U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
- --- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FORM TO .
-------------- -----------
Commission file number: 0-6292
AAROW ENVIRONMENTAL GROUP, INC.
(Name of small business issuer in its charter)
Nevada 73-1491593
- ------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1317 South Turner
Springdale, Arkansas 72764
- --------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(501) 927-1884
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes No X
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No .
Applicable only to corporate issuers
The number of outstanding of Common Stock as of July 7, was 9,318,904.
<PAGE>
AAROW ENVIRONMENTAL GROUP, INC.
Index to Quarterly Report on Form 10-QSB
Part I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements 3
Unaudited Consolidated Balance Sheets
as of September 30, 1997, and December 31, 1996. 3
Unaudited Consolidated Statements of Income for
the Three Months and Nine Months Ended
September 30, 1997 and 1996 4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Supplemental Information 9
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
Part I - Financial Statements
Item 1. Financial Statements
<TABLE>
<CAPTION>
AAROW ENVIRONMENTAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 9,644 $ 2,147
Accounts Receivable 2,732 --
Inventory 24,565 31,625
Insurance Claim 119,182 119,182
--------- ---------
Total Current Assets $ 156,123 $ 152,954
PROPERTY, PLANT AND EQUIPMENT (net of accumulated
depreciation of $ 12,431 and $ 23,730 respectively) 9,135 46,005
OTHER ASSETS:
Organization Costs (net of accumulated
amortization of $ 2,250 and $ 1,575 respectively) $ 2,250 $ 2,925
Covenant Not to Compete (net of accumulated amortization of
amortization of $ 300 and $ 0 respectively) 17,700 0
--------- ---------
Total Other Assets $ 19,950 $ 2,925
--------- ---------
TOTAL ASSETS $ 185,208 $ 201,884
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 21,314 $ 20,309
Payroll Taxes Payable 86,489 67,005
Accrued Interest Payable 3,800 733
Current Portion of Long Term Notes 60,000 66,891
--------- ---------
Total Current Liabilities $ 171,603 $ 154,938
LONG TERM LIABILITIES 0 3,654
--------- ---------
Total Liabilities $ 171,603 $ 158,592
STOCKHOLDERS' EQUITY:
Common Stock, $ 0.001 par value, 30,000,000 shares
authorized, 8,867,945 shares issued and outstanding $ 8,868 $ 7,619
Convertible Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, 3,000,000 shares issued and outstanding, one share
convertible for three shares common 3,000 3,000
Paid in Capital 195,117 99,881
Retained Earnings (193,380) (67,208)
--------- ---------
Total Stockholders' Equity $ 13,605 $ 43,292
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 185,208 $ 201,884
========= =========
</TABLE>
See notes to unaudited financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AAROW ENVIRONMENTAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Three Months Ended Nine Months Ended
September 30 September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C>
SALES INCOME $ 6,608 $ 29,172 $ 34,898 $ 367,164
COST OF SALES:
Materials $ 2,422 $ 8,509 $ 11,971 $ 55,575
Warehouse Labor 0 8,959 0 31,283
Freight 135 0 135 1,183
------------ ------------ ------------ ------------
Total Cost of Sales $ 2,557 $ 17,468 $ 12,106 $ 88,041
------------ ------------ ------------ ------------
Gross Profit $ 4,051 $ 11,704 $ 22,792 $ 279,123
------------ ------------ ------------ ------------
OPERATING EXPENSES 96,533 70,345 120,526 234,667
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS $ (92,482) $ (58,641) $ (97,734) $ 44,456
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES):
Interest Income $ 0 $ 754 $ 0 $ 934
Interest Expense 0 (2,841) (3,136) (4,290)
Penalties 0 0 (1,549) 0
------------ ------------ ------------ ------------
Total Other Income and (Expenses) $ 0 $ (2,087) $ (4,685) $ (3,356)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND INCOME TAXES $ (92,482) $ (60,728) $ (102,419) $ 41,100
------------ ------------ ------------ ------------
EXTRAORDINARY ITEMS AND INCOME TAXES:
Extraordinary Item-- Note Receivable $ 0 $ 0 $ (20,455) $ 0
Extraordinary Item-- Loss on Repossession 0 0 ( 3,298) 0
Income Taxes 0 0 -- (11,869)
------------ ------------ ------------ ------------
Total Extraordinary Items and Income Taxes $ 0 $ 0 $ (23,753) ($ 11,869)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (92,482) $ (60,728) $ (126,172) $ 29,231
============ ============ ============ ============
WEIGHTED AVERAGE number of common stock
