FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1998
Commission File Number: 0-4728
ARROW-MAGNOLIA INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
75-0408335
(I.R.S. Employer Identification No.)
2646 Rodney Lane, Dallas, Texas 75229
(Address of principal executive offices)
(972) 247-7111
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
X
Yes No
Number of common shares outstanding as of June 30, 1998:
Common Stock, $0.10 par value, 2,689,757 shares
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC.
June 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements Page
Arrow-Magnolia International, Inc. and Subsidiary 2
Condensed Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and December 31, 1997.
Arrow-Magnolia International, Inc. and Subsidiary 3
Condensed Consolidated Statements of Income for
the Three and Six Months Ended June 30, 1998 and
1997 (unaudited).
Arrow-Magnolia International, Inc. and Subsidiary 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and
1997 (unaudited).
Notes to Condensed Consolidated Financial 5
Statements (unaudited).
Item 2. Management's Discussion and Analysis or 7
Plan of Operation.
PART II. OTHER INFORMATION.
Item 4. Submission of Matters to a Vote of
Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
<TABLE> June 30, December 31,
Assets 1998 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash $2,178,887 1,878,919
Short-term investments 300,000 300,000
Trade accounts receivable, less
allowance for doubtful
accounts of $288,900 in 1998
and $346,900 in 1997 3,317,316 2,773,352
Inventories 680,856 601,157
Deferred income taxes 98,225 117,946
Other assets 19,924 26,632
--------- ---------
Total current assets 6,595,208 5,698,006
Property and equipment, net 755,356 738,916
Intangible assets, net 134,283 137,318
Note receivable 40,000 40,000
Deferred income taxes 29,912 29,912
Other assets 2,700 2,700
--------- ---------
$7,557,459 6,646,852
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ 600,000 -
Current installments of long-term debt 32,121 101,361
Accounts payable 691,085 571,426
Accrued liabilities 191,401 216,324
Income taxes payable 141,974 140,281
--------- ---------
Total current liabilities 1,656,581 1,029,392
Note payable - 600,000
Deferred compensation 104,500 104,500
--------- ---------
Total liabilities 1,761,081 1,733,892
--------- ---------
Stockholders' equity:
Preferred stock - par value $.10;
authorized 500,000
shares; none issued - -
Common stock - par value $.10;
authorized 10,000,000
shares; 2,689,757 shares issued
and outstanding in 1998
and 2,681,392 shares issued and
outstanding in 1997 268,976 268,139
Additional paid-in capital 2,823,419 2,776,182
Retained earnings 955,639 1,868,639
Stock dividend to be issued (note 4) 1,748,344 -
--------- ---------
Total stockholders' equity 5,796,378 4,912,960
--------- ---------
Commitments
$7,557,459 6,646,852
========== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
Six and three months ended June 30, 1998 and 1997
<TABLE>
Six months ended June 30 Three months ended June 30
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $7,429,538 6,085,891 3,799,339 3,314,188
Cost of sales 4,045,868 3,375,275 2,068,108 1,853,486
--------- --------- --------- ---------
Gross profit 3,383,670 2,710,616 1,731,231 1,460,702
General and
administrative
expenses 2,108,447 1,801,969 1,103,557 871,862
--------- --------- --------- -------
Operating income 1,275,223 908,647 627,674 588,840
--------- --------- --------- -------
Other income (expenses):
Interest expense (28,547) (33,673) (14,024) (16,853)
Other income 52,554 35,167 35,203 17,940
------- -------- -------- --------
Other income
(expenses), net 24,007 1,494 21,179 1,087
------ ------ ------- ------
Income before
income taxes 1,299,230 910,141 648,853 589,927
Income taxes:
Current 444,165 404,321 272,912 235,231
Deferred income
tax expense
(benefit) 19,721 (22,234) (42,887) (14,146)
-------- -------- -------- --------
Net income $835,344 528,054 418,828 368,842
======== ======= ======= =======
Earnings per common share:
Basic $ .28 .18 .14 .13
======== ======= ====== ======
Diluted $ .25 .16 .12 .11
======== ======= ====== ======
Weighted average common
shares outstanding:
Basic 2,954,666 2,871,475 2,956,060 2,871,475
========= ========= ========= =========
Diluted 3,373,624 3,298,838 3,376,341 3,299,928
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC, AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
<TABLE>
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $835,344 528,054
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 71,035 73,274
Deferred income tax expense
(benefit) 19,721 (22,234)
Provision for doubtful accounts 244,796 65,395
Compensation expense from issuance
of common stock, stock
options and warrants 36,886 104,500
Change in operating assets and
liabilities:
Receivables (788,760) (1,057,178)
Inventories (79,699) (104,554)
Other assets 6,708 (95,394)
Accounts payable 119,659 294,790
