FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 27, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
to
Commission file number 1-7737
ARROW AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1449115
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer I.D. No.)
3 SPEEN STREET, FRAMINGHAM, MASSACHUSETTS 01701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 872-3711
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,873,083 shares of the
Company's Common Stock ($.10 par value) were outstanding as of November 7,
1997.
ARROW AUTOMOTIVE INDUSTRIES, INC.
INDEX
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Page NUMBER
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Balance Sheets - September 27, 1997
and June 28, 3
1997....................................................................
Condensed Statements of Operations - Three Months Ended
September 27, 1997 and September 28, 4
1996.........................
Condensed Statements of Cash Flows - Three Months Ended
September 27, 1997 and September 28, 1996 5
........................
Notes to Condensed Financial 6 -7
Statements.................................
ITEM 2. Management's Discussion and Analysis of the Financial
Condition and Results of 8 - 11
Operations.......................................
PART II OTHER INFORMATION
ITEM 1. Legal 12
Proceedings......................................................................
ITEM 2. Changes in 12
Securities.................................................................
ITEM 3. Default upon Senior 12
Securities...................................................
ITEM 4. Submission of Matters to a Vote of Security 12
Holders..................
ITEM 5. Other 12
Information........................................................................
ITEM 6. Exhibits and Reports on Form 8- 12
K..............................................
SIGNATURES .................................................................................................... 13
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PART I - ITEM 1 -- FINANCIAL INFORMATION
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
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ASSETS September 27, June 28,
1997 1997
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CURRENT ASSETS
Cash and equivalents $ 551,357 $ 240,291
Accounts receivable, less allowances 15,196,092 12,538,853
Inventories 31,685,032 30,920,184
Prepaid expenses and other current assets 1,628,726 1,705,746
TOTAL CURRENT ASSETS 49,061,207 45,405,074
PROPERTY, PLANT AND EQUIPMENT 34,027,150 33,989,146
Less allowances for depreciation 22,626,170 22,362,518
11,400,980 11,626,628
OTHER ASSETS 2,482,270 2,300,956
TOTAL ASSETS $ 62,944,457 $ 59,332,658
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of advances under revolving
line of credit $ 2,452,309 $ 3,836,680
Accounts payable 13,868,794 8,523,743
Cash overdrafts 722,085 764,113
Other current liabilities 4,696,564 4,864,374
Current portion of long-term debt 1,165,616 1,166,111
TOTAL CURRENT LIABILITIES 22,905,368 19,155,021
LONG-TERM DEBT 16,477,823 16,819,166
OTHER NONCURRENT LIABILITIES 3,400,605 3,315,105
STOCKHOLDERS' EQUITY
Common stock 296,887 296,887
Other stockholders' equity 20,313,098 20,195,803
Less cost of common stock in treasury 449,324 449,324
TOTAL STOCKHOLDERS' EQUITY 20,160,661 20,043,366
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 62,944,457 $ 59,332,658
</TABLE>
See accompanying notes to the condensed financial statements.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION> THREE MONTHS ENDED
September 27, 1997 September 28, 1996
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Net sales $ 24,341,252 $ 24,481,148
Cost and expenses:
Cost of products sold 18,831,022 19,026,978
Selling, administrative and general 4,744,720 4,652,418
Restructuring charge 1,200,000
Interest 648,215 544,049
24,223,957 25,423,445
Income (loss) before income taxes 117,295 (942,297)
Benefit from income taxes (358,100)
NET INCOME (LOSS) $ 117,295 $ (584,197)
Weighted average number of shares outstanding 2,873,083 2,873,083
EARNINGS (LOSS) PER SHARE $ 0.04 $ (0.20)
</TABLE>
See accompanying notes to the condensed financial statements.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
September 27, 1997 September 28, 1996
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OPERATING ACTIVITIES
Net cash provided by
operating activities $ 2,142,000 $ 3,148,487
INVESTING ACTIVITIES
Net cash used in investing activities (104,725) (155,618)
FINANCING ACTIVITIES
Payment of long-term debt and capital
lease obligations (341,838) (346,239)
Decrease in advances under
revolving line of credit (1,384,371) (3,275,904)
Net cash used in financing
activities (1,726,209) (3,622,143)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
311,066 (629,274)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
240,291 850,537
CASH AND EQUIVALENTS AT END OF PERIOD $ 551,357 $ 221,263
</TABLE>
See accompanying notes to the condensed financial statements.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENT
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
the fair presentation have been included. Operating results for the three
month period ended September 27, 1997 are not necessarily indicative of the
results that may be expected for the year ending June 27, 1998. For further
information, refer to the financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended June 28, 1997.
