SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 0-4728
Arrow-Magnolia International, Inc.
(Name of Small Business Issuer in its Charter)
Texas 75-0408335
(State or other jurisdiction (I.R.S. Employer
of incorporation or
organization) Identification No.)
2646 Rodney Lane, Dallas, Texas 75229
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code:
(972) 247-7111
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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 (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. Yes (X)
No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained
herein, and will not be contained, to the best of registrant s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or
any amendment of this Form 10-KSB. ( )
Issuer's revenues for the fiscal year ended December 31,
1997 were: $12,748,100
The aggregate market value of the registrants voting
stock held by non-affiliates as of December 31, 1997 was:
$7,514,492 (* see note on index page).
The number of shares outstanding of each class of
registrant s common stock as of December 31, 1997 was: Common
Stock, par value $0.10 per share, 2,681,392 shares.
___________________
Documents Incorporated by Reference
Portions of the registrant s definitive proxy
statement to be furnished to stockholders in connection with
its Annual Meeting of Stockholders to be held on May 28, 1998
are incorporated by reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes
No X
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-KSB
INDEX
Securities and Exchange Commission
Item Number and Description Page
PART I
Item 1. Description of Business .............. 1
Item 2. Description of Property .............. 2
Item 3. Legal Proceedings .. ................. 2
Item 4. Submission of Matters to a Vote of Security-Holders 3
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters ..................................... 3
Item 6. Management's Discussion and Analysis or Plan of
Operation .................................... 4
Item 7. Financial Statements ...................... 6
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ............ 6
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange. 6
Item 10. Executive Compensation .................... 6
Item 11. Security Ownership of Certain Beneficial Owners and
Management .......... 6
Item 12. Certain Relationships and Related Transactions . 6
PART IV AND SIGNATURES
Item 13. Exhibits and Reports on Form 8-K ............. 7
SIGNATURES .............................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
F-1
* The figure indicated on the cover page as to the aggregate
market value of shares of issuer's voting stock held by
nonaffiliates, as such figure relates to shares held by
affiliates, represents the issuer's best good faith
estimate for purposes of this annual report on Form 10-KSB
and for no other purpose. The aggregate market value
indicated is based upon the last sales price of the
issuer's common stock as reported by the NASDAQ SmallCap
Market as of December 31, 1997. See "Market for Common
Equity and Related Stockholder Matters."
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC.
Form 10-KSB Annual Report
For the Fiscal Year Ended
December 31, 1997
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Arrow-Magnolia International, Inc., a Texas corporation (the
"Company" or "Arrow-Magnolia"), was incorporated in the State of
Texas in 1937.
The Company's business consists primarily of the manufacture
and distribution of approximately 400 specialty chemical products
for use in cleaning and maintaining equipment and general
maintenance and sanitation. The Company's manufacturing
operations blend, to the Company's specifications and according
to the Company's procedures, a variety of chemicals to create the
Company's products. The Company packages products that it blends
or manufactures and, in addition, purchases products that have
been blended or manufactured and then packaged under the
Company's private labels by third parties. The Company also
distributes certain nonchemical products, such as paper and other
janitorial supplies, related to its chemical products. The
Company's products, including its nonchemical products, are
marketed throughout the United States, Canada and other countries
to a variety of consumers. No single customer accounted for as
much as 10% of its total net sales during 1997, 1996 or 1995.
The Company's product line includes aircraft coatings,
cleaners, corrosion preventatives, degreasers and air fresheners;
construction chemicals such as release agents, concrete
strippers, safety solvents, custom lubricants and rust
reconverters; and telecommunication formulations such as
refinishers, cable cleaners, graffiti removers and fiber optic
lubricants. Sanitation and maintenance products sold by the
Company include soaps, enzymes, deodorants, germicides,
insecticides, disinfectants and miscellaneous janitorial
supplies. Nonchemical products sold by the Company include parts
washers, sprayers, paper products and poly liners. The Company's
products are designed and packaged for large-scale users rather
than individual household consumers.
The Company currently manufactures certain of its products
in order to give the Company greater control over its inventory
in terms of quality and availability of goods. Cost savings are
also effected through elimination of outside vendor overhead and
profit and through reductions in the cost of carrying finished
goods inventory versus raw materials. Currently the Company
manufactures approximately 60% of its products (measured by 1997
sales expressed in dollars). The raw materials necessary for
manufacture of the Company's products and the finished products
resold by the Company are readily available from numerous sources
and the Company is not dependent on any particular supplier for
these items.
The Company markets its products primarily through its own
sales personnel, independent contractors and distributors. In
addition, the Company exhibits its products at national and
international trade shows. The Company attends, on a regular
basis, major trade shows annually. The Company has no material
backlog of orders for its products.
The Company does not incur any material costs in complying
with applicable environmental laws.
PAGE
<PAGE>
Competition
The business of the Company is highly competitive in all of
its phases. However, the industry in which the Company competes
is very fragmented and, although two companies are significantly
larger than other companies engaged in this industry, no single
firm or group of firms dominate the industry as a whole.
Further, the total sales volume of the Company's products
constitutes only a very small portion of the total available
market.
