English law applicable to Flemings, except to the extent
such violation or failure to obtain any consent or approval would not have
a material adverse effect on Flemings' ability to consummate the
transactions contemplated by this Letter Agreement in accordance with
applicable law.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 6
6. Harrow's Representations and Warranties.
Harrow represents and warrants to Flemings as follows:
(a) Harrow is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. Harrow has the full power and
authority to execute, deliver and carry out the terms and provisions of
this Letter Agreement and consummate the transaction contemplated hereby,
and has taken all necessary action to authorize the execution, delivery and
performance of this Letter Agreement;
(b) This Letter Agreement has been duly and validly authorized,
executed and delivered by Harrow and constitutes a valid and binding
agreement of Harrow, enforceable in accordance with its terms, subject to
applicable principles of equity, bankruptcy, reorganization, insolvency or
other laws affecting the enforcement of creditors' rights generally;
(c) The execution of this Letter Agreement by Harrow does not, and the
performance by Harrow of its obligations hereunder will not, constitute a
violation of, conflict with or result in a default under any contract,
commitment, agreement, understanding, arrangement or restriction of any
kind to which Harrow is a party or by which Harrow is bound or any
judgment, decree or order applicable to Harrow, nor is Harrow required to
obtain the approval of any person or organization to enter into and perform
this Letter Agreement other than those which shall have been obtained at
the time this Letter Agreement is performed;
(d) The Option Shares are duly authorized, validly issued, fully paid
and nonassessable; and
(e) Neither the execution and delivery of this Letter Agreement, nor
the performance by Harrow of its obligations hereunder will violate any
provision of law applicable to Harrow (including, without limitation,
applicable securities law and regulations) or require any consent or
approval of, or filing with or notice to any public body or authority under
any provision of law applicable to Harrow (except for such periodic
reporting requirements as may be applicable to Harrow under the United
States Securities Exchange Act of 1934 (the "Exchange Act") or the rules
and regulations promulgated thereunder).
(f) None of the information prepared or to be prepared by
Harrow and furnished to Flemings or its agent in connection with the tender
offer with respect to the Common Stock or disclosed or required to be disclosed,
pursuant to the Exchange Act or otherwise, by Harrow contains or will contain
any untrue statement of material fact or omits or will omit any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 7
7. Certain Covenants.
(a) In connection with entering into this Letter Agreement, Harrow is
establishing an account in its name to be maintained at Flemings in
accordance with its customary practices concerning the maintenance of cash
accounts of customers and bearing interest at an annual rate of five
percent (5%), compounded quarterly, and Harrow is depositing into such
account an amount equal to the aggregate of all the Tranche Purchase Prices
paid by Flemings, representing an equal amount in respect of each Tranche.
The amount so deposited in respect of a particular Tranche may be withdrawn
by Harrow if an Option in respect of that Tranche is exercised or, at
Harrow's option, may be applied towards the Option Price related to such
Tranche as is then exercised. Harrow agrees that if at any time Harrow
fails to pay any sums due to Flemings, Flemings may set off or transfer any
sum standing to the credit of any account Harrow may have with Flemings, or
any other sums that Flemings is holding on Harrow's behalf, in or towards
satisfaction of Harrow's monies, obligations and liabilities to Flemings
under any document or agreement whatsoever. Where such set-off or transfer
requires the conversion of one currency into another, such conversion shall
be calculated at Flemings's then prevailing spot rate of exchange for
purchasing the currency considered.
(b) Until such time as all of the Options in respect of all the
Tranches granted herein shall have been exercised or shall have expired or
otherwise lapsed, Harrow agrees to furnish Flemings with its consolidated
financial statements as at the end of each month (which need not be
audited), which financial statements shall be furnished within 30 days of
the end of the month to which they relate, together with appropriate
certification executed by a duly authorized officer of Harrow attesting to
the Consolidated Net Worth of Harrow as at the end of each such month. The
agreement to furnish such financial statements may be satisfied by the
delivery to Flemings of copies of such filings, if any, as Harrow makes
with the United States Securities and Exchange Commission.
(c) At or prior to the commencement of the tender offer with respect
to the Common Stock, Harrow will furnish Flemings the legal opinion of
Curtis, Mallet-Prevost, Colt & Mosle, counsel to Harrow, with respect to
those matter set forth in Section 6 of this Letter Agreement, with a bring
down certificate delivered at the Closing.
(d) Harrow will provide Flemings with full disclosure of all relevant
information.