and common stock equivalents outstanding 17,867,945 16,618,702 17,867,945 16,618,702
============ ============ ============ ============
NET INCOME (LOSS) per common stock and
common stock equivalents $ (.005) $ (.004) $ (.008) $ .002
============ ============ ============ ============
</TABLE>
See notes to unaudited financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AAROW ENVIRONMENTAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
September 30,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(126,172) $ 29,231
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 3,744 10,623
Amortization 975 675
Extraordinary items 23,753 0
(Increase) decrease in assets:
Accounts receivable (2,732) (25,202)
Prepaid expenses 0 658
Employee receivable 0 (5,397)
Interest receivable 0 (934)
Inventory 7,060 (59,269)
Increase (decrease) in liabilities:
Bank overdraft 0 (1)
Accounts payable 1,005 (10,403)
Payroll taxes payable 19,484 13,063
Sales taxes payable 0 (31)
Accrued interest payable 3,068 (1,001)
Accrued income taxes 0 11,869
Billings in excess of cost and accrued profits 0 67,442
--------- ---------
Net cash provided (used) by operating activities $ (69,815) $ 31,323
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment $ 0 $ (6,395)
Note receivable stockholder 0 (30,595)
Covenant Not to Compete (18,000) 0
--------- ---------
Net cash used by investing activities $ (18,000) $ (36,990)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings
Long-term $ 0 $ 76,888
Short-term 4,500 0
Debt reduction
Long-term (15,045) (71,222)
Proceeds from sale of common stock 105,857
--------- ---------
Net cash provided by financing activities $ 95,312 $ 5,666
--------- ---------
NET INCREASE (DECREASE) IN CASH $ 7,497 $ (1)
CASH AT BEGINNING OF THE PERIOD 2,147 3,008
--------- ---------
CASH AT END OF PERIOD $ 9,644 $ 3,007
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,136 $ 4,290
========= =========
</TABLE>
See notes to unaudited financial statements.
5
<PAGE>
AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
STATEMENT OF SIGNIFICANT ACCOUNTING ASSUMPTIONS
BASIS OF ACCOUNTING
- -------------------
The financial statements of Aarow Environmental Group, Inc. (the
"Company") at September 30, 1997, have been prepared on the accrual
basis of accounting. Using this method, revenue and expenses are
recognized when occurred.
The financial statements included in this report have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all adjustments
which are, in the opinion of management, necessary for a fair
presentation. These financial statements have not been audited by an
independent accountant.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that
the disclosures are adequate. However, these financial statements
should be read in conjunction with the audited financial statements and
notes thereto included in the annual report on form 10-KSB for the year
ended December 31, 1996. The financial data for the interim periods
presented may not necessarily reflect the results to be expected for
the full year.
INVENTORY
- ---------
Inventory is carried at the lower of cost or market and consists of raw
materials and ready to sell products.
PROPERTY AND EQUIPMENT
- ----------------------
Property and Equipment are recorded at acquisition cost. Depreciation
is computed using accelerated methods by charging against earnings
amounts sufficient to amortize the cost of the related assets over
their estimated useful lives.
INCOME TAXES
- ------------
For income tax reporting and financial statement reporting at September
30, 1997, the Company is using depreciation methods that are the same
and therefore there is no accrual for deferred income taxes at this
time. However, because of various elections available at the time of
filing the income tax returns, there may be future differences between
income tax depreciation expense and financial statement depreciation
expense giving rise to accrual of deferred income taxes
NOTE 1: INSURANCE CLAIM
- ------------------------
On August 8, 1996 a fire destroyed $ 119,282 worth of finished
inventory. This inventory was insured by Loyds of London for cost less
a $ 100 deductible. The Company has submitted a claim for payment and
expects payment from the insurer for the full insured amount.
6
<PAGE>
AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 2: PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
All assets are recorded at original cost. Depreciation is calculated
using accelerated methods, lives are five years for office equipment,
seven years for manufacturing equipment and furniture, and 10 years for
Leasehold Improvements.