The principal methods of competition in the business of the
Company are sales personnel, price, quality and delivery
capability. The Company competes with numerous other companies,
both domestic and foreign, and with major chemical companies that
have many products that are substantially similar to those sold
by the Company. Due to the substantial similarity in available
products and technology, product differentiation and preference
is largely a function of the sales effort. Management therefore
believes that the Company is able to compete successfully
whenever it maintains aggressive sales personnel.
To the best knowledge of the Company's management, the
Company is the only distributor of several products which are
specially formulated to the Company's specifications for the
particular applications of the telecommunications industry. There
is no assurance, however, that other manufacturers will not enter
the market in the future.
Employees
As of December 31, 1997, the Company employed forty-fix (46)
full-time employees, including its warehouse personnel and
administrative, accounting, clerical and sales personnel. In
addition, the Company retained the services as independent
contractors of eighty-four (84) sales representatives. None of
the Company's employees are covered by union contracts, and the
Company considers its relationship with its employees to be
excellent.
ITEM 2. DESCRIPTION OF PROPERTY.
The principal executive and warehouse facilities of the
Company are located in a steel, glass, brick and concrete
building owned by the Company at 2646 Rodney Lane, Dallas, Texas.
These facilities occupy approximately 40,000 square feet of floor
space, of which 33,000 square feet are devoted to warehousing and
shipping and manufacturing, and 7,000 square feet to
administrative and executive offices. The Company is currently
evaluating whether to build an additional 30,000 square feet of
warehouse space onto its existing facilities. A deed of trust
has been granted with respect to this property to secure certain
indebtedness of the Company.
The Company believes that all of its plant and office
facilities are in good condition and adequately insured.
The Company does not as a regular aspect of its business
acquire interests in real estate for purposes of investment or
acquire securities of or interests in persons engaged in real
estate activities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property
the subject of, any legal proceedings other than routine
litigation incidental to its business.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted during the fourth quarter of the
fiscal year ended December 31, 1997, to a vote of the Company's
security holders, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is included for quotation on the
NASDAQ SmallCap Market tier of the NASDAQ Stock Market under the
trading symbol "ARWM". The following table sets forth the high
and low sales prices in the common stock during the last eight
quarters, as adjusted to reflect a two-for-one stock dividend
which became effective on June 14, 1996 and a 10% stock dividend
which became effective on July 15, 1997:
Fiscal 1997 High Low
Fourth Quarter $8.25 $5.25
Third Quarter 5.88 3.81
Second Quarter 4.50 3.68
First Quarter 4.63 3.60
Fiscal 1996
Fourth Quarter $4.38 $3.06
Third Quarter 4.19 3.15
Second Quarter 4.50 2.27
First Quarter 2.27 1.93
The approximate number of record holders of the Company's
Common Stock as of December 31, 1997, was 331.
The Company has paid no cash dividends with respect to its
Common Stock since 1988, when it paid a dividend of $0.05 per
share. The Company currently intends to retain any earnings for
use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
<PAGE> <PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
The following table sets forth for the periods indicated the
relative percentages which certain items included in the
consolidated statements of income bear to net sales and the
percentage changes of such items as compared to the indicated
prior period:
<TABLE>
Increase (Decrease)
From Prior Period
Years Ended
Percentage of Net Sales 1997 1996
Years Ended December 31 vs. vs.
1997 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 24.0% 22.5%
Cost of sales 56.4% 57.5% 58.2% 21.6% 21.0%
Gross profit 43.6% 42.5% 41.8% 27.3% 24.4%
General and
administrative
expenses 28.0% 26.2% 28.3% 32.8% 13.5%
Operating
income 15.5% 16.3% 13.5% 18.4% 47.1%
Interest
expense 0.5% 0.8% 1.2% (21.5)% (14.2)%
Income before
income taxes 15.6% 16.0% 12.7% 20.2% 54.6%
Net income 10.0% 10.1% 8.1% 22.4% 53.5%
</TABLE>
Comparison of Annual Results.
Net sales for fiscal year 1997 increased 24.0% from
$10,278,559 to $12,748,100 versus fiscal year 1996 after
increasing 22.5% from fiscal 1995 to fiscal 1996. Cost of sales
as a percentage of net sales decreased to 56.4% in fiscal 1997
from 57.5% in fiscal 1996 and 58.2% in fiscal 1995. The increase
in sales from 1996 to 1997 is primarily attributable to the
extension of sales coverage through the addition of sales
personnel under an ongoing hiring program including the
acquisition of Darsan, Inc. and Southwest Supply & Environmental
in May 1997. As a result of increased sales, which resulted in
better absorption of fixed costs, gross profit increased by 27.3%
from $4,364,634 to $5,555,193 for fiscal 1997 versus fiscal 1996,
after increasing by 24.4% from fiscal 1995 to fiscal 1996. For
the 1997 fiscal year, the gross profit margin reached a record
43.6% of net sales, as compared to 42.5% from 1996 and 41.8% for
1995.
