UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
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: 1-4433
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ARMATRON INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1052250
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Main Street, Melrose MA 02176
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 321-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$1 Par Value
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 requirement for the past 90 days. Yes X No .
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under
a plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the Registrant's common stock outstanding on January
31, 1999 was 2,459,749.
ARMATRON INTERNATIONAL, INC.
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File No. 1-4433
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PAGE(S)
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
- ------ --------------------
Balance Sheet, December 31, 1998 and 1997 September 30, 1998 3
Consolidated Condensed Statements of Operations for the three
months ended December 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the three
months ended December 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6 - 12
Item 2
- ------ Management's Discussion and Analysis of Financial Condition and
Results of Operations 13 - 18
Item 3
- ------ Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 6b
- ------- Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
ARMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997, and September 30, 1998
<TABLE>
<CAPTION>
(Unaudited) (Audited)
December 31, September 30,
---------------------------- -------------
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,413,000 $ 1,455,000 $ 2,677,000
Trade accounts receivable, net 963,000 967,000 1,799,000
Inventories 2,082,000 2,933,000 2,088,000
Deferred taxes 36,000 113,000 37,000
Prepaid and other current assets 343,000 255,000 141,000
---------------------------------------------
Total Current Assets 5,837,000 5,723,000 6,742,000
Property and equipment, net 418,000 564,000 449,000
Other assets 139,000 107,000 139,000
---------------------------------------------
Total Assets $ 6,394,000 $ 6,394,000 $ 7,330,000
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable $ 535,000 $ 601,000 $ 802,000
Other current liabilities 839,000 777,000 925,000
Interest payable to related parties 1,515,000 1,037,000 1,395,000
Current portion under capital lease obligations 21,000 18,000 21,000
---------------------------------------------
Total Current Liabilities 2,910,000 2,433,000 3,143,000
---------------------------------------------
Long-term debt, related parties 4,715,000 4,715,000 4,715,000
---------------------------------------------
Long-term capital lease obligations, net of current portion 6,000 26,000 10,000
---------------------------------------------
Deferred rent, net of current portion 14,000 33,000 18,000
---------------------------------------------
Stockholders' Equity (Deficiency):
Common stock, par value $1 per share, 6,000,000 shares
authorized; 2,606,481 shares issued at December 31,
1998 and 1997 and September 30, 1998 2,606,000 2,606,000 2,606,000
Additional paid-in capital 6,770,000 6,770,000 6,770,000
Accumulated deficit (10,241,000) (9,803,000) (9,546,000)
---------------------------------------------
(865,000) (427,000) (170,000)
Less: Treasury stock at cost - 146,732 at December 31, 1998,
1997 and September 30, 1998 386,000 386,000 386,000
---------------------------------------------
Total Stockholders' Equity (Deficiency) (1,251,000) (813,000) (556,000)
---------------------------------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 6,394,000 $ 6,394,000 $ 7,330,000
=============================================
</TABLE>
The accompanying notes are an integral part of
the consolidated condensed financial statements.
ARMATRON INTERNATIONAL, INC.
Statements of Consolidated Operations
for the Three Months ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Net sales $1,458,000 $1,215,000
Cost of products sold 1,570,000 1,399,000
Selling, general and administrative expenses 487,000 461,000
Other income (expense):
Interest expense-third parties (7,000) (9,000)
Interest expense-related parties (120,000) (120,000)
Interest income 31,000 18,000
-------------------------
Other income (expense), net (96,000) (111,000)
-------------------------
Loss before income taxes (695,000) (756,000)
- -
Provision for income taxes
-------------------------
Net loss $ (695,000) $ (756,000)
=========================
Net loss per share of common stock $(.28) $(.31)
=========================
Weighted average number of common
shares outstanding 2,459,749 2,459,749
=========================
</TABLE>
The accompanying notes are an integral part of
the consolidated condensed financial statements.