The balance sheet at June 28, 1997 has been derived from the audited financial
statements at that date.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
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September 27, 1997 June 28,
1997
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Stated at cost on the first-in, first-out
(FIFO)
method:
Finished goods $ 11,128,441 $ 10,507,186
Work in process and materials 25,793,591 25,649,998
36,922,032 36,157,184
Less reserve required to state inventory on
the
last-in, first-out (LIFO) method (5,237,000) (5,237,000)
$ 31,685,032 $ 30,920,184
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NOTE C -- RESTRUCTURING CHARGE
In fiscal 1996, the Company restructured its operations by closing its
Santa Maria, California production facility and transferring its manufacturing
operations formerly conducted at that facility to its remaining manufacturing
facilities. The action was taken to enhance profit margins by streamlining the
Company's productive capacity to better match its production requirements. As
a result, a $1.2 million restructuring charge was recorded in the first quarter
of fiscal 1997. For the 1997 fiscal year, the restructuring charge amounted to
$1.1 million, consisting of $413,000 of employee termination benefits and
$687,000 related to the facility closing.
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NOTE D -- LONG TERM DEBT
On October 7, 1997, the Company restructured its bank agreements (Prior
Credit Agreements) via an amendment ("Replacement Credit Agreements"). This
amendment was effective as of June 28, 1997. The Replacement Credit Agreements
consist of a replacement $7,500,000 term loan and continuation of a $20 million
revolving line of credit
Under the Replacement Credit Agreements, the interest rate on amounts
outstanding under the revolving line of credit will change depending upon the
achieved debt service coverage ratio and can range from the lender's base rate
to 1.50% over the lender's base rate, as compared to rates at September 27,
1997 under the Prior Credit Agreements of lender's base rate plus 3%. The
revolving credit loan maturity date is July 31, 2000.
Similarly, the interest rate on the replacement term loan on a given date
can range from 0.25% to 1.75% over the lender's base rate depending upon the
achieved debt service coverage ratio. Under the Prior Credit Agreements at
September 27, 1997, the Company was paying interest on the term loan equal to
the lender's base rate plus 3.25%. The term loan has a maturity date of July
31, 2000.
The outstanding balance of the term loan as of the refinancing date was
$4,179,000. The $3,321,000 incremental cash proceeds of the replacement term
loan over the outstanding balance of the prior term loan will be used for
working capital purposes, primarily to reduce accounts payable to vendors. The
balance sheet as of September 27, 1997, reflects the current and long term
portion payable under the Replacement Credit Agreements. The Company's
obligations under these agreements continue to be secured by substantially all
of its assets.
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PART 1
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto. All forward looking statements
contained in the following discussion and analysis and elsewhere in this report
are qualified in their entirety by the cautionary statement appearing at the
end of the discussion and analysis.
BANK REFINANCING
On October 7, 1997, the Company restructured its bank agreements ("Prior
Credit Agreements") via amendment ("Replacement Credit Agreements"). The
amendment was effective as of June 28, 1997. The Replacement Credit
Agreements resulted in $3,321,000 of incremental cash proceeds over the
outstanding balance of the Prior Credit Agreements. The proceeds will be used
for working capital purposes, primarily to reduce accounts payable to vendors.
The Replacement Credit Agreements provide a lower interest rate than the Prior
Credit Agreements.
RESULTS OF OPERATIONS
Operations for the first quarter of fiscal 1998 resulted in net income of
$117,000. Operating results for the first quarter of fiscal 1997 were a loss
of $584,000. The prior fiscal year's operating results included a pretax
restructuring charge of $1,200,000, which had an after tax effect of $800,000.
The restructuring charge resulted from the closure of the Company's California
manufacturing facility and the transfer of the manufacturing operations
formerly conducted at that location to its two remaining manufacturing
facilities. This restructuring was implemented to reduce the Company's
operating break-even point.
Net sales of $24,341,000 for the first quarter of fiscal 1998 declined
slightly from net sales of $24,481,000 for the first quarter of fiscal 1997,
but increased $5,032,000 or 26.1% over net sales of the fourth quarter of
fiscal 1997. Unit sales for the first quarter of the current fiscal year were
7.8% lower than unit sales of the same period in fiscal 1997. One-third of the
unit decline was due to the loss of two customers with the remaining decline
attributable to a general decline in customer demand. The decline in unit
sales did not translate into a similar decline in net sales dollars because of
two factors. The current fiscal quarter had a greater percentage of higher-
dollar, electrical product sales than the same period in fiscal 1997. Also,
customer returns as a percentage of gross sales were lower in the current first
quarter compared to the same period in fiscal 1997. Customer returns are for
re-usable "cores" (our basic raw material), warranty and stock adjustments
received in the normal course of business. These returns are deducted from
gross sales in calculating net sales. Gross sales declined 3.8% for the
comparative 1998 and 1997 first quarter periods.
