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: September 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 September 30, 1998:
Common Stock, $0.10 par value, 2,956,443 shares
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC.
September 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
September 30, 1998 (unaudited) and December 31, 1997.
Arrow-Magnolia International, Inc. and Subsidiary 3
Condensed Consolidated Statements of Earnings for
the Three and Nine Months Ended September 30, 1998
and 1997 (unaudited).
Arrow-Magnolia International, Inc. and Subsidiary 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and
1997 (unaudited).
Notes to Condensed Consolidated Financial 5
Statements (unaudited).
Item 2. Management's Discussion and Analysis or 6
Plan of Operation.
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K 7
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
<TABLE>
Sept. 30, Dec. 31,
Assets 1998 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash $2,815,238 1,878,919
Short-term investments 300,000 300,000
Trade accounts receivable, less
allowance for doubtful
accounts of $354,613 in 1998
and $346,900 in 1997 2,832,768 2,773,352
Inventories 701,293 601,157
Deferred income taxes 103,568 117,946
Other assets 27,585 26,632
---------- ---------
Total current assets 6,780,452 5,698,006
Property and equipment, net 775,789 738,916
Intangible assets, net 132,765 137,318
Note receivable 40,000 40,000
Deferred income taxes 29,912 29,912
Other assets 2,700 2,700
--------- ---------
$7,761,618 6,646,852
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt - 101,361
Accounts payable 683,359 571,426
Accrued liabilities 228,270 216,324
Income taxes payable 101,233 140,281
--------- --------
Total current liabilities 1,012,862 1,029,392
Note payable 600,000 600,000
Deferred compensation 104,500 104,500
--------- ---------
Total liabilities 1,717,362 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;
2,958,733 shares issued and
2,956,443 shares outstanding in 1998
and 2,681,392 shares issued and
outstanding in 1997 295,874 268,139
Additional paid-in capital 4,544,866 2,776,182
Retained earnings 1,214,717 1,868,639
Treasury stock, at cost;
2,290 shares in 1998 (11,201) -
---------- ---------
Total stockholders' equity 6,044,256 4,912,960
Commitments
---------- ---------
$7,761,618 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
Nine and three months ended September 30, 1998 and 1997
<TABLE>
Nine months ended Three months ended
Sept. 30 Sept. 30
--------------------- --------------------
1998 1997 1998 1997
---------- --------- --------- ----------
(unaudited) (unaudited)(unaudited)(unaudited)
<S> <C> <C> <C> <C>
Net sales $10,879,241 9,667,064 3,449,703 3,581,173
Cost of sales 6,059,912 5,435,481 2,014,044 2,060,206
---------- --------- --------- ---------
Gross profit 4,819,329 4,231,583 1,435,659 1,520,967
General and
administrative
expenses 3,166,287 2,694,766 1,057,840 892,797
---------- --------- --------- ---------
Operating
income 1,653,042 1,536,817 377,819 628,797
---------- --------- --------- ---------
Other income (expenses):
Interest expense (39,900) (49,743) (11,353) (16,070)
Other income 72,636 51,989 20,082 16,822
------ --------- --------- ---------
Other income (expenses),
net 32,736 2,246 8,729 752
------ --------- --------- ---------
Income before income
taxes 1,685,778 1,539,063 386,548 628,922
Income tax and expense
(benefit):
Current 576,978 659,101 132,814 254,781
Deferred 14,378 (41,748) (5,344) (19,515)
---------- --------- --------- --------
Net income $1,094,422 921,710 259,078 393,656
========= ========= ========= =========
Earnings per common
share:
Basic $ .37 .32 .09 .14
===== === ==== ====
Diluted $ .32 .28 .08 .12
===== === ==== ====
Weighted average common
shares outstanding:
Basic 2,955,663 2,877,794 2,958,470 2,875,477
=========== ========= ========= =========
Diluted 3,372,446 3,301,746 3,369,554 3,306,014
========== ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC, AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,094,422 921,710
Adjustments to reconcile net income
to net cash used in
operating activities:
Depreciation and amortization 116,553 105,800
Deferred income tax expense (benefit) 14,378 (41,748)
Compensation expense from issuance of
common stock, stock options and
warrants 36,886 104,500
Change in operating assets and
liabilities:
Receivables (59,416) (1,254,532)
Inventories (100,136) (143,686)
Other assets (953) (120,010)
Accounts payable 111,933 311,938
Accrued liabilities 11,946 9,219
Income taxes payable (30,439) 28,844
---------- -------
Net cash provided by (used in)
operating activities 1,195,174 (77,965)
---------- -------
Cash flows from investing activities:
Purchase of short-term investments (100,000) -
Proceeds from maturity of short-term
investments 100,000 -
Acquisition of property and equipment (148,872) (107,882)
---------- -------
Net cash used in investing
activities (148,872) (107,882)
---------- -------
Cash flows from financing activities:
Repayments of note payable - (50,000)
Proceeds from common stock issuance 2,579 3,480
Repayments of long-term debt (101,361) (93,362)
Payments to acquire treasury stock (11,201) -
---------- -------
Net cash used in financing
activities (109,983) (139,882)
---------- -------
Net increase (decrease) in cash 936,319 (325,729)
Cash at beginning of period 1,878,919 1,755,000
---------- ---------
Cash at end of period $2,815,238 1,429,271
========== =========
</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
September 30, 1998
(1) Basis of Presentation
The September 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.