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Statements of Cash Flows
for the Three Months ended December 31, 1998 and 1997
<TABLE>
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(Unaudited)
1998 1997
---- ----
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OPERATING ACTIVITIES
Net loss $ (695,000) $ (756,000)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 43,000 87,000
Amortization of deferred rent (4,000) (5,000)
Change in operating assets and liabilities 408,000 1,069,000
--------------------------
Net cash flow from (used for) operating activities (248,000) 395,000
--------------------------
INVESTING ACTIVITIES
Payments for machinery and (12,000) (62,000)
--------------------------
Net cash flow from (used for) investing activities (12,000) (62,000)
--------------------------
FINANCING ACTIVITIES
Payments on capital lease obligations (4,000) (4,000)
--------------------------
Net cash flow from (used for) financing activities (4,000) (4,000)
--------------------------
Net increase (decrease) in cash and cash equivalents (264,000) 329,000
Cash and cash equivalents at beginning of period 2,677,000 1,126,000
--------------------------
Cash and cash equivalents at end of period $2,413,000 $1,455,000
==========================
</TABLE>
The accompanying notes are an integral part of
the consolidated condensed financial statements.
ARMATRON INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
1. Nature of Business
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. There are no intercompany sales
between segments.
Operations in the Consumer Products segment involve the manufacture and
distribution of its Flowtron Outdoor Products, which consists of insect
control devices including electronic bugkillers and biomisters,
environmental products including mulching leaf-eaters and compost bins, and
storage and handling products including plastic yard carts and plastic
storage sheds and doghouses which comprised 82%, 82% and 93% of the
Company's sales for the three months ended December 31, 1998 and 1997, and
for the year ended September 30, 1998. These products undergo periodic model
changes and product improvements. The Company distributes its consumer
products primarily to major retailers throughout the United States, with
some products distributed under customer labels. Substantially all of this
segment's sales and accounts receivable relates to business activities with
such retailers.
The Industrial Products segment manufactures electronic obstacle avoidance
systems for transportation and automotive applications. These systems are
marketed under the trademark "Echovision". Echovision devices monitor back
blind spots and side blind spots to detect objects and alert operators to
potential hidden hazards, and features intuitive audible warnings, visual
warnings, automatic activation, easy installation on any type vehicle and a
continuous system self-test.
2. Opinion of Management
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (including normal
recurring adjustments) necessary to present fairly the consolidated
financial position as of December 31, 1998 and 1997, and September 30, 1998,
and the consolidated statements of operations for the three months ended
December 31, 1998 and 1997 and the consolidated statements of cash flow for
the three months ended December 31, 1998 and 1997. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K, as
amended, for the year ended September 30, 1998. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. The year-end balance sheet data was derived from audited
financial statements, but does not include disclosures required by generally
accepted accounting principles. The accompanying unaudited, consolidated
condensed financial statements are not necessarily indicative of future
trends or the Company's operations for the entire year.
3. Revenue Recognition
Revenue from product sales is recognized at the time the products are
shipped. Following industry trade practice, the Company's Consumer Products
segment offers extended payment terms for delivery of seasonal items. Sales
terms for the Company's Industrial Products segment are 30 days net. A
provision is recorded for sales allowances and incentives related to volume
and program incentives offered to the Company's various customers.
4. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of less than three months to be cash equivalents. The
Company invests excess funds in short-term, interest-bearing United States
instruments. The Company has no requirements for compensating balances.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed Federally insured limits and in deposit accounts at its commercial
finance company. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
5. Property and Equipment
Property and equipment are stated at cost. Depreciation is computed based
upon the estimated useful lives of the various assets using the straight-
line method with annual rates of depreciation of 10 to 33-1/3%. Capitalized
tooling costs are amortized over three years. Leasehold improvements are
amortized over the lesser of the term of the lease or the estimated useful
life of the related assets. Tooling and molding costs are charged to a
deferred cost account as incurred, prepaid tooling, until the tool or mold
is completed. Upon completion the costs are transferred to a
property/equipment account. Maintenance and repairs are charged to
operations as incurred. Renewals and betterments that materially extend the
life of assets are capitalized and depreciated. Upon disposal, the asset
cost and related accumulated depreciation are removed from their respective
accounts. Any resulting gain or loss is reflected in earnings.
6. Use of Estimates
The presentation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
7. Market Risk
The Company is not subject to market risk associated with risk sensitive
instruments as the Company does not transact its sales in other than United
States dollars, does not invest in investments other than United States
instruments and has not entered into hedging transactions.
8. New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131 "Disclosure about Segments of an Enterprise and
Related Information." These pronouncements are effective for fiscal years
beginning after December 15, 1997. These new pronouncements did not have a
material effect on the Company's financial statements.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." This pronouncement does not have a
material impact on the Company's business or results of operations.