8. Indemnification. Harrow agrees that it will indemnify and hold harmless,
Flemings, its stockholders, employees, agents, affiliates and each person, if
any, that controls Flemings and its affiliates within the meaning of Section 20
of the Exchange Act and Section 15 of the Securities Act of 1933 (the "Act"),
each as amended (any and all of whom are referred to as an "Indemnified Party"),
from and against any and all losses, claims, damages or liabilities, and all
actions in respect thereof (including, but not limited to, all legal or other
expenses reasonably incurred by an Indemnified Party in connection with the
preparation for or defense of any claim, action or proceeding, whether or not
resulting in any liability), sustained or incurred
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 8
by an Indemnified Party: (i) arising out of, or in connection with, any untrue
statement or alleged untrue statement of a material fact contained in any of the
financial or other information furnished to Flemings or its agent by Harrow in
connection with the Transactions including, without limitation, the Offer to
Purchase, or the omission (or alleged omission) therefrom of a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; or (ii) with respect to, caused by, or
otherwise arising out of any transaction contemplated by this Letter Agreement
(including, without limitation, the proposed offer to purchase) or Flemings
performing the services contemplated hereunder; provided, however, Harrow will
not be liable under clause (ii) hereof to the extent that any loss, claim,
damage or liability is found in a final judgment by a court of competent
jurisdiction to have resulted from Flemings' gross negligence or bad faith in
performing such services or for any losses or damages not related to the
proposed transactions.
If the indemnification provided in this Section 8 is unavailable to an
Indemnified Party (including, for purposes of the remainder of this Section 8
Harrow and its stockholders, employees, agents and any person who controls
Harrow within the meaning of Section 20 of the Exchange Act or Section 15 of the
Act) under the preceding paragraph in respect of any losses, claims, damages or
liabilities referred to therein, such other party, in lieu of indemnifying such
Indemnified Party, shall contribute to any amounts paid or payable by such
Indemnified Party in such proportion as is appropriate and equitable under all
of the circumstances.
The foregoing indemnification and contribution provisions of this Section 8
are not in lieu of, but in addition to, any rights which any Indemnified Party
may have hereunder or otherwise.
Each party hereto agrees to notify the other promptly of the assertion
against it or any other person of any claim or the commencement of any action or
proceeding relating to any activity contemplated by this Letter Agreement;
provided, however, that the failure to so notify the other party shall not alter
either party's rights or obligations under this Letter Agreement except to the
extent such other party is actually prejudiced by such failure.
9. Specific Performance. Harrow and Flemings acknowledge and agree that in
the event of any breach of this Letter Agreement, the non breaching party would
be irreparably harmed and could not be made whole by monetary damages. It is
accordingly agreed that Harrow and Flemings, in addition to any other remedy to
which they may be entitled at law or in equity, shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and/or to compel specific performance of this Letter Agreement in any
action, which action may take place in a state court of New York, as provided in
Section 11(h) hereof.
10. Expenses. Upon the completion of the purchase of the Common Stock by
Flemings or its agent, Harrow will pay Flemings for its own account an
arrangement fee equal to US$154,508.90. In addition, Harrow will reimburse
Flemings for all of Flemings' out-of-pocket expenses (including attorneys fees
and expenses) incurred in connection with the transactions contemplated hereby.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 9
11. Miscellaneous.
(a) This Letter Agreement as amended and the Engagement Letter dated
October 15, 1997 between Flemings and Harrow as amended, together
constitute that entire understanding of the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and
understandings, whether oral or written, between the parties hereto with
respect to the subject matter hereof. This Letter Agreement may not be
amended orally, but only by an instrument in writing by each of the parties
to this Letter Agreement.
(b) This Letter Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns. This
Letter Agreement and the rights granted hereunder may not be transferred by
Harrow without the consent of Flemings, which consent shall not be
unreasonably withheld, provided, that (i) Flemings is provided with
evidence reasonably satisfactory to it that such a transfer is in full
compliance with all applicable laws and regulations (including, without
limitation, applicable securities law and regulations), and (ii)
arrangements reasonably satisfactory to Flemings shall have been made with
respect to the deposit referred to in Section 7(a) hereof. In the event any
such transfer occurs, Harrow shall give written notice thereof to Flemings
in accordance with the provisions of Section 11(i) hereof within thirty
(30) days of the effectuation of such transfer. Neither this Letter
Agreement or any rights hereunder may be assigned or otherwise transferred
by Flemings except to an affiliate thereof.
(c) Notwithstanding the foregoing, nothing in this Letter Agreement
shall be deemed to restrict Flemings, at any time after the Put Options and
Call Options granted hereunder lapse and become no longer exercisable with
respect to all Tranches in accordance with the terms hereof, from selling,
assigning, transferring, conveying or otherwise disposing of the Option
Shares at any time to any person, provided, that prior notice of any such
sale, assignment, transfer, conveyance or other disposition is given to
Harrow. In the event of any such sale, assignment, transfer, conveyance or
other disposition, unless there is at the relevant time a payment
obligation on the part of Harrow in respect of the exercise of the Put
Option or any indemnification obligation in respect of this Letter
Agreement, the rights and obligations of the parties hereunder shall cease
as to the Option Shares that are the subject thereof, and Harrow shall have
the right to close the account referred to in Section 7(a) hereof and to
withdraw all funds therefrom without penalty.
(d) Section headings contained in this Letter Agreement are for
reference purposes only and shall not affect the meaning or interpretation
of this Letter Agreement.
(e) All representations, warranties and agreements contained herein
shall survive the Closing related to any particular Tranche.
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 10
(f) This Letter Agreement may be executed in counterparts, each of
which shall, when executed, be an original and all of which shall be deemed
to be one and the same instrument.