General and administrative expenses rose to 28.0% of net
sales in 1997 primarily as the result of hiring additional sales
personnel. In addition, the Company expensed non-recurring
expenses of $75,000 incurred in modifying its computer systems to
be Year 2000 compliant. The Company also charged $129,500 in
compensation expense as the result of issuing options and
warrants to a key employee and a service provider. Such
compensation expenses is based upon the difference between the
exercise price and the granted market price of the common stock
on the date the option is issued. General and administrative
expenses fell as a percentage of net sales to 26.2% in 1996 from
28.3% in 1995 as sales volume improved at a more rapid pace than
the 13.5% increase in these expenses from year to year.
Under Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company reports
compensation expense on the date of grant of an option or warrant
only if the market price of the underlying stock exceeded the
exercise price. During fiscal 1997, as described above, the
Company charged compensation expense for new options and warrants
so issued. However, in the event that any of the options or
warrants outstanding as of December 31, 1997 should be exercised
in the future, no further charges to the financial statements
will
be required. See Note 1(k) to the Consolidated Financial
Statements included herein.
<PAGE>
Interest expense fell as a percentage of net sales to 0.5%
in fiscal 1997 from 0.8% in fiscal 1996 and 1.2% in fiscal 1995
due to application of funds generated from continued
profitability to reduce debt and reduction in the interest rate
paid to the prime rate.
As a result of these factors, for the fiscal year ended
December 31, 1997, net income increased to $1,275,847 from
$1,042,460, or 22.4%, versus the same period in 1996. These
results compare favorably to net earnings for 1995 of $679,074.
Liquidity and Capital Resources.
The Company's working capital (total current assets less
total current liabilities), which was $3,338,518 as of December
31, 1996, improved during 1997 to $4,668,614 as of December 31,
1997. The Company's current assets increased significantly as
the Company's cash, accounts receivable and inventories increased
due to increased sales and profitability. Current liabilities
also increased, but less than current assets, in response to
increased sales volumes.
As shown in the Company's consolidated statements of cash
flows in 1997, the Company generated $403,724 in cash flow from
operations as the Company continued to capitalize on its
profitability, partially offset by increases in receivables and
inventories resulting from its sustained growth. The Company
utilized $286,301 in investing activities as it purchased
property and equipment. A total of $6,496 was provided by
financing activities as the Company issued additional Common
Stock, offset by a reduction in its remaining debt.
Currently the Company is evaluating whether to construct an
additional 30,000 square feet of warehouse space to its existing
facilities. Based upon its initial review, the Company believes
it has more than adequate funds on hand to complete this addition
if the Company concludes that it is desirable. In addition, at
December 31, 1997, the Company had $650,000 available under a
revolving line of credit bearing interest at the lender's prime
rate (8.5% at December 31, 1997). The Company believes that its
present financing is also otherwise adequate for its capital
needs for the foreseeable future.
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, Reporting Comprehensive Income and SFAS
No.
131, Disclosure about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by
major components and as a single total, the change in its net
assets during the period from nonowner sources. SFAS No. 131
establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers.
Adoption of these statements will not impact the Company's
consolidated financial position; results of operations or cash
flows, and any effect will be limited to the form and content of
its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Included at pages F-1 through F-17 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information relating to the Company's Directors and
executive officers is set forth under the heading "Election of
Directors and Information as to Directors, Nominees and Executive
Officers" in the Company's definitive proxy statement relating to
the Company's Annual Meeting of Stockholders to be held May 21,
1998, which will be filed with the Securities and Exchange
Commission on or about April 12, 1998, and such information is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth
under the heading "Executive Compensation" in the Company's
definitive proxy statement relating to the Company's Annual
Meeting of Stockholders to be held May 21, 1998, which will be
filed with the Securities and Exchange Commission on or about
April 12, 1998, and such information is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information relating to the ownership of certain beneficial
owners and management of the Company's Common Stock is set forth
under the heading "Securities Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy
statement relating to the Company's Annual Meeting of
Stockholders to be held May 21, 1998, which will be filed with
the Securities and Exchange Commission on or about April 12,
1998, and such information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to the business relationships and
related transactions with respect to the Company and certain
Directors and nominees for election as Directors is set forth
under the heading "Certain Transactions" in the Company's
definitive proxy statement relating to the Company's Annual
Meeting of Stockholders to be held May 21, 1998, which will be
filed with the Securities and Exchange Commission on or about
April 12, 1998, and such information is incorporated herein by
reference.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
No. Exhibit
3.1 Articles of Incorporation, as amended, of
Arrow-Magnolia International, Inc.(1).
3.2 Bylaws of Magnolia Enterprises, Inc.(2).
10.19 Arrow-Magnolia International, Inc. Amended and
Restated Non-Qualified Stock Option Plan(3).
10.20 Credit Loan Agreement dated August 5, 1994
between Arrow-Magnolia International, Inc. and
Chase Bank of Texas(3).
10.21 Extension and Modification Agreement dated
August 18, 1994 between Arrow-Magnolia
International, Inc. and Chase Bank of
Texas(3).
10.22 1998 Stock Option Plan(4).
23.1 Consent of Independent Auditors.
(1) Filed as Exhibit 3.1 to Arrow-Magnolia International, Inc.