9. Year 2000 Date Conversion
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, forecast production needs and the timing of raw material
purchases, send invoices, or engage in similar normal activities.
The Company has completed the analysis and evaluation phase of its Year 2000
project and has determined that it will be required to modify or replace
significant portions of its hardware and software so that its computer
systems will properly recognize dates beyond December 31, 1999. The Company
has also begun the process of upgrading and modernizing its major
information systems, including its operating and financial systems. The
replacement systems will be Year 2000 compliant. The Company expects to
begin using its new systems during the second quarter of fiscal 1999. The
Company will utilize both internal and external resources to reprogram or
replace, and test the software for Year 2000 modifications. The Company
plans to complete its Year 2000 project no later than July 31, 1999. The
total cost of upgrading most of the Company's major operating and financial
systems, including the Year 2000 project, for fiscal years 1998 through
2000, is estimated at $100,000 and is being funded through operating cash
flows and leasing arrangements. Of the total project cost, approximately
$80,000 has been expended and is attributable to the purchase of new
software and hardware. The remaining $20,000 will be expensed as incurred.
There can be no assurance the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
The Company has been in communication with its major vendors to ensure
compatibility of systems. If such systems do not function properly the
Company could experience delays in receipt of its raw materials which would
result in delays in scheduled deliveries of shipments by the Company.
The Company expects to begin developing contingency plans to determine what
actions the Company will take if its trading partners are not Year 2000
compliant. The Company expects the contingency plan to be completed by the
end of the third quarter in fiscal 1999.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are 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. However, there can be no assurance that these estimates
will be achieved and actual results could differ materially from those
plans. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
and similar uncertainties.
10. Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts
receivable. If any of the Company's major customers fail to pay the Company
on a timely basis, it could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
export sales are not significant.
For the three months ended December 31, 1998, Sears, Roebuck and Co. and
Utilimaster Corporation accounted for approximately 28% and 12%,
respectively, of the Company's net sales. At December 31, 1998, Sears,
Roebuck and Co. and Utilimaster Corporation accounted for approximately 59%
and 8%, respectively, of the Company's trade accounts receivable balance.
For the year ended September 30, 1998, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 29% and 11%, respectively, of the
Company's net sales. At September 30, 1998, Sears, Roebuck and Co. and Home
Depot, Inc. accounted for approximately 44% and 2%, respectively, of the
Company's trade accounts receivable balance.
For the three months ended December 31, 1997, Sears, Roebuck and Co. and
Utilimaster Corporation accounted for approximately 24% and 17%,
respectively, of the Company's net sales. At December 31, 1997, Sears,
Roebuck and Co. and Utilimaster Corporation accounted for approximately 42%
and 9%, respectively, of the Company's trade accounts receivable balance.
11. Supplemental Cash Flow Information
The Company's cash payments for interest and income taxes for the three
months ended December 31, 1998 and 1997 were as follows:
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1998 1997
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<S> <C> <C>
Interest paid - related parties $ - $ -
Interest paid - third parties $7,000 $9,000
Income taxes paid $ - $ -
</TABLE>
12. Major Suppliers
The Company had purchased its plastic storage sheds, yard carts, compost
bins, and doghouses from one supplier. In July 1998, the Company
transferred its production molds for yard carts to a new supplier. In
November 1998, the Company transferred its production mold for compost bins
and storage sheds to the same new supplier. The new supplier has begun
production runs for the yard carts, storage sheds and compost bins and has
not experienced any significant difficulties in meeting scheduled
deliveries. The suppliers manufacture the products in accordance with the
Company's designs and specifications. The Company believes that other
suppliers could provide the required products although comparable terms may
not be realized. A change in suppliers could cause a delay in scheduled
deliveries of products to the Company's customers and a possible loss of
revenue, which would adversely affect the Company's results of operations.
