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 June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-21922
ARROW TRANSPORTATION CO.
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(Exact name of Registrant as specified in its charter)
Oregon 93-1103182
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10145 N. Portland Road, Portland, Oregon 97203
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 286-3661
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.
Class Outstanding at June 30, 1997
- -------------------------- ----------------------------
Common stock, no par value 4,261,005 Shares
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ARROW TRANSPORTATION CO. AND SUBSIDIARY
Form 10-Q -- For the Quarter Ended June 30, 1997
INDEX
Part I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
a) Consolidated Balance Sheets --June 30, 1997 and 3
December 31, 1996
b) Consolidated Statements of Operations -- Three and Six Months
Ended June 30, 1997 and June 30, 1996 4
c) Consolidated Statements of Shareholders' Equity (Deficiency) --
December 31, 1996 and June 30, 1997 5
d) Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1997 and June 30, 1996 6
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Balance Sheets
(Amounts in thousands)
June 30,
1997 December 31,
(Unaudited) 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 47 $ 64
Accounts receivable, net 2, 940 2,758
Other receivables 35 52
Repair parts and supplies 227 236
Prepaid expenses and other 829 744
Prepaid tires 479 483
Deferred income taxes 58 58
----------- -----------
Total current assets 4,615 4,395
Equipment and property, net 10,757 11,877
Other assets 56 60
Deferred income taxes 307 307
----------- -----------
Total assets $ 15,735 $ 16,639
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Line of credit borrowings $ 1,729 $ 1,915
Note payable to shareholder 70 -
Accounts payable 2,663 1,673
Accrued expenses 1,912 2,034
Current portion of debt and capital leases 2,646 2,140
----------- -----------
Total current liabilities 9,020 7,762
Long-term debt 3,854 4,280
Obligations under capital leases 3,002 3,534
Claims and contingencies - -
Shareholders' equity:
Preferred stock, $5.00 par value (authorized 500,000
shares; issued and outstanding 50,000 shares) 250 250
Common stock, no par value (authorized 10,000,000
shares; issued and outstanding 4,261,005 in 1997
and 4,191,366 in 1996) 4,934 4,909
Preferred stock dividend to be distributed 1 -
Accumulated deficit (5,326) (4,096)
----------- -----------
Total shareholders' (deficiency) equity (141) 1,063
----------- -----------
Total liabilities and
shareholders'(deficiency) equity $ 15,735 $ 16,639
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $ 6,438 $ 7,419 $ 12,631 $ 14,158
--------- --------- --------- ---------
Compensation 3,749 4,173 7,311 8,140
Supplies and maintenance 568 831 1,297 1,647
Fuel and fuel taxes 553 692 1,104 1,293
Depreciation and amortization 494 616 993 1,229
Taxes and licenses 280 274 523 527
Insurance and claims 217 285 445 489
Selling and administration 101 379 398 683
Rent and purchased transportation 354 344 699 606
Communication and utilities 71 123 188 267
--------- --------- --------- ---------
Total operating expenses 6,387 7,717 12,958 14,881
--------- --------- --------- ---------
Income (loss) from operations 51 (298) (327) (723)
Interest expense 222 280 447 582
Non-operating income (7) (33) (157) (130)
--------- --------- --------- ---------
Loss before income taxes and extraordinary items (164) (545) (617) (1,175)
Income tax benefit - (210) - (453)
--------- --------- --------- ---------
Loss before extraordinary items (164) (335) (617) (722)
Extraordinary items (612) - (612) -
--------- --------- --------- ---------
Net loss $ (776) $ (335) $ (1,229) $ (722)
========= ========= ========= =========
Loss per share:
Loss before extraordinary items $ (.04) $ (.08) $ (.15) $ (.17)
Extraordinary items (.14) - (.14) -
--------- --------- --------- ---------
Net loss $ (.18) $ (.08) $ (.29) $ (.17)
========= ========= ========== ==========
Shares used in per share calculation 4,247 4,161 4,228 4,154
</TABLE>
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity (Deficiency)
(Unaudited)
(Amounts in thousands)
Preferred
Stock Total
Preferred Common Dividend to Accumulated Shareholders'
Stock Stock Be Distributed Deficit Equity (Deficiency)
--------- --------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 250 $ 4,909 $ - $ (4,096) $ 1,063
Issuance of stock for ESPP (1) - 25 - - 25
Preferred stock dividend - - 1 (1) -
Net loss - - - (1,229) (1,229)
--------- --------- -------------- ----------- -------------------
Balance, June 30, 1997 $ 250 $ 4,934 $ 1 $ (5,326) $ (141)
========= ========= ============== =========== ===================
</TABLE>
(1) ESPP is the Employee Stock Purchase Plan
See notes to consolidated financial statements.