NOTE 3: LIABILITIES
- ---------------------
<TABLE>
<CAPTION>
The Company's Long-Term debt consists of the following:
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Anchor Financial, 21 % interest, $ 354.39 per month $ 0 $ 1,173
Maturity Date: 6-30-1997
Secured by computer printers and a copier
Springdale Bank & Trust, 10.25%, $ 534.58 per month 0 9,372
Maturity Date: 5-10-98
Secured by 90 GMC truck
Springdale Bank & Trust, 10.25%, Monthly Int. Only Payment 60,000 60,000
Maturity Date on Demand
Secured by Inventory and accounts receivable
Secured by Common Stock
Current Portion of long-term debt (60,000) (66,891)
---------- ----------
Long-term debt, less current portion $ 0 $ 3,654
=========== ==========
The following is a summary of principal maturities of debt:
June 30, 1998 $ 60,000 $ 66,891
=========== ==========
</TABLE>
NOTE 4: RELATED PARTY TRANSACTIONS AND EXTRAORDINARY ITEMS
- ------------------------------------------------------------
On February 24, 1997, Springdale Bank and Trust, a note holder, called
a note in the amount of $ 9,372 that was in default. Springdale Bank
and Trust obtained possession of the collateral which was a 90 GMC
truck.
At December 31, 1996, Dan Pilkington was the president of the Company.
As president, Mr. Pilkington made various assets available to himself
which totaled a book value of $ 20,455. The removal of these assets was
originally recorded as a note receivable from officer. It has been
determined that this receivable is not collectable and is being
recognized as an extraordinary item on the September 30, 1997, income
statement.
NOTE 5: MANAGEMENT CHANGE
- --------------------------
On May 12, 1997 a new president, officers, and board of directors were
elected.
NOTE 6: GOING CONCERN
- ----------------------
As shown in the accompanying financial statements, the Company has
incurred a loss for the period ended September 30, 1997 and has a
deficit in working capital. Due to inadequate management in previous
quarters there has been a reduction in the number of distributors for
the Company's product resulting in a corresponding drop in overall
sales. As discussed in Note 5 the existing president at March 31, 1997,
was removed and new officers were elected. The new management has begun
a plan
7
<PAGE>
AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 6: GOING CONCERN - continued
- ----------------------------------
to recapitalize the Company and to reestablish the relationship with
the distributors. There can be no assurance that the Company will be
successful in its efforts to implement this plan. If the Company is
unsuccessful in its efforts, it may be necessary to undertake such
other actions as may be appropriate to preserve asset value. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE 7: EARNINGS PER COMMON SHARE
- ----------------------------------
Earnings per common share were computed using the weighted average
number of common shares outstanding after adding the dilutive effect of
the conversion of the preferred stock.
8
<PAGE>
AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
SUPPLEMENTAL INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
Operating Expenses:
Accounting $ 10,559 $ 4,000 $ 12,019 $ 7,650
Advertising 0 0 0 100
Amortization 225 225 675 675
Auto & Truck 1,018 1,577 2,660 10,354
Bank Charges 14 0 130 56
Credit Card Fees 0 79 0 217
Contributions 0 0 0 500
Depreciation 792 3,838 3,744 10,623
Dues & Subscriptions 0 0 0 220
Insurance 0 2,391 222 7,718
Management Expense 0 534 0 1,384
Miscellaneous 320 0 380 18
Office Expense 6,699 949 10,199 7,314
Office Salaries 36,997 8,502 42,997 25,549
Other Salaries 7,699 6,600 7,699 21,903
Payroll Tax Expense 3,419 2,370 3,878 6,552
Postage 22 0 22 1,664
Rent 3,529 9,035 4,591 22,379
Repairs 0 0 0 285
Sales Commission 0 950 0 19,319
Supplies 9,002 11,133 9,882 12,598
Taxes & Licenses 0 0 0 130
Telephone 6,503 3,934 6,956 20,220
Travel 1,706 13,360 6,197 53,772
Unemployment Taxes 1,129 255 1,375 1,411
Utilities 0 613 0 2,056
-------- -------- -------- --------
Total $ 89,633 $ 70,345 $113,626 $234,667
======== ======== ======== ========
9
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this Report.