13. Inventories
Inventories are stated on a first-in, first-out (FIFO) basis at the lower of
cost or market. Inventories consisted of the following at:
<TABLE>
<CAPTION>
(Unaudited)
December 31, (Audited)
------------------------- September 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Raw Material, primarily purchased
components $1,445,000 $1,924,000 $1,338,000
Work in Process 19,000 16,000 29,000
Finished Goods 618,000 993,000 721,000
-----------------------------------------
$2,082,000 $2,933,000 $2,088,000
=========================================
</TABLE>
14. Other Assets
Other assets consisted of the following at:
<TABLE>
<CAPTION>
(Unaudited)
December 31, (Audited)
--------------------- September 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Other receivable, net of current portion $ 33,000 -- $ 33,000
Note receivable - employee, due under
terms of an annual renewal note,
interest payable monthly at an
annual rate of 6%, secured by a
second mortgage 100,000 100,000 100,000
Other 6,000 7,000 6,000
------------------------------------
$139,000 $107,000 $139,000
====================================
</TABLE>
15. Other Current Liabilities
Other current liabilities consisted of the following at:
<TABLE>
<CAPTION>
(Unaudited)
December 31, (Audited)
--------------------- September 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Retirement plan $313,000 $331,000 $313,000
Salaries, commissions and benefits 15,000 55,000 62,000
Sales allowances and incentives 71,000 152,000 109,000
Professional fees 194,000 90,000 205,000
Warranty costs 61,000 40,000 57,000
Advertising costs 100,000 65,000 103,000
Other 85,000 44,000 76,000
------------------------------------
$839,000 $777,000 $925,000
====================================
</TABLE>
16. Debt
Line of Credit with Related Parties
The Company has a $7,000,000 line of credit with a realty trust operated for
the benefit of the Company's principal shareholders. This line of credit,
with interest at 10%, requires monthly payments of interest only, and is
collateralized by all assets of the Company. Such collateral is subordinate
to the revolving line of credit agreement with the finance company. In
October 1998, the Company renewed this line of credit with the realty trust
operated for the benefit of the Company's principal shareholders under the
same terms and conditions and extended the maturity date to October 1, 1999.
The Company had $4,715,000 outstanding under this line of credit at December
31, 1998 and 1997, and September 30, 1998. Repayment of this line of credit
is subordinate to the repayment of any and all balances outstanding on the
revolving line of credit from a commercial finance company, which is
further, described below. At December 31, 1998, interest payments of
$1,515,000 associated with this line were in arrears for the period November
1, 1995 to December 31, 1998. On November 24, 1998, the Company received a
waiver for the covenant violation as to the interest payments. The waiver
extends the due date as to the interest payments until September 30, 1999.
Note Payable
The Company has a revolving line of credit agreement with a commercial
finance company, Congress Financial Corporation, which permits combined
borrowings up to $3,500,000 in cash and letters of credit. This credit
agreement is collateralized by all assets of the Company and expires in
December 1999. The terms of this agreement include a borrowing limit which
fluctuates depending on the levels of accounts receivable and inventory
which collateralize the borrowings. The agreement contains various
covenants pertaining to maintenance of working capital, net worth,
restrictions on dividend distributions and other conditions. Interest on
amounts outstanding is payable on a monthly basis at an annual rate of 1
3/4% over the commercial base rate. The commercial base rate was 8.0% at
December 31, 1998. At December 31, 1998, the Company did not have
borrowings outstanding other than letters of credit amounting to
approximately $213,000. Pursuant to the borrowing formula, under this
credit agreement, approximately $930,000 was available.
17. Commitments and Contingencies
At December 31, 1998, the Company has commitments of $163,000 for the
purchase of capital expenditures, primarily tooling and dies.
In January 1991, the California Department of Health Services issued a
Corrective Action Order (CAO) against the Company and a former subsidiary.
The CAO requires the Company and a former subsidiary to comply with a
Cleanup and Abatement Order that had been issued in 1990 against the Company
for soil contamination at the site of the former subsidiary. To date, no
determination has been made with regard to the extent of any environmental
damage and who may be liable. The Company does not believe, based on the
information available at this time, that the outcome of this matter will
have a material adverse effect on its financial position or results of
operations.
An action was filed in U.S. District Court, Central District of California
in late 1996 relating to the foreign arbitration award described below. The
Company was first joined as a party by the first amended petition filed on
March 3, 1997. The second amended petition was filed on June 27, 1997.
The action seeks confirmation and enforcement of a foreign arbitration award
in favor of Alsthom, currently and formerly Chantiers de L'Atlantique
("Alsthom"), and Assurances Generales de France ("AGF") (collectively
"Petitioners") against Respondents J.C. Carter Company, Inc. ("JCC III"),
the Company, Armatron-JCC, Inc., formerly known as J.C. Carter Company, Inc.