5
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<TABLE>
<CAPTION>
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Six Months Ended
----------------------------------
June 30, June 30,
Cash flows from operating activities: 1997 1996
------------ ------------
<S> <C> <C>
Net loss $ (1,229) $ (722)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 993 1,246
Deferred income taxes 0 (453)
Extraordinary items 612 -
Gain on sale of equipment, net (48) -
Changes in operating assets and liabilities:
Receivables (165) (624)
Repair parts and supplies 9 6
Prepaid expenses and other (85) 219
Prepaid tires - 159
Accounts payable and accrued expenses 881 21
Other 3 (32)
------------ ------------
Net cash provided by (used in) operating activities 971 (180)
------------ ------------
Cash flows from investing activities:
Capital expenditures (40) (68)
Proceeds from sale of assets held for sale and equipment 219 662
------------ ------------
Net cash provided by investing activities 179 594
------------ ------------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts (625) 273
Net (payment) borrowing on line of credit (186) 771
Net proceeds from shareholder note 70 -
Proceeds from employee stock purchase plan 25 19
Repayments:
Long-term debt (232) (696)
Capital lease obligations (219) (1,033)
Issuance of preferred stock - 250
------------ ------------
Net cash used in financing activities (1,167) (416)
------------ ------------
Net decrease in cash (17) (2)
------------ ------------
Cash at beginning of period 64 33
------------ ------------
Cash at end of period $ 47 $ 31
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the six months for interest $ 352 $ 520
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Reorganization
On June 2, 1997, Arrow's wholly-owned operating subsidiary, Arrow Transportation
Co. of Delaware, filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States District Court for the
District of Oregon ("the Court"). The company is operating as a
debtor-in-possession subject to the jurisdiction of the Court.
(2) Financial Statements
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. The
accompanying unaudited consolidated financial statements reflect in the opinion
of management all adjustments considered necessary for a fair presentation as of
June 30, 1997.
Bankruptcy laws provide that interest is not payable to a lender where that
lender is undersecured, so the Company has made estimates of the value of
certain of its fixed assets which are encumbered with loans and capital leases.
In those instances where the Company estimates that the lender is undersecured,
interest expense has not been accrued for the post bankruptcy filing period.
Detailed appraisals of assets, future court decisions and/or future stipulated
agreements with the respective lenders and lessors may in the future cause these
estimates to be altered and the filing of a plan of reorganization may also
result in the restatement of the related indebtedness.
(3) Extraordinary Items
Extraordinary items include a $500,000 charge to reflect a summary judgement
ruling by the District Court Judge in favor of Sal N. Cincotta, the former CEO
for Arrow, in his action for breach of an employment agreement. The other
$112,000 of extraordinary items primarily represents professional fees incurred
due to the Company's bankruptcy filing (see Note 1).
(4) Employee Stock Purchase Plan
During the three months ended June 30 1997, the Company suspended issuance of
stock under the Employee Stock Purchase Plan.
(5) Credit Arrangement
On June 2, 1997, the Company entered an agreement to modify and extend its
current credit arrangement during the Company's reorganization. The arrangement
provides for a line of credit at an interest rate of 1.5% over the lender's
reference rate (8.5% at June 30, 1997). Maximum borrowing under the line is
limited to the lesser of $3,000,000 or 85% of eligible accounts receivable which
were $2,586,000 at June 30, 1997. The unused portion of the line of credit was
$469,000 at June 30, 1997.
7
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The Company's authority to borrow money under the arrangement terminates upon
the earliest of November 15, 1997, the effective date of a plan of
reorganization confirmed in the Company's Chapter 11 case, the conversion of the
Company's case to a case under Chapter 7 of the Unites States Bankruptcy Code,
the appointment of a trustee for the Company, or the occurrence of an event of
default under the terms of the arrangement.
(6) Shareholders' (Deficiency) Equity
A temporary account, "Preferred Stock Dividend to Be Distributed", has been
established to reflect an annual stock dividend payable pursuant to the
Preferred Stock Purchase and Option Agreement ("the Agreement"). When the 3,500
shares are distributed, the temporary account will be eliminated and permanent
capital accounts will be adjusted.