Rendezvous Trails of America, Inc. (formerly Holiday Resorts
International, Inc.) ("RTA"), the former parent of Aarow Environmental (formerly
Rain Forest - Moose, Ltd.), was incorporated in April 1970. The name of the
Company was changed from Rain Forest - Moose, Ltd., to Aarow Environmental
Group, Inc., on June 13, 1997. Since 1986, RTA became inactive and did not
conduct any operations or activities through 1995 and, as of December 31, 1995,
did not have any assets. Pursuant to an Agreement and Plan of Merger, dated
February 23, 1996, RTA merged with and into Aarow Environmental as the surviving
corporation. The merger of RTA with and into Aarow Environmental effectively
changed the state of domicile of RTA to Nevada as a result of Aarow
Environmental being the surviving corporation and was accounted for as a
reorganization of entities under common control which was recorded at historical
cost. Rain Forest - Moose, Ltd., an Arkansas corporation ("RFM Arkansas"), was
formed on March 15, 1994. Pursuant to a Plan of Reorganization and Agreement of
Merger, dated March 5, 1996, RFM Arkansas merged with a wholly-owned subsidiary
of the Company, and as the surviving corporation, RFM Arkansas became a
wholly-owned subsidiary of the Company which was accounted for as a reverse
acquisition of the Company by RFM Arkansas under the purchase method of
accounting (the "RFM Arkansas Acquisition"). Therefore, the following discussion
and analysis of results of operations discussed below are only those of RFM
Arkansas prior to the RFM Arkansas Acquisition.
Results of Operations
The following table sets forth selected results of operations for the
three months and nine months ended September 30, 1997 and 1996, which are
derived from the unaudited consolidated financial statements of the Company. The
results of operations for the periods presented are not necessarily indicative
of the Company's future operations.
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------- ---------------------------------------------
1997 1996 1997 1996
--------------------- --------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
Sales income $ 6,608 100.0% $ 29,172 100.0% $ 34,898 100.0% $ 367,164 100.0%
--------- --------- --------- --------- --------- --------- --------- ---------
Cost of sales:
Materials 2,422 36.7% 8,509 29.2% 11,971 34.3% 55,575 15.1%
Warehouse labor 0 0% 8,959 30.7% 0 0% 31,283 8.5%
Freight 135 .2% 0 0% 135 .4% 1,183 .4%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Cost of Sales 2,557 36.9% 17,468 59.9% 12,106 34.7% 88,041 24.0%
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 4,051 63.1% 11,704 40.1% 22,792 65.3% 279,123 76.0%
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses 96,533 1,460.9% 70,345 241.1% 120,526 345.4% 234,667 63.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Income or (loss) from operations (92,482) 1399.5% (58,641) 201.0% (97,734) 280,1% 44,456 12.1%
--------- --------- --------- --------- --------- --------- --------- ---------
Other income and (expense):
Interest income 0 0% 754 2.6% 0 0% 934 .3%
Interest expense 0 0% (2,841) 9.7% (3,136) 9.0% (4,290) 1.2%
Penalties 0 0% 0 0% (1,549) 4.4% 0 0%
--------- --------- --------- --------- --------- --------- --------- ---------
Total other income
and (expense) 0 0% (2,087) 7.2% (4,685) 13.4% (3,356) .9%
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary items and
income taxes (92,482) 1399.5% (60,728) 208.2% (102,419) 293.5% 41,100 11.2%
--------- --------- --------- --------- --------- --------- --------- ---------
Extraordinary items and
income taxes:
Loss on Note Receivable 0 0% 0 0% (20,455) 58.6% 0 0
Loss on Repossession 0 0% 0 0% (3,298) 9.5% 0 0
Income tax expense 0 0% 0 0% 0 0% (11,869) 3.2%
--------- --------- --------- --------- --------- --------- --------- ---------
Total extraordinary items
and income taxes 0 0% 0 0% (23,753) 68.1% (11,869) 3.2%
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income or (loss) ($ 92,482) 139.5% ($ 60,728) 208.2% ($126,172) 361.5% $ 29,231 8.0%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
10
<PAGE>
Comparison of the Three Months and Nine Month Periods ended September 30, 1997
and 1996.