(g) This Letter Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without
reference to the conflicts of law principles thereof.
(h) Harrow and Flemings hereby agree that any suit, claim, action or
proceeding relating to or arising under this Letter Agreement may (without
prejudice to the ability of either party to commence proceedings in any
other jurisdiction) be brought in a state court of New York having
competent subject matter jurisdiction over the matters set forth in this
Letter Agreement or in a federal court sitting in New York (each a "New
York Court"). Each of Harrow and Flemings hereby consents to personal
jurisdiction in any such action brought in any such New York Court,
consents to service of process upon it in the matter set forth in Section
11(i) hereof, and waives any objection it may have to venue in any such New
York Court or to any claim that any such New York Court is an inconvenient
forum.
(i) All notices and other communications under this Letter Agreement
shall be in writing and delivery thereof shall be deemed to have been made
either (A) if mailed, when received, or (B) if transmitted by hand
delivery, telegram, telex, telecopier or facsimile transmission, when
transmitted to the party entitled to receive the same, at the addressee
indicated below or at such other address as such party shall have specified
by written notice to the other parties hereto given in accordance herewith:
(A) if to Flemings, addressed to:
Robert Fleming & Co. Limited
25 Coptha Avenue
London EC2R 7DR
England
Attention: Michael J.C. Watts
Facsimile: (+44) 171 256 5036
Telex: 297451
with copies to:
Baker & McKenzie
805 Third Avenue
New York, New York 10022
Attention: Richard L. Nevins, Esq.
Facsimile: (+1) 212 891 3819
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 11
(B) if to Harrow, addressed to:
Harrow Industries, Inc.
2627 East Beltline, S.E.
Grand Rapids, Michigan 49546
Attention: John S. Hogan
Facsimile: (+1) 616 942 2170
with copies to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, NY 10178
Attention: Eileen P. Matthews, Esq.
Facsimile: (+1) 212 697 1559
(j) Should any litigation or arbitration be commenced (including any
proceedings in a bankruptcy court) between the parties hereto or their
representatives concerning any provision of this Letter Agreement or the
rights and duties of any person or entity hereunder, the party prevailing
in such litigation or arbitration shall be entitled, in addition to such
other relief as may be granted, to reasonable attorneys' and arbitration
fees and the costs of litigation or arbitration.
(k) Any waiver by any party of a breach of any provision of this
Letter Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of
this Letter Agreement. The failure of a party to insist upon strict
adherence to any term of this Letter Agreement on one or more sections
shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term
of this Letter Agreement.
(1) No provision in this Letter Agreement shall constitute any person
a third party beneficiary.
(m) If any term, provision, covenant or restriction of this Letter
Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or
<PAGE>
Robert Fleming & Co. Limited
November 14, 1997
Page 12
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Letter Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated; provided; however, that in
the event the provisions of this Letter Agreement dealing with the purchase and
sale of the Option Shares is held to be invalid then this entire Letter
Agreement shall be invalidated.
If the foregoing correctly reflects the ten-ns of our agreement, please
countersign the enclosed copy of this letter in the space provided below,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
HARROW INDUSTRIES, INC.
By: /s/ Donald G. Calder
Name: Donald G. Calder
Title: Chairman
Accepted and agreed to as of the date first above written:
ROBERT FLEMING & CO. LIMITED
By: ___________________________
Name: J. M. Cole
Title: Director
<PAGE>
AMENDMENT TO
PUT AND CALL AGREEMENT
This Amendment (this "Amendment") to the Put and Call Agreement dated
October 15, 1997, as amended as of November 14, 1997 (the "Put/Call Agreement"),
between Harrow Industries, Inc., a Delaware corporation ("Harrow") and Robert
Fleming & Co. Limited, a British merchant banking firm ("Flemings") is made as
of the 9th day of December 1997 by and between such parties.
RECITALS
WHEREAS, Harrow and Flemings entered into the Put/Call Agreement and have
resolved to amend certain sections of agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual promises
contained herein and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
I. AMENDMENTS
1. The first paragraph of the Put/Call Agreement is hereby amended by
deleting the words "not to exceed US$10,000,000" from the first sentence and
replacing them with the words "equal to US $6,967,260".
2. The second paragraph of the first page of the Put/Call Agreement is
hereby deleted in its entirety.
3. Section 3(b) of the Put/Call Agreement is hereby amended to read in its
entirety as follows:
"(b) The Call Option and the Put Option shall each be exercisable in
Tranches, as set forth below.