(7) Subsequent Events
During July 1997, the Court authorized the Company to make reduced monthly
payments under equipment financing agreements with four of its creditors while
the Company is reorganizing. The Company's financing agreement with another
creditor was rejected by the Court effective July 1, 1997 and nine tractors were
returned to such creditor. The Company has not yet received authorization to
make payments under equipment financing agreements with two other creditors.
(8) Claims and Contingencies
The Company is party to three potentially material actual or pending
proceedings. All pre-bankruptcy litigation and claims have been automatically
stayed under Section 362 of the U.S. Bankruptcy Code. All pre-bankruptcy
litigation and claims will be addressed by the Bankruptcy Court in due course.
(a) The Washington Department of Ecology ("Ecology") has named the Company as a
potentially responsible party and served an administrative enforcement order on
the Company and 16 other companies associated with the Yakima Railroad Area
("YRRA") in Yakima, Washington. Ecology alleges in the order that all 17 of the
companies have some connection with the presence of the chemical
Perchloroethylene ("PCE") in the ground water underlying the YRRA. The Company
used carbon filtration to treat wash water from its trucks.
The spent carbon was taken by an independent transporter to the Cameron-Yakima
facility located within the YRRA. This transporter directly contracted with the
Cameron-Yakima recycling facility. Ecology claims that Cameron-Yakima is a
source of PCE contamination, along with other facilities located within the
YRRA. The principal parties with respect to the enforcement order are Ecology,
the Company and the 16 other companies that were served with the order. There
are many other parties, not named on the order, who used Cameron-Yakima and are
potentially liable for contamination at the site. The order directs the
respondent parties to develop and implement a remedial investigation/feasibility
study ("RI/FS") of the YRRA to identify the nature and extent of PCE
contamination in the ground water. The order further directs the respondents to
provide bottled drinking water to certain households within the YRRA if PCE is
detected in sampled domestic tap water.
8
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It is possible that, upon completion of the RI/FS, Ecology could order the
Company and other parties to take further action, including remediation. Ecology
has settled claims with a number of other potentially responsible parties at
this site, but thus far the Company has not been able to settle this claim on a
basis acceptable to the Company. If the Company is unable to reach a separate
settlement, the Company may be potentially liable for remediation costs that are
not recovered from the settling parties and for contribution. Given the current
status and inherent uncertainties in this matter the Company is unable to
determine or quantify in any meaningful way its potential liability, and
therefore, cannot determine whether it will have a material effect on the
Company's financial condition, results of operations, or cash flows. The
settlements thus far proposed by Ecology would have had material adverse effects
on the Company's financial condition and cash flows.
(b) In 1991, the Company was added as a defendant to a case entitled Department
of Labor & Industries vs. Puget Sound Trucklines, et al., in King County,
Washington Superior Court, that alleges the Company, among others, has violated
the overtime pay provisions of Washington state law. Puget Sound Truck Lines
reached an out of court settlement with the Department of Labor and Industries
in 1995. In May 1996, the case was restyled Rex W. Allen et al vs. Arrow
Transportation Company. The action, as to the Company, now involves 30 current
and former Company employees. Eight plaintiffs reached a settlement with the
Company in 1996. The remaining plaintiffs seek unspecified overtime pay,
interest and attorney's fees. The plaintiff has indicated that it intends to
amend its claim against the Company to include the Company's payment practices
since 1991. If permitted and proven, this expansion would have the effect of
increasing the Company's potential liability to the plaintiffs, and might affect
the Company's future employment practices in the State of Washington. The
Company is unable at this time, however, to determine what effect, if any, this
litigation will have on the Company's financial condition, results of
operations, or cash flows.
An action was filed against the Company on May 7, 1996, by Sal N. Cincotta in
the United States District Court for the District of Oregon alleging breach of
contract and unpaid wages. Mr. Cincotta was previously employed by the Company
as its President and Chief Executive Officer, and was a director of the Company
prior to his resignation on May 3, 1996. On October 18, 1996, Mr. Cincotta filed
a motion for summary judgement in this action, seeking $458,139 in total
damages. On February 11, 1997, a Magistrate Judge entered a Proposed Findings
and Recommendation in favor of Mr. Cincotta, including an award of pre-judgement
interest. The Company strongly objected to the Proposed Findings and
Recommendation and appealed the issue to a District Court Judge. In May 1997,
the District Court Judge adopted the Magistrate's findings and recommendation
that the plaintiff's motion for summary judgement on all claims be granted.
Extraordinary items include a $500,000 charge to reflect the summary judgement
ruling by the District Court Judge in favor of Sal N. Cincotta.