Accrued liabilities (24,923) (42,178)
Income taxes payable 10,302 (73,625)
--------- ----------
Net cash provided by
(used in) operating
activities 451,069 (329,150)
-------- ----------
Cash flows from investing activities:
Purchase of short-term investments (200,000) -
Proceeds from maturity of short-term
investments 200,000 -
Acquisition of property and equipment (84,440) (99,182)
--------- ---------
Net cash used in
investing activities (84,440) (99,182)
--------- ---------
Cash flows from financing activities:
Repayments of note payable - (50,000)
Proceeds from common stock issuance 2,579 -
Repayments of long-term debt (69,240) (58,240)
--------- ---------
Net cash used in
financing activities (66,661) (108,240)
--------- ---------
Net decrease in cash 299,968 (536,572)
Cash at beginning of period 1,878,919 1,755,000
--------- ---------
Cash at end of period $2,178,887 1,218,428
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 1998
(1) Basis of Presentation
The June 30, 1998 condensed consolidated financial statements
(unaudited) include the accounts of Arrow-Magnolia International,
Inc., and its Chemco Chemical Company Division, and its
wholly-owned subsidiary, Bio/Dyne Chemical Company, an inactive
corporation. All significant intercompany balances and
transactions have been eliminated.
The quarterly financial information included herein is unaudited;
however, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of results for the
interim period and may not be indicative of results for the full
year. Certain items in the 1997 condensed consolidated financial
statements have been adjusted to reflect the actual timing of
certain transactions as described in the Company's December 31,
1997 annual report on Form 10-KSB.
(2) Earnings Per Share
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, during
1997 and retroactively restated all per share amounts. SFAS No.
128 reporting requirements replace primary and fully-diluted
earnings per share (EPS) with basic and diluted EPS. Basic EPS
is calculated by dividing net income (available to common
shareholders) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Both basic and diluted EPS have been restated for all periods
presented for the effects of the common stock dividend as
discussed in note 4.
(3) Newly Adopted Accounting Pronouncements
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting the components
of comprehensive income and requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be included in a financial
statement that is displayed with the same prominence
as other financial statements. Comprehensive income includes net
income as well as certain items that are reported directly within
a separate component of shareholders' equity and bypass net
income. The adoption of Statement 130 did not have a material
impact on the Company's financial condition or results of
operations.
<PAGE>
(4) Stock Dividend to be Issued
On May 21, 1998, the Company declared a 10% common stock dividend
for shareholders of record as of July 14, 1998. The declarations
for the post-balance sheet issuance of common stock under the
stock dividend has been deducted from retained earnings and
reflected in the Company's unaudited June 30, 1998 condensed
consolidated balance sheet as a separate component of
stockholders' equity. On July 14, 1998, $26,898 and $1,721,446
was transferred from the stock dividend to be issued account to
common stock and additional paid-in capital, respectively.
PAGE
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of
Operation.
Material Changes in Financial Condition.
The Company's working capital (total current assets less total
current liabilities), which was $4,668,614 as of December 31,
1997, increased to $4,938,627 as of June 30, 1998. The
increase in working capital was primarily the result of growth in
cash and trade accounts receivable as a result of improved sales
in the quarter, largely offset by increased accounts payable
incurred in connection with increased sales and reclassification
of the Company's debt to its secured lender to current
liabilities because its due date of May 1, 1999 is within one
year of the quarter end.
The Company's cash flow from operations for the quarter provided
$451,069 as funds generated from earnings and management of
accounts payable exceeded cash used to support additional growth,
primarily to fund increased accounts receivable and inventory.
Funds were also utilized to acquire property and equipment and to
reduce debt. The resulting increase in cash for the quarter was
$299,968.
Currently, the Company is evaluating whether to construct an
additional 30,000 square feet of warehouse space to its existing
facilities and should have more than adequate funds on
hand to complete this addition if the Company concludes that it
is desirable. The Company believes that its present financing is
also otherwise adequate for its capital needs for the
foreseeable future.