Sales income decreased to $6,608 in the three months ended September
30, 1997 (the "1997 Three-Month Period") from $29,172 for the three months ended
September 30, 1996, 1996 (the "1996 Three-Month Period"), a decrease of $22,564
(a decrease of 77.3 percent). Sales income decreased to $34,898 in the nine
months ended September 30, 1997 (the "1997 Nine-Month Period") from $367,164 in
the nine months ended September 30, 1996 (the "1996 Nine Month Period"), a
decrease of $332,266 (a decrease of 90.5 percent). The decrease in sales income
was due to decreased sales of Peat Moose Absorbent products during the 1997
Three-Month Period and 1997 Nine-Month Period (collectively the "1997 Interim
Period") as compared to the 1996 Three-Month Period and 1996 Nine Month Period
(collectively the "1996 Interim Period"), which was attributable to continuing
operational problems resulting from the loss of $119,282 worth of finished
inventory to a fire on August 8, 1996, and inadequate management in attempting
to deal with the difficulties resulting from the causality loss during the
following eight months. During the first quarter of 1997, the former President
of the Company disappeared and in March 1997, new officers and directors were
appointed and installed to manage the Company. Because of the very low level of
sales activity during the 1997 Interim Period, cost of sales decreased to $4,051
and $12,106 during the 1997 Three-Month Period and the 1997 Nine-Month Period,
respectively, from $17,468 and $88,041 during the 1996 Three-Month Period and
the 1996 Nine-Month Period, respectively, with no costs being incurred for
warehouse labor during the 1997 Interim Period.
Gross profit declined to $4,051 and $ 22,792 during the 1997
Three-Month Period and the 1997 Nine-Month Period, respectively, from $11,704
and $279,123 during the 1996 Three-Month Period and the 1996 Nine-Month Period,
respectively. As a percent of sales income, gross profit increased to 63.1
percent during the 1997 Three-Month Period from 40.1 percent during the 1996
Three-Month Period, which was due to no warehouse costs having been incurred
with respect to the sale, while gross profit decreased to 65.3 percent during
the 1997 Nine-Month Period from 76 percent during the 1996 Nine-Month Period,
which was attributable to the increased cost of materials as a percent of sale,
the cost of materials as a percent of sales income increased from 15.1 percent
during the 1996 Nine-Month Period to 34.3 percent during the 1997 Nine-Month
Period. Since the casualty loss in August 1996, the Company has been required to
obtain its peat-moss absorbent materials from third-party providers which has
resulted in increased costs of materials, while during the 1996 Interim Period
these materials were manufactured or processed by the Company.
Operating expenses increased to $96,533 (1,460.9 percent of sales
income) in the 1997 Three-Month Period from $70,345 (241.1 percent of sales
income) in the 1996 Three-Month Period, which was principally due to the
increase in office salaries from $8,502 during the 1996 Three-Month Period to
$36,997 during the 1997 Three-Month Period, an increase of $28,495 (a 335.2
percent increase). This increase was attributable to the resumption of business
activities in the 1997 Three Month Period, while during the 1996 Three-Month
Period the Company's business activities were curtailed due to the August 1996
casualty loss. However, operating expenses decreased to $113,626 (325.6 percent
of sales income) in the 1997 Nine-Month Period from $234,667 (63.9 percent of
sales income) in the 1996 Nine-Month Period which was due to the business
inactive of the Company commencing in August 1996 which continued until March
1997, when current management assumed management control of the Company. The
decrease in operating expenses during the 1997 Nine-Month Period was principally
attributable to the reduction of auto and truck expense of $7,694, depreciation
of $6,879, insurance of $7,496, management expense of $1,384, rent of $17,788,
sales commissions of $19,319, supplies of $2,716, telephone expense of $13,264,
travel of $47,575 and utilities of $2,056. The operating expenses incurred
during the 1997 Interim Period were incurred in an attempt to preserve asset
value, both tangible and intangible, and to reestablish channels of product
distribution and sales following the August 1996 casualty loss and former
management's inabilities or absence.
The Company experienced a loss from operations of $92,482 and $97,734
in the 1997 Three-Month Period and 1997 Nine-Month Period, respectively,
compared to a loss from operations of $58,641 in the 1996 Three-Month Period and
income from operations of $44,456 in the 1996 Nine-Month Period. The loss from
operations in the 1997 Three-Month Period was 1,399.5 percent of sales income
and 280.1 percent of sales income in the 1997 Nine-Month Period.
11
<PAGE>
During the 1997 Interim Period, the Company incurred a loss on the
repossession of a Company vehicle as a result of the default on a note to
Springdale Bank and Trust. In addition, a loss was incurred as a result of the
Company's former president having made various assets available to himself which
totaled a book value of $ 20,455. The removal of these assets was originally
recorded as a note receivable from officer and was determined to be
uncollectible.