<TABLE>
Identification of Tranche: Comprised of:
<S> <C>
Tranche A 16,589 shares of Common Stock
Tranche B 16,589 shares of Common Stock
Tranche C 16,589 shares of Common Stock
Tranche D 16,589 shares of Common Stock
<PAGE>
Tranche E 16,589 shares of Common Stock
Tranche F 16,589 shares of Common Stock
Tranche G 16,589 shares of Common Stock"
</TABLE>
4. Section 4 of the Put/Call Agreement shall be amended by deleting
$1,000,000" from the second sentence and replacing it with the amount
"US$995,323"; and by deleting the table set forth therein and replacing it with
the following table:
<TABLE>
If Put Option or Call Option is This Applicable Option Price or
exercised on or prior to: Tranches A, B, C, D, E, F or G
shall be:
<S> <C>
December 31, 1997 $1,074,949
June 30, 1998 $1,144,621
December 31, 1998 $1,224,247
December 31, 1999 $1,393,452
December 31, 2000 $1,567,634
December 31, 2001 $1,741,815
December 31, 2002 $1,990,646
December 31, 2003 $2,239,476
December 31, 2004 $2,488,307
December 31, 2005 $2,786,904
</TABLE>
II. MISCELLANEOUS
1. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to such terms in the Put/Call Agreement.
2. This Amendment shall be interpreted and construed in accordance with the
internal laws of the State of New York regardless of the law that might be
applied under principles of conflicts of law.
<PAGE>
3. This Amendment and any amendments, waivers, consents, or supplements
hereto or hereunder may be executed in any number of counterparts, and by
different parties hereto or thereto in separate counterparts, each of which when
so executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Amendment shall
become effective upon the execution and delivery of a counterpart by each of the
parties hereto.
4. Except as specifically modified by this Amendment, in all other respects
the terms and conditions of the Put/Call Agreement are hereby ratified and
confirmed by the parties thereto and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers as of
the date first written above.
HARROW INDUSTRIES, INC.
By:/s/ Donald G. Calder
Name: Donald G. Calder
Title: Chairman
ROBERT FLEMING & CO. LIMITED
By:_________________________________
Name:
Title:
<PAGE>
EXHIBHIT 10.17
Harrow Industries, Inc.
Economic Value Added Executive Incentive Plan
Plan Purpose
The purpose of the Harrow Industries, Inc. Economic Value Added Incentive
Plan (the "EVA Plan") is to motivate and encourage Harrow management to work
together in the creation of economic value in order that the company may achieve
its strategic goals and continue to grow, prosper, and provide for the long term
interests of its shareholders.
Objectives of the Plan
The specific objectives of the EVA Plan are as follows:
1. To communicate the Company's strategic goals in a clearly
defined and quantifiable manner.
2. Encourage employees to understand they all have a direct
impact on operating results.
3. To provide the management team with a common and significant
financial interest in creating value through improvement in
EVA.
4. Significantly increase the likelihood the Company will achieve
or surpass its five year plan forecast.
Philosophy
The Company believes that executive rewards should track with Company
performance. Rewards should be structured to be generous in periods when
executives drive the Company toward the achievement of superior performance and
scant when performance falls short. Since Harrow's shareholders have
historically held a long term outlook on their investment in the Company, it is
essential that the financial interests of the executive be based on a similar
long term period.
<PAGE>
Eligibility
The following positions are eligible for participation in the Plan:
President & Chief Operating Officer (Harrow Products, Inc.)
Vice President & Treasurer (Harrow Products, Inc.)
Vice President HR & Secretary (Harrow Products, Inc.)
Vice President & Controller (Harrow Products, Inc.)
Vice President Information Services (Harrow Products, Inc.)
President (Division/Subsidiary)
Direct Reports (Division/Subsidiary)
Direct Reports to Division or Subsidiary Presidents are eligible to
participate at the sole discretion of the respective business unit President and
subject to approval by the President and Chief Operating Officer of Harrow
Products, Inc. Typical positions at this level which would be eligible for this
Plan include the following:
Sales & Marketing VP or Director
Controller
Manufacturing/Operations VP or Director
Purchasing/Materials Management VP or Director
Engineering VP or Director
Human Resources VP or Director
Other positions may be included upon the recommendation of the
President/COO of Harrow and the approval of the Chairman of the Board.
Participants in the Plan may not participate in any other incentive pay,
commission override, gainsharing, or other supplemental, compensation program.
Participation in one year does not guarantee participation in subsequent years.
Due to the varying nature of certain positions between business units, inclusion
of a position at one division will not necessarily mean a similarly titled
position at another unit would be included in the Plan.
Effective Date
This Plan is effective upon approval of the Board of Directors of Harrow
Industries, Inc. and will continue indefinitely at the discretion of the Board.
<PAGE>
Plan Administration
The President and Chief Operating Officer of Harrow Products, Inc. is
responsible for the ongoing administration of the Plan. The
Executive/Compensation Committee of Harrow Industries, Inc. shall annually
review both the provisions of the Plan and approve all payouts hereunder.
Overview of Plan Structure
The Plan rewards Participants based upon achievement in sustaining and
increasing their operation's EVA. Economic Value Added (EVA) is a single,
comprehensive measurement by which division and consolidated performance is
evaluated. "EVA" is defined as net operating profit after tax (NOPAT) less a
capital charge based upon the tangible net operating assets employed in the
business. More detailed information regarding how the Company calculates EVA is
provided in Exhibit I. Adjustments or exceptions to this calculation may not be
made without the approval of the President/COO and the Chairman of the Board.