Form 10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference.
(2) Filed as Exhibit 3.2 to Magnolia Chemical Company, Inc. Form
10-Q for the quarter ended June 30, 1982 and incorporated
herein by reference.
(3) Filed as Exhibits 10.19, 10.20 and 10.21 to Arrow-Magnolia
International, Inc. Form 10-KSB for the fiscal year ended
December 31, 1994 and incorporated herein by reference.
(4) Filed as Exhibit 10.19 to Arrow-Magnolia International, Inc.
Form S-8 Registration Statement and incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements and Schedule
Page
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31,
1997 and 1996 F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
All other schedules have been omitted as not
applicable or not required.
PAGE
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Arrow-Magnolia International, Inc.:
We have audited the accompanying consolidated balance sheets of
Arrow-Magnolia International, Inc. and subsidiary as of December
31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements 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 financial
position of Arrow-Magnolia International, Inc. and subsidiary as
of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 6, 1998
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,878,919 1,755,000
Short-term investments 300,000 300,000
Trade accounts receivable,
less allowance for doubtful
accounts of $346,900 in 1997
and $245,521 in 1996 (note 4) 2,773,352 1,585,552
Inventories (note 4) 601,157 516,572
Deferred income taxes (note 6) 117,946 83,170
Other assets 26,632 19,801
Total current assets 5,698,006 4,260,095
Property and equipment, net
(notes 2 and 5) 738,916 606,046
Intangible assets, net (note 3) 137,318 96,011
Note receivable 40,000 40,000
Deferred income taxes (note 6) 29,912 19,602
Other assets, at cost 2,700 1,000
$6,646,852 5,022,754
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of
long-term debt (note 5) $101,361 107,483
Accounts payable 571,426 413,836
Accrued liabilities 216,324 161,029
Income taxes payable 140,281 239,229
Total current liabilities 1,029,392 921,577
Note payable (note 4) 600,000 650,000
Deferred compensation 104,500 -
Long-term debt,
excluding current
installments (note 5) 122,362
Total liabilities 1,733,892 1,693,939
Stockholders' equity (notes 7
and 8):
Preferred stock - par value
$.10, authorized 500,000
shares; none issued - -
Common stock - par value $.10,
authorized 10,000,000
shares; issued and outstanding
2,681,392 shares in 1997 and
2,373,120 shares in 1996 268,139 237,312
Additional paid-in capital 2,776,182 1,347,748
Retained earnings 1,868,639 1,743,755
Total stockholders' equity 4,912,960 3,328,815
Commitments and contingencies
(note 10)
$6,646,852 5,022,754
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Net sales $12,748,100 10,278,559 8,393,829
Cost of sales 7,192,907 5,913,925 4,885,799
Gross profit 5,555,193 4,364,634 3,508,030
General and
administrative
expenses 3,574,817 2,692,320 2,371,447
Operating
income l,980,376 1,672,314 1,136,583
Other income
(expenses):
Interest expense (64,989) (82,841) (96,552)
Interest income 62,946 42,992 17,150
Other income 4,475 17,158 9,516
Other income
(expenses), net 2,432 (22,691) (69,886)
Income before
income taxes 1,982,808 1,649,623 1,066,697
Income taxes (note 6) 706,961 607,163 387,623
Net income $1,275,847 1,042,460 679,074
Earnings per common
share:
Basic $.49 .40 .28
Diluted $.42 .36 .24
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
</TABLE>
<TABLE>
Total
Common stock Additional stock-
paid-in Retained holders'
Shares Amount capital earnings equity
<S> <C> <C> <C> <C> <C>
Balance at December
31, 1994 2,000,000 $200,000 800,000 322,221 1,322,221
10% stock dividend 200,000 20,000 280,000 (300,000) -
Issuance of common
stock for cash 115,200 11,520 190,080 - 201,600
Net income - - - 679,074 679,074
Balances at December
31, 1995 (note 7) 2,315,200 231,520 1,270,080 701,295 2,202,895
Exercise of stock
options and
related
tax benefits 7,920 792 3,168 - 3,960
Exercise of stock
warrants and
related
tax benefits 50,000 5,000 57,500 - 62,500
Expense resulting
from issuance
of stock
warrants (note 7) - - 17,000 - 17,000
Net income - - - 1,042,460
1,042,060
Balances at December
31, 1996 2,373,120 237,312 1,347,748 1,743,755
3,328,815
10% stock
dividend 237,312 23,731 1,127,232 (1,150,963) -
Exercise of
stock options and
related
tax benefits 6,960 696 13,688 - 14,384
Exercise of
stock warrants
and
related tax
benefits 64,000 6,400 262,514 - 268,914
Expense resulting
from issue
of stock
warrant (note 7) - - 25,000 - 25,000
Net income - - - 1,275,847 1,275,847
Balances at December
31, 1997 2,681,392 $268,139 2,776,182 1,868,639 4,912,960
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
1997 1996 l995
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $1,275,847 1,042,460 679,074
Adjustments to
reconcile net income
to net cash
provided by operating
activities:
Depreciation and
amortization 143,748 72,549 74,148
Gain on disposition
of property and
equipment - - (2,500)
Deferred income taxes (45,086) 13,469 (18,817)
Provision for doubtful
accounts 291,901 236,632 193,838
Compensation expense
from issuance of stock
options and warrants 129,500 17,000 -
Change in operating
assets and liabilities:
Receivables (1,479,701) (482,776) (663,583)
Inventories (84,585) 165,253 (71,212)
Other assets (8,531) 4,066 11,458
Accounts payable 125,966 (7,447) 126,476
Accrued liabilities 55,295 (22,051) 53,270
Income taxes payable (630) 64,475 45,088
Net cash provided by
operating activities 403,724 1,103,630 427,240
Cash flows from
investing activities:
Proceeds from sale
of short-term
investments 300,000 990,051 -