A net loss was sustained during the 1997 Three-Month Period and the
1997 Interim Period of $92,482 and $126,172, respectively. In comparison, the
Company sustained a loss of $60,728 during the 1996 Three-Month Period and had
net income of $29,231 during the 1996 Interim Period. During the 1997
Three-Month Period, the Company issued 444,677 shares of common stock in payment
of certain current liabilities in the amount of $71,885, which was accounted for
as a source of cash and payment of expenses and current liabilities.
Quarterly Results of Operations
The Company's operations are affected by seasonal trends principally
based upon weather conditions. In the Company's experience, sales volume tends
to be higher in the second, third and fourth calendar quarters and lower in the
first quarter. Because the general and administrative expenses associated with
maintaining and adding to the Company's manufacturing and product distribution
work force are relatively fixed over the short term, the Company's margins tend
to increase in periods of higher sales volume and decrease in periods of lower
sales volume. These effects are not always apparent because of the impact and
timing of factors which are beyond the control of the Company. Nevertheless, the
Company's results of operations for a particular calendar quarter may not be
indicative of the results to be expected during other quarters.
Income Taxes
For income tax reporting and financial statement reporting at September
30, 1997 and 1996, the Company is using depreciation methods that are the same
and therefore there is no accrual for deferred income taxes at this time.
However, because of various elections available at the time of filing the income
tax returns, there may be future differences between income tax depreciation
expense and financial statement expense giving rise to accrual of deferred
income tax.
Liquidity and Capital Resources
The Company incurred a loss for the nine months ended September 30,
1997 and had a deficit in working capital of $15,480. Due to inadequate
management in the last calendar quarter of 1996 and the first calendar quarter
of 1997, there was a reduction in the number of distributors and channels of
distribution for the Company's products which resulted in a substantial
reduction in product sales. On March 31, 1997, the former President of the
Company was removed and new officers and directors were elected. Under new
management, the Company begun a plan to recapitalize the Company and to
reestablish the relationships with its form distributors and channels of product
distribution. However, there can be no assurance that future cash flows from
operations and availability of credit from vendors will be sufficient to
implement management's business plan or that the Company will be successful in
its efforts to implement such plan. If the Company is unsuccessful in its
efforts, it may be necessary to undertake such other actions as may be
appropriate to preserve asset value.
Due to the Company's relatively short operating history under new
management, its lack of substantial equity, its working capital deficit and
volume of sales, traditional bank lending facilities are not currently
available. Historically, the Company financed its growth from borrowings and
shareholder contributions and depended in part upon credit terms form its
various vendors as a source of financing. Arrangements with such vendors have
generally been informal, without specific agreements as to terms and payments.
The availability of credit from vendors, or the terms of any such credit, cannot
be assured. Because future cash flows and the availability of vendor credit or
other financing are subject to a number of variables, there can be no assurance
that the Company's cash flows and capital resources will be sufficient to enable
the Company to service its outstanding debt and liabilities or to maintain
currently planned levels of sales and product distribution.
12
<PAGE>
Net cash used by operating activities totaled $69,815 in the 1997
Interim Period, while net cash provided by operating activities totaled $31,323
in the 1996 Interim Period. During the 1997 Interim Period the Company
experienced operating difficulties as a result of lack of working capital
following the August 8, 1996, casualty loss and the resulting operational
decline and inactivity of the Company during the first calendar quarter of 1997.
The Company also experienced inadequate management until the election of new
management for the Company in March 1997. The new management for the Company
begun a plan to augment the capital of the Company and to resume full
operations. However, there is no assurance that the Company will be successful
in its efforts to implement its capital augmentation plan and the resumption of
full business operations, including the reestablishment of its former channels
of product distribution. During the 1997 Interim Period, net cash flows provided
by financing activities totaled $95,312, while, in comparison net cash flows
provided by financing activities totaled $5,666 during the 1996 Interim Period.
During the 1997 Interim Period, the Company had net cash used by investing
activities of $18,000, while during the 1996 Interim Period, the company had net
cash used by investing activities which totaled $36,990.