1. Target Incentive: Each participant is assigned a "Target Incentive"
based on his or her level within the Plan. The Target Incentive is determined
each year by multiplying the participant's base compensation by the following
percentages:
President & Chief Operating Officer 70%
Corporate Officers/ Bus. Unit Presidents 60%
Direct Reports to Bus. Unit Presidents 30%
2. Criteria for Incentive Awards: Based upon the Participant's level within
the Plan, the annual award is earned solely based on EVA, or on a combination of
EVA and the achievement of agreed upon personal objectives. The percentage of a
Participant's total annual award based on EVA is as follows:
President/Chief Operating Officer 100%
Corporate Officers / Bus. Unit Presidents 90%
Direct Reports to Bus. Unit Presidents 80%
3. Calculation of Award and Creation of Incentive "Pools": Each business
unit and the corporation annually determines its Economic Value Added using the
definition of EVA provided in Exhibit I. Provided a unit achieves a specified
minimum growth in EVA (as provided in the table below), the unit earns a current
year incentive
<PAGE>
pool equal to its prior year incentive pool. If a business unit creates EVA in
excess of this minimum growth requirement, 20% of the excess EVA is contributed
to the current year incentive pool. Likewise, if a business unit's EVA falls
short of the minimum growth requirement, 20% of the decrease will be subtracted
from the pool. For purposes of determining corporate incentive pool, the amount
is similarly increased or decreased by 10% based upon consolidated EVA.
Minimum EVA Growth Requirements
The minimum required growth in EVA required to sustain the prior year incentive
pool is the higher of the following:
<TABLE>
Minimum % of Minimum $ Amount
Prior Year EVA of EVA Growth
<S> <C> <C>
Ives Division 6% $150,000
LSE Division 8% $175,000
Rutt Division 6% $100,000
FHP Division 7% $150,000
Corona Division 6% $125,000
Recognition Systems, Inc. 10% $100,000
Corporate (consolidated) 7% $600,000
</TABLE>
4. Determination of Individual EVA Awards: Each business unit and corporate
computes an annual Award Percentage determined by dividing the applicable bonus
pool for the current year by the total target incentives for all individuals
participating in the bonus plan. An individual's EVA incentive award is
determined by multiplying a participant's Target Incentive (number I above) by
applicable EVA percentage (number 2 above) and then by the Award Percentage
(preceding sentence).
Awards to individual participants are not subject to any maximum. Conversely, if
the computed incentive pool is negative, a participant's deferred account will
be reduced accordingly.
5. Determination of Individual Objective Awards: The Chief Operating
Officer and each division or subsidiary President will have separate incentive
pools available for allocation to their respective subordinates based upon the
achievement of mutually agreed upon personal objectives for the performance
year. The pool available for allocation by each division President is equal to
20% of the total subordinate Target Incentives multiplied by the applicable
Award Percentage for the year. The pool available for allocation by the Chief
Operating Officer is equal to 10% of the total Target
<PAGE>
Incentives of other corporate officers and business unit Presidents multiplied
by their applicable Award Percentages for the year. Awards from this pool are
made to Participants at the sole discretion of their respective President.
Amounts not awarded from the available pool in any performance year may not be
carried over and awarded in a subsequent year. Examples of Incentive Award
calculations can be found in Exhibit 111.
6. Payment of Incentive Awards: Annual incentive awards to all Participants
employed by the Company on the last day of the performance year are calculated
and paid no later than February 28 of the year following the end of the
performance year. The amount of the annual payout is equal to one-third (1/3) of
the sum of 1) any unpaid carryover balance from prior years, 2) any interest
credited as of the end of the performance year, and 3) the annual incentive
award for the current performance year. Participants who terminate during a
performance year for reasons other than death, disability, retirement, or due to
a change in control are not eligible for a pro-rated incentive award.
Prior Year Incentive Pool
For purposes of computing business unit and corporate incentive pools for
the current performance year, the prior year incentive compensation pool is
generally equal to total prior year incentive awards to all plan participants
employed by the Company on the last day of the current performance year. Prior
year incentive awards to participants terminated prior to end of the performance
year are not included. However, the prior year pool does include a proforma
annual incentive award for participants joining the Company during the year.
Proforma amounts included are subject to approval by the President/COO and
Chairman of the Company.
Transition Rules
The initial prior year incentive compensation pool for each business unit,
except for Recognition Systems, Inc., and the corporate office for use in
determining performance year 1998 incentive awards is equal to the incentive
pools for performance year 1997 determined as if the Plan had been in effect for
that year. For purposes of determining 1997 proforma incentive pools, the prior
year incentive pools are equal to the actual incentive compensation amounts paid
under the predecessor plan (the Harrow Products, Inc. Executive and
Mid-Management Incentive Plan).
<PAGE>
For Recognition Systems, Inc., the initial prior year incentive pool for
use in determining its performance year 1998 incentive awards is equal to the
total of amounts determined for each RSI Participant after restructuring his/her
actual total 1997 compensation into base pay and variable compensation
components in a manner consistent with comparable Company employees who are
Participants in the Plan.