Purchase of short-term
investments (300,000) (600,000) (690,051)
Acquisition of
property and
equipment (286,301) (292,726) (30,905)
Proceeds from sale
of property
and equipment - - 2,500
Net cash (used in)
provided by
investing activities (286,301) 97,325 (718,456)
Cash flows from
financing activities:
Proceeds from issuance
of note
payable 12,000 34,487 200,000
Repayments of
note payable (57,000) (174,487) (100,000)
Proceeds from
issuance of
long-term debt - - 25,448
Repayments of
long-term debt (133,484) (133,834) (131,296)
Proceeds from
issuance of
common stock 184,980 66,460 201,600
Net cash provided
by (used in) financing
activities 6,496 (207,374) 195,752
Net increase (decrease)
increase in
cash and cash
equivalents 123,919 993,581 (95,464)
Cash and cash
equivalents at
beginning of year 1,755,000 761,419 856,883
Cash and cash
equivalents at end of
year $1,878,919 1,755,000 761,419
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the
accounts of Arrow-Magnolia International, Inc.
(Arrow) and its wholly-owned subsidiary, Bio/Dyne
Chemical Company (Bio/Dyne) (collectively the
Company). All significant intercompany balances
and transactions have been eliminated in
consolidation.
(b) Nature of the Operations
The Company is engaged in the sale and distribution of
chemical products, primarily industrial and
institutional cleaning and maintenance supplies and
related products, to industrial users, telephone supply
distributors, governmental agencies and school systems.
The Company's customers operate in many different
industries and geographic regions. No single customer
accounted for more than 10% of net sales in 1997, 1996
or 1995.
(c) Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
(d) Cash Equivalents and Statements of Cash Flows
For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments
with original maturities of three months or less to be
cash equivalents. Cash equivalents of $988,378 and
$988,27 at December 31, 1997 and 1996, respectively,
consist of U.S. treasury bills with original maturities
of less than three months.
Cash paid for interest during 1997, 1996 and 1995 was
$64,989, $82,841 and $96,552, respectively. Cash paid
for federal income taxes during 1997, 1996 and 1995 was
$752,677, $356,310 and $204,000, respectively.
(e) Short-term Investments
Short-term investments at December 31, 1997 and 1996
represent investments in bank certificates of deposit.
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(f) Inventories
Inventories, which consist primarily of merchandise
purchased for resale and raw materials purchased for
blending, are stated at the lower of cost or market.
Cost is determined using the first-in, first-out
method.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the
estimated useful lives of the assets. The cost of
maintenance and repairs is charged to expense as
incurred; significant renewals and betterment are
capitalized.
(h) Goodwill
Goodwill, which represents the excess of purchase price
over fair value of net assets acquired, is amortized on
a straight-line basis over the expected periods to be
benefited, generally 40 years. The Company assesses the
recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over
its remaining life can be recovered through
undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment,
if any, is measured based on projected discounted
future operating cash flows using a discount rate
reflecting the Company's average cost of funds The
assessment of the recoverability of goodwill will be
impacted if estimated future operating
cash flows are not achieved.
(i) Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted
tax rates that will apply in the years in which those
temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in
income in the period that includes
the enactment date.
(j) 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
stockholders) 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.
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Shares used in calculating basic and diluted income per
share are as follows:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Weighted average common
shares outstanding 2,623,999 2,575,672 2,441,162
Dilutive securities:
Common stock options 648,388 603,548 605,000
Warrants to service
providers 46,667 54,333 20,833
Assumed repurchase of
common shares (284,958) (307,061) (282,205)
Weighted average shares
common outstanding-
diluted basis 3,034,096 2,926,492 2,784,790
</TABLE>
(k) Stock Option Plan
Prior to January I, 1996, the Company accounted for its
stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be
recorded on the date of grant only if the current
market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide proforma net income and
pro forma earnings per share disclosures for employee
stock option grants
made in 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
(l) Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of
The Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material
impact on the Company's financial position, results of
operations, or liquidity.
(m) Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board
issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities. SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and is to
be applied prospectively. This Statement provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of
liabilities based on consistent application of a
financial-components approach that focuses on control.
It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowing.
Adoption of this Standard did not have a material
impact on the Company's financial position, results of
operations or liquidity.