On May 21, 1998, the Company declared a 10% common stock dividend
for shareholders of record as of July 14, 1998. Both basic and
diluted EPS have been restated for all periods presented for the
effects of the common stock dividend.
(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>
The Company is assessing the reporting and disclosure
requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires a
public business enterprise report financial and descriptive
information about its reportable operating segments. The
statement is effective for financial statements for periods
beginning after December 15, 1997, but is not required for
interim financial statements in the initial year of its
application. The Company will adopt the provisions of SFAS No.
131 in its December 31, 1998 consolidated financial statements.
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 $5,767,590 as of September 30, 1998.
The increase in working capital was primarily the result of
growth in cash as a result of the Company's profitability for the
year to date.
The Company's cash flow from operations for the 1998 fiscal
year to date provided $1,195,174 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 ($148,872) and to reduce debt ($101,361).
The resulting increase in cash for the 1998 fiscal year to date
was $936,319.
Currently, the Company has determined 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. 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 nine months ended September 30, 1998
increased to $10,879,241 from $9,667,064 or 12.5%, from the same
period of 1997, but decreased slightly to $3,449,703 from
$3,581,173, or 3.7%, in the third quarter of 1998 as compared to
the corresponding period of 1997. The decrease in sales for the
third quarter is the result of a realignment of the sales force
resulting from the Company's efforts to identify and replace
representatives performing below the Company's expectations as
part of the overall program to improve sales coverage. The
increases for the year to date are primarily attributable to the
extension of sales coverage through the addition of sales
personnel under an ongoing hiring program.
Cost of sales as a percentage of net sales improved modestly
to 55.7% of net sales for the nine months ended September 30,
1998 as compared to 56.2% of net sales for the same period of
1997. For the third quarters of 1998 and 1997, cost of goods sold
was 58.4% and 57.5%, respectively. Cost of goods sold improved
for the year to date as a result of better absorption of fixed
costs through the Company's larger volume of sales, but slid
slightly during the third quarter as a result of the slight
decrease in sales.
As a result, gross profit increased by 13.9% to $4,819,329
from $4,231,583 for the nine months ended September 30, 1998
versus the comparable period of fiscal 1997, but decreased
by 5.6% to $1,435,659 from $1,520,967 for the third quarters of
1998 and 1997, respectively.
General and administrative expenses increased by 17.5% and
18.5% for the comparable three month and nine month periods,
respectively. This increase reflects expenses associated
with supporting the Company's growing sales organization and
costs associated with completion of installation of a new
computer system.
<PAGE>
As a result of these factors, net income increased
dramatically for the comparable nine months periods to $1,094,422
from $921,710, or 18.7%, but decreased to $259,078 from
$393,656, or 34.2% for the comparable third quarters of 1998 and
1997.
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 1998, the Company completed the conversion
of its computer systems.
The nature of the Company's business is such that the
business risks associated with the Year 2000 can be reduced by
working closely with and assessing the vendors supplying the
Company's raw materials and with the Company's customers to
ensure that they are aware of the Year 2000 business risks and
are appropriately assessing and addressing them.
Because third party failures could have a material impact on
the Company's ability to conduct business, questionnaires will be
sent to the Company's vendors to obtain reasonable assurance that
plans are being developed to address the Year 2000 issue. The
return questionnaires will be assessed by the Company, and
categorized based upon readiness for the Year 2000 issues and
prioritized in order of significance to the business of the
Company. To the extent that vendors do not provide the Company
with satisfactory evidence of their readiness to handle Year 2000
issues, contingency plans will be developed to obtain qualified
replacement vendors by March 1, 1999.
The Company does not believe the costs related to the Year
2000 compliance project will be material to its financial
position or results of operations. However, the cost of the
project is based on management's best estimates, which were
derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third party
modification plans, and other factors. Unanticipated failures by
critical vendors could have a material adverse effect on the cost
of the project and its completion date.
Part II. OTHER INFORMATION
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: November 13, 1998 By: /s/ Morris Shwiff
----------------------
Morris Shwiff, President
and Principal Executive
Officer
Date: November 13, 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 September 30, 1998 and is
qualified in its entirety by reference to such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2815238
<SECURITIES> 300000
<RECEIVABLES> 3187381
<ALLOWANCES> 354613
<INVENTORY> 701293
<CURRENT-ASSETS> 6780452
<PP&E> 1634523
<DEPRECIATION> 858734
<TOTAL-ASSETS> 7761618
<CURRENT-LIABILITIES> 1012862
<BONDS> 600000
0
0
<COMMON> 295874
<OTHER-SE> 5748382
<TOTAL-LIABILITY-AND-EQUITY> 7761618
<SALES> 10879241
<TOTAL-REVENUES> 10879241
<CGS> 6059912
<TOTAL-COSTS> 6059912
<OTHER-EXPENSES> 3166287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39900
<INCOME-PRETAX> 1685778
<INCOME-TAX> 591356
<INCOME-CONTINUING> 1094422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1094422
<EPS-PRIMARY> .37
<EPS-DILUTED> .32
</TABLE>