Initial Carryover Balances
For purposes of computing annual incentive payouts, participants are
credited with an "Initial Carryover Balance" generally equal to the total of
actual incentive payments under the predecessor incentive plan for fiscal years
1996 and 1997.
Individuals who were not Participants in the predecessor plan for all of
fiscal 1996 or 1997 are credited with an Initial Carryover Balance determined on
a proforma basis assuming they had been paid an incentive for the entire period.
The balance credited shall be based on a Target Incentive for the position. Any
exception must be recommended by the respective business unit President and
approved by the President/COO and Chairman of Harrow.
The Initial Carryover Balance is not subject to interest charges or credits
or repayment during a Participant's period of employment. In determining a
Participant's vested account balance, the Initial Carryover Balance is deducted
from a Participant's total account balance upon termination of employment for
any reason.
Optional Deferrals
A Participant may elect, prior to the beginning of the performance year, to
defer receipt of any portion of his annual incentive award up to a maximum of
100% of the total award for that performance year. The Participant's election
must also indicate the desired payment schedule of any deferred incentive,
including payment of any related interest credits. Elections under this section
are irrevocable.
Interest on Mandatory and Optional Deferals
Interest will be credited on any deferred balances at an annual rate equal
to the highest rate the Company pays at the time of the deferral on its debt
capital or 10%, whichever is lower. Interest is not credited on the
Participant's Initial Carryover Balance.
<PAGE>
Treatment of New Employees
An eligible employee who joins the Company during a performance period may
be included in the Plan as a Participant at the discretion of his or her
respective business unit President. The new Participant will be entitled to a
pro-rated share of an annual award. Exceptions must be approved by the
President/COO and Chairman of Harrow.
Acquisitions
Upon acquisition of a business, an initial prior year EVA amount and
incentive compensation pool and the minimum future EVA growth requirements for
use in determining subsequent incentive awards under the Plan are determined by
the Company's President/COO and approved by the Chairman of the Board of the
Company. The initial prior year incentive compensation pool for use in
determining subsequent performance year incentive awards is equal to the total
of the variable amounts determined for each Plan Participant after restructuring
his/her actual total prior year compensation into base pay and variable
compensation components in a manner consistent with other comparable Company
employees who are Participants in the Plan.
Consolidated prior year EVA amounts and future EVA growth requirements are
similarly adjusted upon acquisition for use in determining future incentive
awards for corporate officers. Prior year EVA amounts and future EVA growth
requirements are also adjusted for any business unit where the acquired business
is included in the determination of its EVA.
Terminations and Vesting of Deferred Balances
In the event a Participant terminates his or her employment with the
Company voluntarily or involuntarily for reasons other than death, disability,
retirement or a change in control, deferred balances are payable as follows:
Mandatory Deferred Balances (excluding Initial Carryover Balance) 50%
Optional Deferrals (if any) 100%
Payment will be made to terminated Participants at the next regularly
scheduled date for payment of incentive awards.
<PAGE>
A participant is entitled to a pro-rated award for the current year if his
employment is involuntarily terminated under the Executive Severance Policy.
Employees who voluntarily terminate are not eligible for such pro-rated.
Death, Disability, Retirement, and Changes in Control
In the event a Participant dies, becomes disabled (defined as qualifying
either for the Company's Long Term Disability Plan or Social Security
Disability), or retires (defined as qualifying for normal or early retirement
under the Company's Retirement Plan), 100% of the sum of mandatory and any
optional deferred balances are payable to the Participant (less Initial
Carryover Balances) at the next regularly scheduled date for the payment of
incentive awards. In the event of a change in control of the Company or one of
its business units (defined as acquisition by a purchaser of more than 50% of
the Company's stock or substantially all the assets of the Company or one of its
units) 100% of the sum of mandatory and any optional deferred balances are
payable to the Participant (less Initial Carryover Balances) upon closing of the
transaction.
A Participant is entitled to a pro-rated award for the current year if the
event of death, disability, retirement, or change in control occurs prior to the
conclusion of a performance year.
Funding
The Plan is an unfunded, non-qualified deferred compensation plan. Monies
that become due to Participants are unsecured obligations of the company.
Amendment and Termination of the Plan
The Plan may be amended or terminated at any time and without prior notice,
at the sole discretion of the Board of Directors of Harrow Industries, Inc. Any
deferred balances (excluding any Initial Carryover Balances) shall become 100%
vested upon termination of the Plan.
<PAGE>
Exhibit I - Economic Value Added (EVA)
Economic Value Added (EVA) is determined as follows:
EVA = NOPAT - CAPITAL CHARGE
NOPAT (net operating profit after taxes) is determined as follows:
BUSINESS UNIT OPERATING INCOME+/-ADJUSTMENTS+/-INCOME TAXES
Business unit operating income is defined as operating income as regularly
determined for purposes of both internal and external reporting and subject to
annual audit by the Company's independent accounts.