Material Changes in Results of Operations
Net sales for the six months ended June 30, 1998 increased to
$7,429,538 from $6,085,891, or 22.1%, from the same period of
1997 and to $3,799,339 from $3,314,188, or 14.6%, in the second
quarter of 1998 as compared to the corresponding period of 1997.
These increases are primarily attributable to the extension of
sales coverage through the addition of sales personnel under an
ongoing hiring program which included the acquisition of Darsan,
Inc. and Southwest Supply & Environmental in May 1997.
Cost of sales as a percentage of net sales improved modestly to
54.6% of net sales for the six months ended June 30, 1998 as
compared to 55.5% of net sales for the same period of 1997. For
the second quarters of 1998 and 1997, cost of goods sold was
54.4% and 55.9%, respectively. Cost of goods sold has improved
as a result of better absorption of fixed costs through the
Company's larger volume of sales.
As a result, gross profit increased by 28.4% to $3,383,670 from
$2,710,616 for the six months ended June 30, 1998 versus the
comparable period of fiscal 1997 and by 18.5% to $1,731,231 from
$1,460,702 for the second quarters of 1998 and 1997,
respectively.
General and administrative expenses increased by 26.6% and 17.0%
for the comparable three month and six month periods,
respectively. This increase reflects expenses associated with
supporting the Company's growing sales organization.
<PAGE>
As a result of these factors, net income increased dramatically
for the comparable six months periods to $835,344 from $528,054,
or 58.2%, and for the comparable second quarters of 1998 and 1997
to $418,828 from $368,842, or 13.6%.
Year 2000 Issue
In 1996, the Company developed a plan to deal with the Year 2000
problem and began converting its computer systems to be Year 2000
compliant. During 1997, the Company began the conversion of its
computer systems. The Year 2000 problem is the result of
computer programs being written using two digits rather than four
to define the applicable year. The Company is expending all
costs associated with these systems as the costs are incurred.
The Company does not expect to incur any material costs during
the conversion of its computer system.
PAGE
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of Arrow-Magnolia
International, Inc. was held on May 21, 1998, at which time the
shareholders were asked to vote upon election of Directors and
approval of the declaration of a 10% stock dividend.
All nominees identified in the Company's proxy materials were
elected. The votes in such election were tabulated as follows:
Nominees For Against
Morris Shwiff 2,350,554 1,421
Mark Kenner 2,351,754 221
Fred Kenner 2,351,854 121
Robert D. DeRosier 2,351,854 121
Clifton R. Duke 2,351,754 221
The votes to approve the dividend were tabulated as follows:
For Against Abstain Broker's Non Vote
2,348,775 500 0 2,700
Therefore, as contemplated, a 10% stock dividend was distributed
on August 1, 1998 to shareholders of record as of July 15, 1998.
Item 6. Exhibits and Reports.
(a) None
PAGE
<PAGE>
SIGNATURE
Pursuant to the requirement of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ARROW-MAGNOLIA INTERNATIONAL,
INC.
Date: August 14, 1998 By: /s/ Morris Shwiff
Morris Shwiff, President
and Principal Executive
Officer
Date: August 14, 1998 By: /s/ Fred Kenner
Fred Kenner, Vice
President,
Secretary and Treasurer;
the Principal Financial
and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
registrant's Form 10-QSB for the quarter ended June 30, 1998 and is
qualified in its entirety by reference to such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2178887
<SECURITIES> 300000
<RECEIVABLES> 3606216
<ALLOWANCES> 288900
<INVENTORY> 680856
<CURRENT-ASSETS> 6595208
<PP&E> 1570090
<DEPRECIATION> 814734
<TOTAL-ASSETS> 7557459
<CURRENT-LIABILITIES> 1656581
<BONDS> 0
0
0
<COMMON> 268976
<OTHER-SE> 5527402
<TOTAL-LIABILITY-AND-EQUITY> 7557459
<SALES> 7429538
<TOTAL-REVENUES> 7429538
<CGS> 4045868
<TOTAL-COSTS> 4045868
<OTHER-EXPENSES> 2108447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28547
<INCOME-PRETAX> 1299230
<INCOME-TAX> 444165
<INCOME-CONTINUING> 835344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835344
<EPS-PRIMARY> .28
<EPS-DILUTED> .25
</TABLE>