("JCC II"), a former subsidiary of the Company, and ITT Corporation and ITT
Industries, Inc. (collectively "ITT"). The arbitration related to certain
cryogenic cargo pumps supplied in the 1970's by the J.C. Carter Company
Division of ITT ("JCC I") to Alsthom, which installed the pumps in two
liquid natural gas tanker ships, the Mourad Didouche and the Ramdane Abane.
The arbitration award was entered in favor of Alsthom and AGF, an insurer
subrogated to the rights of Alsthom, and against "J.C. Carter Company" or
"J.C. Carter Company, Inc." by the International Chamber of Commerce in
Paris in 1995. The amount of the award as to AGF is 62,431,000 French
francs ("FF") and as to Alsthom is 5,469,000 FF (an aggregate of
approximately $7 million U.S. dollars at December 31, 1998), both with
interest from January 30, 1993 at the "French official rate."
Petitioners' operative pleading in the legal action, its Second Amended
Petition, seeks confirmation of the award against JCC III and, in addition,
seeks its confirmation and enforcement against the other Respondents,
including the Company, on the theories of fraudulent conveyance, collateral
estoppel and virtual representation, judicial estoppel and equitable
estoppel, and alter ego and/or successor liability relating to events
transpiring from 1983 through the completion of the foreign arbitration
proceeding in 1997. In 1983, the Company and ITT were parties to an asset
sale transaction involving the business and assets of JCC I. JCC II, a now
inactive California corporation, was formed at that time for purpose of
acquiring the assets and certain liabilities of JCC I and ceased transacting
business after the 1987 asset sale transaction with JCC III.
The Company answered the Second Amended Petition denying any liability,
asserting various affirmative defenses and cross-claims against ITT for
contractual indemnity and for equitable indemnity. ITT and JCC III have
cross-claimed against the Company.
At the present time the Company is unable to determine the outcome of the
claims asserted by and against the Company in the legal action because the
case is still at an early stage of discovery and because of the existence of
disputed issues of fact bearing on the outcome of those claims. However,
there can be no assurance that the outcome to the proceedings will not have
an adverse effect on the financial condition of the Company.
In November 1998, the Company was advised that it had been named as a
defendant in a lawsuit brought by a consumer of one of the Company's
products. The consumer claims that the product caused personal injury and
other damages. The Company believes that it has valid defenses. The
Company has insurance coverage for such claims and accrued its insurance
deductible amount in fiscal 1998 to cover the estimated defense costs
associated with this matter.
18. Related Party Transactions
The Company paid approximately $15,000 for legal services during the three
months ended December 31, 1998 and 1997 to a law firm to which a Director of
the Company is a member.
As further described in Note 16, the Company has a $7,000,000 line of credit
arrangement from a realty trust operated for the benefit of the Company's
principal shareholders.
Item 2. Management's Discussion and Analysis of Financial Conditions and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron leaf-
eaters, bugkillers, yard carts, compost bins, biomisters, storage sheds and
doghouses which comprised 82%, 82% and 93% of the Company's sales for the
three months ended December 31, 1998 and 1997 and for the year ended
September 30, 1998, respectively. The Company distributes its consumer
products primarily to major retailers throughout the United States, with
some products distributed under customer labels. Substantially all of this
segment's sales and accounts receivable relates to business activities with
such retailers. The Industrial Products segment manufactures electronic
obstacle avoidance systems for transportation and automotive applications
and markets these systems under the trademark "Echovision". Production of
these systems began in fiscal 1996. There are no intercompany sales between
segments. For the three months ended December 31, 1998, Sears Roebuck and
Co. and Utilimaster Corporation accounted for approximately 28% and 12%,
respectively, of the Company's net sales. At December 31, 1998, Sears
Roebuck and Co. and Utilimaster Corporation accounted for approximately 59%
and 8%, respectively, of the Company's trade accounts receivable balance.