Adjustments to business unit operating income consist of the following:
o Increases (+) or decreases (-) in the business unit's recorded
LIFO reserve
o Any recorded provision for incentive compensation under the
Plan (+)
o Any recorded provision for the amortization of intangible
assets (+)
o Any recorded provision for noncompete payments
o Any recorded pension income (-) or expense (+) which does
not represent cash received from or paid to the Company's
pension trusts
o Any items deemed to be strategic investments
o Amortization of any items deemed to be strategic investments
determined on a straight-line basis over an agreed upon
amortization period (-)
Strategic investments are items greater than $100,000 that are expected to
result in operating income in future periods but are required to be recognized
as expenses or losses in the current fiscal year under generally accepted
accounting principles. Examples of such items include research and development
expenses, acquired businesses which are not expected to initially generate
positive EVA, remerchandising programs and certain advertising cost. In order to
qualify as a strategic investment for incentive computation purposes, the amount
and amortization period of the investment must be planned and agreed to by the
President/COO and Chairman of the Company in advance of any expenditure or loss.
Generally this is done as part of the annual strategic planning review.
<PAGE>
The division is required to recognize an amortization charge in future
performance periods regardless of whether the item actually results in future
operating income. A capital charge (see below) is also imposed on any item
considered to be a strategic investment.
Income taxes are determined by multiplying adjusted business unit operating
income by an average tax rate of 40% and subtracting any income tax credits
attributed directly to the business unit. Such credits include foreign tax
credits utilized, foreign sales corporation (FSC) incentives, jobs tax credits,
and research and development credits.
The capital charge is based on an average cost of debt and equity capital of 12%
applied to the tangible net operating assets employed in the business. Net
operating assets consist of the following:
Cash (+ or -)
Accounts receivable net of any allowances (+)
Inventories (determined on a FFFO basis) net of any obsolescence or market
reserves (+)
Other assets (excluding intangible assets, prepaid pension costs, intercompany
accounts and short-term investments or marketable securities) (+)
Fixed assets (+)
Strategic investments (+)
Accounts payable and accrued expenses (-)
Deferred compensation expense (excluding any amounts deferred under the
Plan) (-)
Deferred income taxes (+ or -)
The capital charge for all of above captions except for fixed assets and
strategic investments is determined by multiplying the monthly average of such
items by the average cost of debt and equity capital. The capital charge for
land and construction in progress is determined by multiplying the monthly
average of such items by the average cost of debt and equity capital. The
capital charges for depreciable assets and strategic investments are the level
charges which when added to depreciation or amortization are sufficient to
provide the investor with an annual after-tax return of 12% and recover the cost
of the investment over the depreciable life or amortization period of the asset
(see attached tables for determining applicable capital charges.)
<PAGE>
Depreciable Assets and Strategic Investment Charges
(Expressed as Percent of Asset or Investment Cost)
<TABLE>
Depreciable Assets Strategic Investments
Annual Annual Annual Annual
Useful Depreciation Capital Amortization Income Capital
Life Charge Charge Period Charge Charge
<S> <C> <C> <C> <C> <C>
3 33.333% 8.302% 3 33.333% 4.981%
4 25.000% 7.923% 4 25.000% 4.754%
5 20.000% 7.741% 5 20.000% 4.645%
7 14.286% 7.626% 7 14.286% 4.576%
8 12.500% 7.630% 8 12.500% 4.578%
9 11.111% 7.657% 9 11.111% 4.594%
10 10.000% 7.698% 10 10.000% 4.619%
11 9.091% 7.751%
12 8.333% 7.810%
13 7.692% 7.875%
14 7.143% 7.944%
15 6.667% 8.016%
20 5.000% 8.388%
25 4.000% 8.750%
30 3.333% 9.081%
31 3.226% 9.143%
32 3.125% 9.203%
33 3.030% 9.262%
34 2.941% 9.319%
35 2.857% 9.375%
40 2.500% 9.630%
</TABLE>
<PAGE>
Exhibit II - Incentive Pool Calculation
Example 1
A business unit's prior year EVA was $2,000,000 and prior year incentive awards
totaled $250,000. Its minimum growth requirement to sustain the prior year bonus
pool is the greater of 6% of prior year EVA or $100,000. All prior year
participants remain in the plan and there are no new participants. The business
unit's current year EVA is $2,370,000.
<TABLE>
<S> <C>
Prior year EVA $2,000,000
Minimum growth requirement 120,000
----------
Minimum EVA required to sustain prior bonuses $2,120,000
==========
Current year EVA $2,370,000
Minimum required EVA 2,120,000
----------
EVA growth in excess of required minimum 250,000
Sharing percentage 20%
----------
Increase in bonus pool 100,000
Prior year bonus pool 250,000
----------
Current year bonus pool $350,000
==========
</TABLE>
<PAGE>
Example 2
Same as Example 1 except current year EVA is $1,620,000.
<TABLE>
<S> <C>
Prior year EVA $2,000,000
Minimum growth requirement 120,000
----------
Minimum EVA required to sustain prior bonuses $2,120,000
==========
Current year EVA $1,620,000
Minimum required EVA 2,120,000
----------
Deficiency in current year EVA (500,000)
Sharing percentage 20%
----------
Decrease in bonus pool (100,000)
Prior year bonus pool 250,000
----------
Current year bonus pool $150,000
==========
</TABLE>
<PAGE>
Exhibit III - Determination of Individual Awards
Example 1
A business unit's current year incentive pool is $300,000 and its target pool
computed by multiply the business unit president salary by 60% and all other
business unit participants' salaries by 30% is $200,000. The base compensation
of an business unit executive other than the president is $80,000.