As of December 31, 1996, RFM Arkansas had two long-term loans from
Springdale Bank & Trust Company (the "Bank"), which were secured by certain a
vehicle and inventory and accounts receivable, bear interest at 10.5 percent per
annum, and required monthly principal and interest installment payments of $535
through May 1998 and monthly interest payments. At December 31, 1996, the
outstanding principal balance of these loans were $9,372 and $30,000,
respectively. On February 24, 1997, Springdale Bank and Trust called the note in
the amount of $9,372 which was in default and obtained possession of the
collateral, a company vehicle. The Company also has an equipment loan with
Anchor Financial Corp. secured by office equipment, bearing interest at 21
percent per annum, and requiring monthly principal and interest installment
payments of $354, which was paid in full at September 30, 1997.
Currently cash flows from operations are not sufficient to service its
obligations under the various financing arrangements and maintain operations of
the Company. Management of the Company has developed a plan to augment its
capitalization in order to resume full manufacturing and marketing operations.
However, there is no assurance that the Company will be successful in its
efforts to implement its plan for additional capitalization and the resumption
of full business operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this Report constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or other
variations thereon, or by discussions of strategies that involve risks and
uncertainties. The actual results of the Company or industry results may be
materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include general economic and business conditions; the ability of the
Company to implement its business plan and strategy; industry changes; changes
in customer preferences; product competition; availability of key personnel;
increasing operating costs; unsuccessful advertising and promotional efforts;
changes in brand awareness and preferences; acceptance of new product offerings;
and changes in, or the failure to comply with, government regulations
(especially environmental protection laws and regulations); the ability of the
Company to obtain vendor credit or other financing; and other factors.
13
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the period
covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger between Rendezvous Trails of
America, Inc. and Rain Forest - Moose, Ltd., dated February 23,
1996.*
2.2 Certificate and Articles of Merger of Rendezvous Trails of
America, Inc. with and into Rain Forest - Moose, Ltd.*
2.3 Plan of Reorganization and Agreement of Merger between Rain
Forest - Moose, Ltd., a Nevada corporation, RFM Acquisition
Corporation of Oklahoma, Inc., an Oklahoma corporation, Rain
Forest - Moose, Ltd., an Arkansas corporation, Dan Pilkington,
Jeff Martin, Stan Sisemore, Jim Anderson and Bill Hooten, dated
March 5, 1996.**
2.4 Certificate of Merger of RFM Acquisition Corporation of Oklahoma,
Inc. with and into Rain Forest - Moose, Ltd.**
4.1 Agreement and Plan of Merger between Rendezvous Trails of
America, Inc. and Rain Forest - Moose, Ltd., dated February 23,
1996.*
4.2 Plan of Reorganization and Agreement of Merger between Rain
Forest - Moose, Ltd., a Nevada corporation, RFM Acquisition
Corporation of Oklahoma, Inc., an Oklahoma corporation, Rain
Forest - Moose, Ltd., an Arkansas corporation, Dan Pilkington,
Jeff Martin, Stan Sisemore, Jim Anderson and Bill Hooten, dated
March 5, 1996**.
4.2 Certificate of the Powers Designation, Rights and Preferences for
the Series I Convertible Preferred Stock of Rain Forest - Moose,
Ltd., dated March 5, 1996.**
4.3 Registration Rights Agreement between Rain Forest - Moose, Ltd.
and Dan Pilkington, dated March 5, 1996.**
14
<PAGE>
10.1 Plan of Reorganization and Agreement of Merger between Rain
Forest - Moose, Ltd., a Nevada corporation, RFM Acquisition
Corporation of Oklahoma, Inc., an Oklahoma corporation, Rain
Forest - Moose, Ltd., an Arkansas corporation, Dan Pilkington,
Jeff Martin, Stan Sisemore, Jim Anderson and Bill Hooten, dated
March 5, 1996.**
10.2 Registration Rights Agreement between Rain Forest - Moose, Ltd.
and Dan Pilkington, dated March 5, 1996.**
27 Financial Data Schedule.
- ----------
* Incorporated by reference to Form 8-K, dated March 5, 1996, filed with the
Commission on March 20, 1996. ** Incorporated by reference to Form 8-K, dated
March 7, 1996, filed with the Commission on March 22, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
SIGNATURES
In accordance with the Exchange Act, the Registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
AAROW ENVIRONMENTAL GROUP, INC.,
(Registrant)
By: /s/ Stanley L. Sisemore
------------------------------
Stanley L. Sisemore, President
Date: July 8, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SEPTEMBER 30, 1997 UNAUDITED FINANCIAL STATEMENTS OF AAROW
ENVIRONMENTAL GROUP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000047968
<NAME> Arrow Environmental Group, Inc.
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