If any of the Company's major customers fail to pay the Company on a timely
basis, it could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company had purchased its
plastic storage sheds, yard carts, compost bins, and doghouses from one
supplier. In July 1998, the Company transferred its production molds for
its yard carts to another supplier and, in November 1998, the Company
transferred its production molds for its storage sheds and compost bins to
this new supplier. The new supplier is producing yard carts, storage sheds
and compost bins and has not experienced any significant difficulties in
meeting scheduled deliveries. The suppliers manufacture these products in
accordance with the Company's designs and specifications. The Company
believes that other suppliers could provide the required products although
comparable terms may not be realized. A change in suppliers could cause a
delay in scheduled deliveries of products to the Company's customers and a
possible loss of revenue, which would adversely affect the Company's results
of operations.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of the results of operations and
financial conditions and other sections of this report contain forward-
looking statements about its prospects for the future. Such statements are
subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Such risks and uncertainties
include, but are not limited to the following:
* The Company's consumer products business is cyclical and is affected
by weather and some of the same economic factors that affects the
consumer and lawn and garden industries generally, including interest
rates, the availability of financing and general economic conditions.
In addition, the lawn and garden products manufacturing business is
highly competitive. Actions of competitors, including changes in
pricing, or slowing demand for lawn and garden products due to general
or industry economic conditions or the amount of inclement weather
could result in decreased demand for the Company's products, lower
prices received or reduced utilization of plant facilities.
* Increased costs of raw materials can result in reduced margins, as can
higher transportation and shipping costs. Historically, the Company
has been able to pass some of the higher raw material and
transportation costs through to the customer. Should the Company be
unable to recover higher raw material and transportation costs from
price increases of its products, operating results could be adversely
affected.
* If progress in manufacturing of products is slower than anticipated or
if demand for products produced does not meet current expectations,
operating results could be adversely affected.
* If the Company is not successful in strengthening its relationship
with its customers, growing sales at targeted accounts, and expanding
geographically, operating results could be adversely affected.
* If the Company loses any of its major customers, operating results
could be adversely affected.
YEAR 2000 DATE CONVERSION
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, forecast production needs and the timing of raw material
purchases, send invoices, or engage in similar normal activities.
The Company has completed the analysis and evaluation phase of it Year 2000
project and has determined that it will be required to modify or replace
significant portions of its hardware and software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
has also begun the process of upgrading and modernizing its major
information systems, including its operating and financial systems. The
replacement systems will be Year 2000 compliant. The Company expects to
begin using its new systems during the second quarter of fiscal 1999. The
Company will utilize both internal and external resources to reprogram or
replace, and test the software for Year 2000 modifications. The Company
plans to complete its Year 2000 project no later than July 31, 1999. The
total cost of upgrading most of the Company's major operating and financial
systems, including the Year 2000 project, for fiscal years 1998 through
2000, is estimated at $100,000 and is being funded through operating cash
flows and leasing arrangements. Of the total project cost, approximately
$80,000 has been expended and is attributable to the purchase of new
software and hardware. The remaining $20,000 will be expensed as incurred.
There can be no assurance the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material advise effect on the Company.
The Company has been in communication with its major vendors to ensure
compatibility of systems. If such systems do not function properly the
Company could experience delays in receipt of its raw materials which would
result in delays in scheduled deliveries of shipments by the Company.
The Company expects to begin developing contingency plans to determine what
actions the Company will take if its trading partners are not Year 2000
compliant. The Company expects the contingency plan to be completed by the
end of the third quarter in fiscal 1999.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are 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. However, there can be no assurance that these estimates
will be achieved and actual results could differ materially from those
plans. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
including labor costs, raw material purchases and funding of accounts
receivable. Historically, the Company's sources of cash have been
borrowings from banks and finance companies and notes from related parties.
During the three months ended December 31, 1998, operating activities used
$248,000 of cash primarily due to an increase in prepaid and other current
assets of $202,000, a decrease in accounts payable of $267,000, and the net
loss of $695,000. The decrease in accounts receivable of $836,000 was
primarily due to management's focus on cash management during the three
months ended December 31, 1998. The increase in prepaid and other current
assets was primarily due to increased deposits for materials used in
production.
Other current liabilities increased $62,000 to $839,000 at December 31, 1998
as compared to $777,000 at December 31, 1997. The increase was primarily
due to an increase of approximately $104,000 in professional fees
attributable to estimated legal defense costs associated with product
liabilities, offset by a decrease of $81,000 for sales allowances and
incentives due to less incentives being offered by the Company during the
three months ended December 31, 1998 and an increase of $35,000 for
advertising costs.
The Company has a $3,500,000 revolving line of credit agreement with a
commercial finance company. This credit agreement is collateralized by all
assets of the Company and expires in December 1999. The terms of this
agreement include a borrowing limit which fluctuates depending on the levels
of accounts receivable and inventory which collateralize the borrowings.