<TABLE>
<S> <C>
Current year bonus pool $300,000
Target bonus pool 200,000
Ratio of current bonus pool to target pool 150%
Participant's base salary $80,000
Target bonus percentage 30%
Target bonus 24,000
Portion of award based on personal objectives @ 20% 4,800
--------
Target EVA bonus 19,200
Ratio of current bonus pool to target pool 150%
Current year EVA bonus 28,800
Current award for achievement of personal objectives 7,000
-------
Total incentive award $35,800
=======
</TABLE>
Example 2
Same as Example 1 except business unit participant is a division president with
base compensation of $150,000.
<TABLE>
<S> <C>
Current year bonus pool $300,000
Target bonus pool 200,000
Ratio of current bonus pool to target pool 150%
Participant's base salary $150,000
Target bonus percentage 60%
Target bonus 90,000
Portion of award based on personal objectives @ 10% 9,000
--------
Target EVA bonus 81,000
Ratio of current bonus pool to target pool 150%
Current year EVA bonus 121,500
Current award for achievement of personal objectives 15,000
--------
Total incentive award $136,500
========
</TABLE>
<PAGE>
<TABLE>
Harrow Industries, Inc. and Subsidiaries
Exhibit 11--Statement Regarding Computation of Per Share Earnings
Fiscal year ended
November 30, December 1, December 3,
1997 1996 1995
Primary
<S> <C> <C> <C>
Weighted average shares outstanding ........ 892,685 1,074,046 1,100,000
Net effect of dilutive stock options - based
on the treasury stock method using
average market price .................. 9,078 1,454
Total ...................................... 901,763 1,075,500 1,100,000
Net earnings ............................... $7,402,000 $5,315,000 $3,403,000
Preferred stock dividend requirements ...... (105,000) (200,000) (200,000)
Total ...................................... $7,297,000 $5,115,000 $3,203,000
Per share amount ........................... $8.09 $4.76 $2.91
Amount reported (Note) ..................... $8.17 $4.76 $2.91
</TABLE>
<TABLE>
Fiscal year ended
November 30, December 1, December 3,
1997 1996 1995
<S> <C> <C> <C>
Fully diluted
Weighted average shares outstanding 892,685 1,074,046 1,100,000
Net effect of dilutive stock options - based
on the treasury stock method using
market price at end of period 9,373 2,931
Total 902,058 1,076,977 1,100,000
Net earnings $7,402,000 $5,315,000 $3,403,000
Preferred stock dividend requirements (106,000) (200,000) (200,000)
Total $7,296,000 $5,115,000 $3,203,000
Per share amount $8.09 $4.75 $2.91
</TABLE>
Note: Reported earnings per share are based solely on average outstanding shares
since the inclusion of common stock equivalents (stock options) results in
dilution of less than 3%.
<PAGE>
<TABLE>
Harrow Industries, Inc. and Subsidiaries
Exhibit 12--Statement Regarding Computation of Ratio of Earnings
to Fixed Charges
Fiscal year ended
November 30, December 1, December 3, November 27, November 28,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Earnings before income
taxes $12,202,000 $8,845,000 $4,595,000 $2,591,000 $182,000
Fixed charges:
Interest expense 5,465,000 5,962,000 6,391,000 5,980,000 6,145,000
Amortization of deferred
financing costs 96,000 436,000 226,000 333,000 343,000
Interest portion of rental
expense 690,000 757,000 709,000 687,000 621,000
Total fixed charges 6,251,000 7,155,000 7,326,000 7,000,000 7,109,000
Earnings $18,453,000 $16,000,000 $11,921,000 $9,591,000 $7,291,000
Ratio of earnings to fixed 2.95x 2.24x 1.63x 1.37x 1.03x
charges
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-02-1996
<PERIOD-END> NOV-30-1997
<CASH> 337
<SECURITIES> 0
<RECEIVABLES> 24,388
<ALLOWANCES> 1,372
<INVENTORY> 14,321
<CURRENT-ASSETS> 41,021
<PP&E> 49,033
<DEPRECIATION> 27,349
<TOTAL-ASSETS> 82,948
<CURRENT-LIABILITIES> 21,212
<BONDS> 51,539
7,826
4
<COMMON> 11
<OTHER-SE> (3,709)
<TOTAL-LIABILITY-AND-EQUITY> 82,948
<SALES> 160,906
<TOTAL-REVENUES> 160,906
<CGS> 102,139
<TOTAL-COSTS> 102,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,561
<INCOME-PRETAX> 12,202
<INCOME-TAX> 4,800
<INCOME-CONTINUING> 7,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,402
<EPS-PRIMARY> 8.17
<EPS-DILUTED> 8.17
</TABLE>