Gross margin as a percentage of net sales was 22.6% in the first quarter
of fiscal 1998 compared to 22.3% for the same period last fiscal year.
Increased cash requirements created by the closure of the Company's California
manufacturing facility in fiscal 1997, resulted in an increase in cost of goods
sold in excess of $400,000 during the first quarter of fiscal 1998 for
materials and labor. Due to cash constraints, the Company lengthened payment
terms with suppliers of component parts and cores which resulted in the Company
paying premium prices or incurring additional freight charges for shorter
delivery schedules. Labor costs per unit produced also increased during the
period due to inefficiencies and overtime premium expenses, primarily related
to the significant increase in customer demand during the first quarter.
Selling, general and administrative expenses in the first quarter of
fiscal 1998 of $4,745,000 or 19.5% of net sales, increased $92,000 compared to
the same period in the prior fiscal year with expenses of $4,652,000, or 19.0%
of net sales. The Company anticipated and achieved lower payroll and related
costs due to its consolidation of manufacturing operations. However,
additional non-payroll costs were incurred in the current quarter. In the
first quarter of fiscal 1998, $136,000 was incurred related to the issuance of
new electrical and clutch product catalogs and $63,000 was incurred related to
acquisition costs for new customers. The increased selling, general and
administrative expenses in the current fiscal year compared to the first
quarter of fiscal 1997 are also due to a $210,000 one-time benefit related to
the cost of employee benefits included in fiscal 1997.
Interest expense in the current fiscal year increased approximately
$100,000 or 19% over the corresponding period in fiscal 1997. The higher
interest expense in the current fiscal quarter is due to higher interest rates
and a higher average outstanding borrowing balance in the current fiscal year.
The Replacement Credit Agreements have a favorable interest rate structure
compared to the Prior Credit Agreements and should result in lower interest
rates in future periods.
CAPITAL RESOURCES
Net cash of $2,142,000 was provided by operating activities during the
three months ended September 27, 1997, compared to net cash provided by
operations of $3,148,000 at the end of the first quarter of the prior fiscal
year. Cash provided in the current fiscal period was primarily due to the
increase in trade payables. Trade payables increased $5,135,000 during the
three months ended September 27, 1997, due to the higher level of purchasing
required to meet production demand in the first quarter of fiscal 1998 and also
due to the lengthening of payment terms to the Company's vendors. An increase
in accounts receivable of $2,657,000 and increase in inventory of $765,000 used
cash from operations during the first quarter of fiscal 1998. Net cash
provided by operations in the first quarter of fiscal 1997 was primarily due to
the decrease in accounts receivable of $3,085,000 and the increase in other
liabilities of $1,008,000, offset by an increase in inventory of $1,058,000.
Net cash was used in investing activities of $105,000 and $156,000 as of
the end of the first quarter of fiscal 1998 and 1997, respectively. Cash of
$1,726,000 and $3,275,000 was used in financing activities, primarily to
reduce the Company's advances under its revolving line of credit, as of the end
of the first quarter of fiscal 1998 and 1997, respectively.
The Company's Prior Credit Agreements, at September 27, 1997, consisted of
a term loan in the original principal amount of $9 million and a revolving line
of credit with a principal amount of up to $20 million. On October 7, 1997,
the Company restructured the Prior Credit Agreements via an amendment effective
as of June 28, 1997. The Replacement Credit Agreements consist of a
replacement $7,500,000 term loan and continuation of the $20 million revolving
line of credit. The Company's primary lender issued a one-third participation
to a financial credit institution (the "Replacement Lenders") to replace the
prior participant.
Under the Replacement Credit Agreements, as in the Prior Credit
Agreements, amounts available to the Company under the revolving line of credit
are subject to a borrowing base formula based upon certain percentages of the
Company's accounts receivable and inventories. The interest rate on amounts
outstanding under the line will change depending upon the achieved debt service
coverage ratio and can range from the lender's base rate to 1.50% over the
lender's base rate, as compared to rates at September 27, 1997 under the Prior
Credit Agreements of the lender's base rate plus 3%. The revolving credit loan
maturity date is July 31, 2000.
Similarly, the interest rate on the replacement term loan on a given date
can range from 0.25% to 1.75% over the lender's base rate depending upon the
achieved debt service coverage ratio. Under the Prior Credit Agreements at
September 27, 1997, the Company was paying interest on the term loan equal to
the lender's base rate plus 3.25%. The term loan has a maturity date of July
31, 2000.