(n) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, Reporting Comprehensive Income and
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. SFAS No. 130
requires that an enterprise report, by major components
and as a single total, the change in its net assets
during the period from nonowner sources. SFAS No. 131
establishes annual and interim reporting standards for
an enterprise's operating segments and related
disclosures about its products, services, geographic
areas and major customers. Adoption of these statements
will not impact the Company's consolidated financial
position; results of operations or cash flows, and any
effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal
years beginning after December 15, 1997
(o) Fair Value of Financial Instruments
The Company defines the fair value of a financial
instrument as the amount at which the instrument could
be exchanged in a current transaction between willing
parties. Financial instruments included in the
Company's financial statements include cash and cash
equivalents, short-term investments, trade accounts
receivable, other receivables, note receivable, other
assets, note payable and long-term debt. Unless
otherwise disclosed in the notes to the consolidated
financial statements, the carrying value of financial
instruments is considered to approximate fair value due
to the short maturity and characteristics of those
instruments. The carrying value of long-term debt
approximates fair value as terms approximate those
currently available for similar debt instruments.
(Continued)
<PAGE> <PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(p) Year 2000
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.
(q) Reclassification
Certain items in the 1996 and 1995 consolidated
financial statements have been reclassified to conform
with the 1997 presentation.
(2) Property and Equipment
Property and equipment consist of the following at December
31, 1997 and 1996:
Useful lives 1997 1996
Land - $95,310 95,310
Buildings and
improvements 5 to 40 years 428,633 415,591
Machinery and
equipment 3 to 10 years 710,579 546,348
Furniture and
fixtures 5 to 10 years 256,679 211,206
1,491,201 1,268,455
Less accumulated
depreciation (752,285) (662,409)
$738,916 606,046
During the fourth quarter, the Company recorded an increase
to depreciation expense for assets not previously
depreciated throughout the year. Previously reported
unaudited first, second and third quarter net income would
each have been reduced by approximately $18,000 had the
expense been recorded throughout the year.
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Intangible Assets
Intangible assets consist of the following at December 31,
1997 and 1996:
Useful lives 1997 1996
Goodwill 40 years $160,124 110,500
Customer lists 5 years 17,500 17,500
Sales force 7 years 82,500 82,500
Other 8 years 10,500 10,500
270,624 221,000
Less accumulated
amortization (133,306) (124,989)
$137,318 96,011
(4) Note Payable
The note payable at December 31, 1997 is a revolving line of
credit ($600,000 outstanding at December 31, 1997) with an
asset-based lender due on May 1, 1999. The credit agreement
provides for a commitment from the lender at the lesser of
$1,250,000 or the borrowing base as defined. At December 31,
1997, the unused portion of the commitment was $650,000. The
credit agreement contains various debt covenants, the most
restrictive of which requires the Company to maintain
certain minimum financial criteria. At December 31, 1997 the
Company believes it is in compliance with all debt covenant
requirements. The note requires monthly payments of interest
at the lenders prime rate (8.5% at December 31, 1997) and is
collateralized by certain accounts receivable and
inventories. As the line of credit bears interest at market
rates, the carrying amount of borrowing outstanding at
December 31, 1997 approximates fair value.
(5) Long-term Debt
Long-term debt consists of the following at December 31,
1997 and 1996:
1997 1996
Note payable to a bank, interest at
prime (8.25% at December 31,
1997), principal and interest of
$8,250 payable monthly, maturing
August 1999, collateralized
by the Company's office and
warehouse $90,000 215,000
Note payable to a bank in monthly
installments of $707, including
interest at 7.9%, maturing
September 1998, and collateralized
by an automobile 6,361 14,845
Note payable to certain individuals,
principal of $1,000 payable
monthly, maturing May 1998 5,000 -
101,361 229,845
Less current installments 101,361 107,483
$ - 122,362
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) Income Taxes
Income tax expense (benefit) for the years ended December
31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995
U.S federal - current $734,278 557,008 378,754
U.S. federal - deferred (45,086) 13,469 (18,817)
State - current 17,769 36,686 27,686
$706,961 607,163 387,623
Income tax expense for the years ended December 31, 1997, 1996
and 1995 differs from the"expected" tax expense (computed by
applying the 34% U.S. federal corporate rate to income before
income taxes) as follows:
1997 1996 1995
Computed "expected"
tax expense $674,155 559,172 362,677
Amortization of goodwill 703 5,253 3,994
State income taxes,
net of federal benefit 11,728 24,213 18,273
Other 20,375 18,525 2,679
$706,961 607,163 387,623
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 1, 1997 and 1996 are presented
below:
1997 1996
Deferred tax assets:
Accounts receivable, principally
due to allowance for
doubtful accounts $117,946 83,477
Expense resulting from issuance
of stock options and warrants 33,585 -
Property and equipment,
principally due to differences in
depreciation - 22,557
Total gross deferred tax assets 151,531 106,034
Less valuation allowance - -
Net deferred tax assets 151,531 106,034
Deferred tax liabilities:
Property and equipment,
principally due to differences in
depreciation (2,291) -
Other (1,382) (3,262)
Total gross deferred tax
liabilities (3,673) (3,262)
Net deferred tax asset $147,858 102,772
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Deferred tax assets and liabilities are computed by applying
the effective U.S. federal income tax rate to the gross
amounts of temporary differences and other tax attributes.