The agreement contains various covenants pertaining to maintenance of
working capital, net worth and other conditions. Interest on amounts
outstanding is payable at 1 3/4% over the commercial base rate. The
commercial base rate was 8.0% at December 31, 1998. At December 31, 1998,
the Company did not have borrowings outstanding other than letters of credit
amounting to approximately $213,000. Pursuant to the borrowing formula,
under this credit agreement, approximately $930,000 was available.
The Company has a $7,000,000 line of credit with a realty trust operated for
the benefit of the Company's principal shareholders. This line of credit,
with interest at 10%, requires monthly payments of interest only, and is
collateralized by all assets of the Company. Such collateral is subordinate
to the revolving line of credit agreement with the finance company. The
Company had $4,715,000 outstanding under this line of credit at December 31,
1998 and 1997. Repayment of this line of credit is subordinate to the
repayment of any and all balances outstanding on the revolving line of
credit from the commercial finance company. At December 31, 1998, interest
payments of $1,515,000 associated with this line were in arrears for the
period November 1, 1995 to December 31, 1998. On November 24, 1998, the
Company received a waiver for the covenant violation as to the interest
payments. The waiver extends the due date as to the interest payments until
September 30, 1999.
Sales terms for the Industrial Products segment are 30 days net. Following
industry trade practice, the Consumer Products segment offers extended
payment terms for delivery of seasonal product items such as the bugkillers,
electric leaf-eater, biomister, compost bin, yard carts and storage sheds,
resulting in fluctuating requirements for working capital.
In January 1991, the California Department of Health Services issued a
corrective action order (CAO) against the Company and a former subsidiary to
comply with a Cleanup and Abatement order which had been issued in 1990.
The CAO requires the Company and a former subsidiary to comply with a
cleanup and abatement order that had been issued in 1990 against the Company
for soil contamination at the site of the former subsidiary. To date, no
determination has been made with regard to the extent of any environmental
damage and who may be liable. The Company does not believe, based upon the
information available at this time, that the outcome of this matter will
have a material adverse effect on its financial position or results of
operations.
An action was filed in U.S. District Court, Central District of California
in late 1996 relating to the foreign arbitration award described below. The
Company was first joined as a party by the first amended petition filed on
March 3, 1997. The second amended petition was filed on June 27, 1997.
The action seeks confirmation and enforcement of a foreign arbitration award
in favor of Alsthom, currently and formerly Chantiers de L'Atlantique
("Alsthom"), and Assurances Generales de France ("AGF") (collectively
"Petitioners") against Respondents J.C. Carter Company, Inc. ("JCC III"),
the Company, Armatron-JCC, Inc., formerly known as J.C. Carter Company, Inc.
("JCC II"), a former subsidiary of the Company, and ITT Corporation and ITT
Industries, Inc. (collectively "ITT"). The arbitration related to certain
cryogenic cargo pumps supplied in the 1970's by the J.C. Carter Company
Division of ITT ("JCC I") to Alsthom, which installed the pumps in two
liquid natural gas tanker ships, the Mourad Didouche and the Ramdane Abane.
The arbitration award was entered in favor of Alsthom and AGF, an insurer
subrogated to the rights of Alsthom, and against "J.C. Carter Company" or
"J.C. Carter Company, Inc." by the International Chamber of Commerce in
Paris in 1995. The amount of the award as to AGF is 62,431,000 French
francs ("FF") and as to Alsthom is 5,469,000 FF (an aggregate of
approximately $7 million U.S. dollars at December 31, 1998), both with
interest from January 30, 1993 at the "French official rate."
Petitioners' operative pleading in the legal action, its Second Amended
Petition, seeks confirmation of the award against JCC III and, in addition,
seeks its confirmation and enforcement against the other Respondents,
including the Company, on the theories of fraudulent conveyance, collateral
estoppel and virtual representation, judicial estoppel and equitable
estoppel, and alter ego and/or successor liability relating to events
transpiring from 1983 through the completion of the foreign arbitration
proceeding in 1997. In 1983, the Company and ITT were parties to an asset
sale transaction involving the business and assets of JCC I. JCC II, a now
inactive California corporation, was formed at that time for purpose of
acquiring the assets and certain liabilities of JCC I and ceased transacting
business after the 1987 asset sale transaction with JCC III.