The outstanding balance of the term loan as of the refinancing date was
$4,179,000. The $3,321,000 incremental cash proceeds of the replacement term
loan over the outstanding balance of the prior term loan will be used for
working capital purposes, primarily to reduce accounts payable to vendors. The
balance sheet as of September 27, 1997, reflects the current and long term
portion payable under the Replacement Credit Agreements. The Company's
obligations under these agreements continue to be secured by substantially all
of its assets.
Both the Prior Credit Agreements and the Replacement Credit Agreements
contain certain provisions and covenants which, among other things, restrict
the amount of future indebtedness, amount of cash dividends and capital
expenditures and require the Company to maintain levels of minimum
profitability, tangible net worth, debt service coverage and liabilities to
worth ratios. Certain of these covenants were modified in the Replacement
Credit Agreements.
The Company believes that based upon its current operating forecast for
fiscal 1998, its existing cash balance and cash generated from operations
combined with its borrowing ability under its financing agreements, the Company
will have sufficient funds to meet its cash requirements for operations and
other obligations over the next twelve months.
OUTLOOK
Consolidation of the Company's production capacity and the streamlining of
administrative functions has been a key focus in the past fiscal year. These
efforts were necessary to reduce operating costs. The Company views its
ability to achieve profitable operations as primarily dependent on sales
volume. The Company has prioritized its efforts to identify and obtain new
sales opportunities. During the latter part of the first quarter of fiscal
1998, the Company has seen growth in its Canadian customer base, as well as
additional business in the U.S. primarily as a result of merger and acquisition
activity by its customers. However, large swings in the Company's quarterly
sales, the timing of customer's returns and the mix of products sold in a given
period are factors that can adversely impact the gross margin achieved on
sales.
Sales during the month of October, while higher than the previous fiscal
year's October sales, were lower than expected. Higher than anticipated
customers returns were a contributing factor.
However, it is uncertain at this time if the lower sales in the month of
October are indicative of the Company's performance for its second quarter of
fiscal 1998.
CAUTIONARY STATEMENT
All statements in the foregoing discussion and analysis which are not
historical fact are forward looking statements. In connection with the "Safe
Harbor" provisions of the private Securities
Litigation Reform Act of 1995, the Company is providing the following
cautionary statement to identify some (but not necessarily all) of the
important factors that could cause its actual results to differ
materially from those anticipated in any forward looking statements made in
this report or otherwise by or on behalf of the Company.
Actual results of the Company may differ from those anticipated in any
forward looking statement made by or on behalf of the Company due to the
following factors, among other risks and
uncertainties affecting the Company's business: lack of availability to the
Company of adequate funding sources and cash from operations; reduced product
demand and industry over-capacity; a change in product sales mix between
electrical or mechanical products; the loss of or a material reduction in
orders from either of the Company's two largest customers or other material
loss of business; month-to-month volatility in sales volumes or customer
returns which can result in additional labor and operating costs; new business
acquisition costs, unseasonably mild weather patterns, the impact of inflation,
and the various other factors identified in the discussion appearing under the
heading "Outlook" above and elsewhere in this report.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
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PART II OTHER INFORMATION
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ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
None.
ITEM 3. Default upon Senior
Securities.
None.
ITEM 4. Submission of Matters to a
Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form
8-K.
A. Exhibits
Exhibit 27 Financial Data Schedule Page 14
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ARROW AUTOMOTIVE INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
(Registrant)
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November 10, 1997 /s/ Jim L. Osment
Jim L. Osment
President and Chief Executive Officer
November 10, 1997 /s/ James F. Fagan
James F. Fagan
Executive Vice President, Treasurer
and Chief Financial Officer
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<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet and statement of operations, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> SEP-27-1997
<CASH> 551
<SECURITIES> 0
<RECEIVABLES> 15,757
<ALLOWANCES> 561
<INVENTORY> 31,685
<CURRENT-ASSETS> 49,061
<PP&E> 34,027
<DEPRECIATION> 22,626
<TOTAL-ASSETS> 62,944
<CURRENT-LIABILITIES> 22,905
<BONDS> 16,478
0
0
<COMMON> 297
<OTHER-SE> 19,864
<TOTAL-LIABILITY-AND-EQUITY> 62,944
<SALES> 24,341
<TOTAL-REVENUES> 24,341
<CGS> 18,831
<TOTAL-COSTS> 18,831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 648
<INCOME-PRETAX> 117
<INCOME-TAX> 0
<INCOME-CONTINUING> 117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