Deferred tax assets and liabilities relating to state income
taxes are not material. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those
temporary differences become deductible. Management
considers the scheduled reversal of deferred tax
liabilities, projected fixture taxable income, and tax
planning strategies in making this assessment. The Company
expects the net deferred tax assets at December 31, 1997 to
be realized as a result of future taxable income.
(7) Stockholders' Equity
Stock equivalents at December 31, 1997, 1996 and 1995 and
changes in stock equivalents for the three-year period
ended December 31, 1997 are presented below:
Stock Options Stock warrants
Stock option/warrant
exercise price $0.50 $2.00 $4.125 $1.25 $2.25
Stock options
issued and
outstanding,
December 31, 1994 400,000 - - - -
Issuance of
option/warrant 100,000 - - 50,000 -
10% stock dividend 50,000 - - - -
Stock
options/warrants
issued and
outstanding,
December 31, 1995 550,000 - - 50,000 -
Exercise of
option/warrant (7,920) - - (50,000) -
Issuance of warrant - - - - 40,000
Stock
options/warrants
issued and
outstanding,
December 31, 1996 542,080 - - - 40,000
Issuance of
option/warrant - 50,000 20,000 - -
Exercise of
option/warrant (6,960) - (20,000) - (44,000)
10% stock dividend 54,208 5,000 - - 4,000
Stock options
issued and
outstanding,
December 31, 1997 589,328 55,000 - - -
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTER NATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a) Stock Option Plan
The Company has a nonqualified stock option plan (Plan)
covering 600,000 shares of common stock. Participants
are selected by the Company's Board of Directors from
the executive officers and other key employees of the
Company. The Plan provides that the option price per
share and vesting period for stock options issued under
the Plan are determined by the Company's Board of
Directors.
In December 1994, 400,000 stock options were granted to
certain of officers of the Company at an option price
of $.50 per share, the estimated fair market value of
the common stock at the date of grant. These stock
options were fully exercisable at the date of grant.
In January 1995, the Plan was amended to provide for an
increase in the number of shares subject to the Plan to
550,000 shares and an additional 100,000 options were
granted to certain key employees. These stock options
were issued at an option price of $.50 per share, the
estimated fair value of the common stock at the date of
grant, and vest in annual increments of 20% with the
first 20% vesting occurring on the date of issuance.
Total options outstanding under the Plan were increased
by 50,000 options in 1995 due to a 10% stock dividend.
At December 31, 1997, 14,880 of the options outstanding
under the Plan had been exercised.
In January 1997, the Company granted 50,000 stock
options to an employee of the Company. These stock
options were issued at an option price of $2.00 per
share. The stock options were fully exercisable at the
date of grant. During the fourth quarter, the Company
recognized the aggregate excess of the market price
over the exercise price at date of grant as expense, $
104,500. Had the Company recognized the effect of this
entry at the time of grant, previously reported
unaudited net income would have been reduced to
$177,212. Total options outstanding
were increased to 55,000 options in 1997 due to a 10%
stock dividend. At December 31, 1997, no options have
been exercised.
(b) Stock Warrants
On May 15, 1995, the Company issued stock warrants to a
certain service provider. The stock warrants were
exercisable to purchase up to 50,000 shares of the
Company's common stock at $1.25 per share, the
estimated fair market value of the common stock at the
date of grant. The stock warrants were fully
exercisable at the date of the grant. During 1996, all
of the warrants were exercised.
In May 1996, the Company issued stock warrants to an
additional service provider. The stock warrants were
exercisable to purchase up to 40,000 shares of the
Company's common stock at $2.25 per share. Total
options outstanding were increased to 44,000 options in
1997 due to a 10% stock dividend. The Company is
recognizing the aggregate excess of the estimated fair
value over the exercise price at date of grant of
$42,000 as expense over the two year term of the
service agreement, which is the same life as the
warrants. The Company recognized
approximately $25,000 and $17,000 as compensation
expense during 1997 and 1996, respectively, related to
these warrants. During 1997, all of the warrants were
exercised
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
In May 1997, the Company issued stock warrants to a
service provider. The stock options were exercisable to
purchase up to 20,000 shares of the Company's common
stock at $4.125 per share, the estimated fair value at
date of grant. The stock options were fully exercisable
at the date of the grant. During 1997, all of the stock
options were exercised.
On June 14, 1996, the Company declared a 2 for 1 stock split
effected in the form of a stock dividend. As a result, all
share and per share information in the accompanying
consolidated financial statements has been retroactively
restated to give effect to the split. In addition, effective
July 1, 1997, the Company issued a 10% stock dividend on all
outstanding common shares.