The Company answered the Second Amended Petition denying any liability,
asserting various affirmative defenses and cross-claims against ITT for
contractual indemnity and for equitable indemnity. ITT and JCC III have
cross-claimed against the Company.
At the present time the Company is unable to determine the outcome of the
claims asserted by and against the Company in the legal action because the
case is still at an early stage of discovery and because of the existence of
disputed issues of fact bearing on the outcome of those claims. However,
there can be no assurance that the outcome to the proceedings will not have
an adverse effect on the financial condition of the Company.
In November 1998, the Company was advised that it had been named as a
defendant in a lawsuit brought by a consumer of one of the Company's
products. The consumer claims that the product caused personal injury and
other damages. The Company believes that it has valid defenses. The
Company has insurance coverage for such claims and has accrued its insurance
deductible amount in fiscal 1998 to cover the estimated defense costs
associated with this matter.
During the three months ended December 31, 1998, the Company made cash
investments of $12,000 in capital expenditures primarily for tooling and
dies used in production and manufacturing equipment. At December 31,
1998, the Company has commitments of approximately $163,000 for the purchase
of capital expenditures, primarily for tooling and dies.
The Company believes that its present working capital, credit arrangements
with a commercial finance company and related parties, and other sources of
financing will be sufficient to finance its seasonal borrowing needs,
operations and investment in capital expenditures in fiscal 1999. Other
sources of financing, provided by the Company's principal stockholder, are
available to finance any working capital deficiencies.
RESULTS OF OPERATIONS
The results of consolidated operations for the three months ended December
31, 1998 resulted in a net loss of $695,000, or $.28 per share, as compared
with a net loss of $756,000, or $.31 per share, for the three months ended
December 31, 1997.
Sales increased $243,000, or 20.0%, to $1,458,000 for the three months ended
December 31, 1998, as compared to $1,215,000 for the corresponding period in
the previous year. The increase in sales was attributable to a 19.9%
increase in sales of Consumer Products and a 20.7% increase in sales of
Industrial Products.
Operating profit is the result of deducting operating expenses excluding
interest expense, general corporate expenses, and income taxes from total
revenue.
Sales and operating loss for the Consumer Products segment for the three
months ended December 31, 1998 were approximately $1,201,000 and $435,000,
respectively, as compared to $1,002,000 and $472,000, respectively, for the
three months ended December 31, 1997. Sales increased $199,000, or 19.9%,
primarily due to increased sales of leafeaters and yard carts. Product
lines within the Consumer Products segment are subject to seasonal
fluctuations, with most shipments occurring in the spring and summer
seasons. The Company anticipates that sales of the Consumer Products
segment will continue at approximately the same levels as those in fiscal
1998.
Sales and operating profit for the Industrial Products segment for the three
months ended December 31, 1998 were $257,000 and $43,000, respectively, as
compared to sales of $213,000 and operating loss of $3,000, for the three
months ended December 31, 1997. The increase in net sales for the
Industrial Products segment of $44,000, or 20.7%, was primarily due to
additional volume of shipments of the Company's Echovision systems to an
existing customer.
Selling, general and administrative expenses increased $26,000, or 5.6%, to
$487,000 for the three months ended December 31, 1998, as compared to
$461,000 for the three months ended December 31, 1997 primarily due to
increased sales volume. Selling, general and administrative expenses, as a
percentage of sales, were 33.4% during the three months ended December 31,
1998 as compared to 37.9% during the three months ended December 31, 1997.
The decrease in the percentages was due to the Company's cost containment
efforts.
Additional tax benefits from losses on operations during the three months
ended December 31, 1998 were offset by changes to the related valuation
allowance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company is not subject to market risk associated with risk sensitive
instruments as the Company does not transact its sales in other than United
States dollars, does not invest in investments other than United States
instruments and has not entered into hedging transactions.
Item 6b. Reports on Form 8-K
- ------------------------------
No reports were filed on Form 8-K during the quarter ended December 31, 1998
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, thereunto duly authorized.
ARMATRON INTERNATIONAL, INC.
February 12, 1999 By: /s/ Charles J. Housman
----------------------
Charles J. Housman
Chairman of the Board,
President and Director
Chief Executive, Financial
and Accounting Officer
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