(8) Stock Options
The per share weighted-average fair value of stock options
granted during 1997 and 1995 was $3.74 and $.249,
respectively, on the date of grant using the Black Scholes
option-pricing model. There were no stock options granted
during 1996. The following weighted-average assumptions were
used in the pricing model:
1997 1995
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 6.7% 7.82%
Expected life 7 years 7 years
The Company applies APB Opinion No. 25 in accounting for its
Plan and, accordingly, has recognized no compensation
expense for stock options granted at exercise prices at
least equal to the market value of the Company's common
stock. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts
indicated below:
1997 1996 1995
Net income:
As reported $1,275,847 1,042,460 679,074
Pro forma $1,193,347 1,042,460 651,684
Basic earnings
per common share:
As reported $.49 .40 .28
Pro forma $.45 .40 .27
Diluted earnings
per common
share:
As reported $.42 .36 .24
Pro forma $.39 .36 .23
(Continued)
PAGE
<PAGE>
ARROW-MAGNOLIA INTERNATIONAL, INC AND SUBSIDIARY
Notes to Consolidated Financial Statements
Pro forma net income reflects only options granted in 1997
and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented
above because compensation costs is reflected over the
option' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered
(9) Quarterly Financial Data (Unaudited)
Quarterly net income and 1997 earnings per share,
retroactively restated for the adoption of SFAS No. 128 is
as follows:
Earnings Per share
Net income Basic Diluted
First quarter $159,212 $.06 $.05
Second quarter 368,842 $.14 $.12
Third quarter 393,656 $.15 $.13
Fourth quarter 354,137 $.13 $.12
$1,275,847
(10) Commitments and Contingencies
The Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's
consolidated financial position, results of operations or
liquidity.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of The
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
ARROW-MAGNOLIA INTERNATIONAL, INC.
By: /s/ Morris Shwiff
Morris Shwiff, President
Dated: March 31, 1998
Pursuant to the requirements of The Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Morris Shwiff Director, Chairman of the }
Morris Shwiff Board and President }
(Principal Executive Officer) }
}
/s/ Mark I. Kenner Director and Executive }
Mark I. Kenner Vice President } March
} 31, 1998
/s/ Fred Kenner Director, Vice President }
Fred Kenner Secretary and Treasurer }
(Principal Financial and }
Accounting Officer) }
}
Director }
Robert D. DeRosier }
}
Director }
Clifton R. Duke }
<PAGE>
INDEX TO EXHIBITS
Number Exhibit
Page
3.1 Articles of Incorporation, as amended, of Arrow-Magnolia
International, Inc.(1).
3.2 Bylaws of Magnolia Enterprises, Inc.(2)
10.19 Arrow-Magnolia International, Inc. Amended and
Restated Non-Qualified Stock Option Plan.(3)
10.20 Credit Loan Agreement dated August 5, 1994 between
Arrow-Magnolia International, Inc. and Chase
Bank of Texas(3)
10.21 Extension and Modification Agreement dated August 18,
1994 between Arrow-Magnolia International, Inc. and
Chase Bank of Texas (3)
10.22 1998 Stock Option Plan(4).
23.1 Consent of Independent Auditors.
(1) Filed as Exhibit 3.1 to Arrow-Magnolia International, Inc.
Form 10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference.
(2) Filed as Exhibit 3.2 to Magnolia Chemical Company, Inc. From
10-Q for the quarter ended June 30, 1982 and incorporated
herein by reference.
(3) Filed as Exhibits 10.19, 10.20 and 10.21 to Arrow-Magnolia
International, Inc. Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference.
(4) Filed as Exhibit 10.19 to Arrow-Magnolia International, Inc.
Form S-8 Registration Statement and incorporated herein by
reference.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
registrant's Form 10-KSB for the fiscal year ended December 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1878919
<SECURITIES> 300000
<RECEIVABLES> 3120252
<ALLOWANCES> 346900
<INVENTORY> 601157
<CURRENT-ASSETS> 5698006
<PP&E> 1491201
<DEPRECIATION> 752285
<TOTAL-ASSETS> 6646852
<CURRENT-LIABILITIES> 1029392
<BONDS> 600000
0000
0000
<COMMON> 268139
<OTHER-SE> 4644821
<TOTAL-LIABILITY-AND-EQUITY> 6646852
<SALES> 12748100
<TOTAL-REVENUES> 12748100
<CGS> 7192907
<TOTAL-COSTS> 7192907
<OTHER-EXPENSES> 3574817
<LOSS-PROVISION> 0000
<INTEREST-EXPENSE> 64989
<INCOME-PRETAX> 1982808
<INCOME-TAX> 706961
<INCOME-CONTINUING> 1275847
<DISCONTINUED> 0000
<EXTRAORDINARY> 0000
<CHANGES> 0000
<NET-INCOME> 1275847
<EPS-PRIMARY> .49
<EPS-DILUTED> .42
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Arrow-Magnolia International, Inc.:
We consent to the incorporation by reference in the Registration
Statements (No. 333-47709 and 333-01511) on Forms S-8 of Arrow-
Magnolia International, Inc. of our report dated February 6, 1998,
relating to the consolidated balance sheets of Arrow-Magnolia
International, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in
the December 31, 1997, annual report on Form 10-K of Arrow-Magnolia
International, Inc.
KPMG Peat Marwick LLP
Dallas, Texas
March 30, 1998