The Company is a defendant in various claims and other legal proceedings arising
in the ordinary course of business. While resolution of these matters cannot be
predicted with certainty, management believes that the ultimate outcome of such
litigation will not have a materially adverse effect on the Company's financial
position, results of operations or cash flows. In addition to legal
contingencies, management estimates the Company's liability for property,
freight and workers' compensation claims based upon prior claim experience and
records such liabilities in its financial statements.
9
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(9) New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued FAS No. 128,
Earnings per Share, which simplifies EPS determination and brings U.S. practice
for earnings per share (EPS) in closer conformity with international practices
by replacing primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic EPS is based on outstanding stock, without regard to common stock
equivalents (which currently must be considered in the calculation of primary
EPS). Diluted EPS is similar to fully diluted EPS as currently computed. The
effective date is for financial statements ending after December 15, 1997. The
adoption of this standard is not expected to have a material effect on the
Company's financial statements as the Company's common stock equivalents
currently have an anti-dilutive effect on EPS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements of the Company and notes thereto appearing elsewhere herein.
This report contains forward looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Factors that might cause
such differences include but are not limited to those discussed below and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
On Monday, June 2, 1997, a petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code was filed for the Registrant's only wholly owned subsidiary
Arrow Transportation Co. of Delaware. The financial burden imposed by rapid
fleet and geographic expansion, and an unfavorable union labor agreement,
combined with intrastate deregulation and contingent liabilities and litigation
faced by the Company, made it impossible for the company to continue to operate
without some relief from those obligations.
The Company's subsidiary is continuing to operate normally and is moving forward
with its profit improvement plan. The Company's working capital lender has been
supportive and agreed to provide financing to the Company during the bankruptcy
reorganization process. In addition, its principal equipment lenders and lessors
and unsecured creditors have been supportive of the Company's reorganization
efforts. Four major requirements must be achieved as part of the bankruptcy
reorganization process in order for the Company's subsidiary to successfully
emerge from the bankruptcy a stronger, more competitive operator in its
industry.
These requirements are: (1) A new labor agreement with the Teamsters Union which
will allow the Company to improve its competitive position enabling it to
compete effectively against non-union competitors which now represent
approximately 90% of the tank truckload market. (2) A recapitalization of the
Company's subsidiary from the infusion of new equity capital. (3) A
restructuring of all its debt and lease obligations on terms which will enable
the Company to generate a positive cash flow. (4) Resolution of the pre
bankruptcy litigation and claims against the Company and its subsidiary.
10
<PAGE>
The most critical component to a successful reorganization is item (1) above, a
new labor agreement with the Teamsters Union. Requirements numbers (2) and (3)
are dependant upon achieving a labor agreement that will enable the company to
compete effectively and operate profitably. The Company is currently engaged in
negotiations with the Teamsters in a attempt to achieve this most critical
requirement. If the Company is unable to reach agreement with the Teamsters
Union on a new labor agreement, it will most likely seek a buyer for the
business or discontinue operations and its bankruptcy proceeding will be
converted to a Chapter 7 liquidation.
Results of Operations
Operating Revenues
Revenue for the quarter and six months ended June 30, 1997 decreased 13.2% and
10.8%, respectively, compared to the same periods in 1996. During 1996, as part
of its restructuring plan, the Company closed terminals in Baton Rouge, LA,
Chattanooga, TN, Port Neches, TX and Tulsa, OK. The Company also downsized and
refocused its Houston, TX terminal on those lanes of traffic upon which it could
achieve balanced freight demand.
Shipments totaling 7,586 and 14,556 for the quarter and six months ended June
30, 1997, respectively, represent decreases of 2.2% and 1.7% compared to the
same periods in 1996. Average miles per shipment decreased to 381 and 382 for
the quarter and six months ended June 30, 1997, respectively, from 446 and 445
for the same periods in 1996. Average revenue per shipment decreased to $849 and
$868 for the quarter and six months ended June 30, 1997, respectively, from $956
for both periods in 1996. Revenue per mile increased to $2.23 and $2.27 for the
quarter and six months ended June 30, 1997, compared to $2.10 for both periods
in 1996. These changes reflect the elimination of some non-contributory
long-haul business associated with the company's terminals in Texas and the
Southern U.S. The effect of industry over-capacity on pricing also effected
revenue per shipment.
Operating Expenses
Operating expenses, as a percentage of revenue ("operating ratio"), decreased to
99.2% and 102.6% for the quarter and six months ended June 30, 1997,
respectively, compared to 104.0% and 105.1% for the same periods in 1996.
Contractual increases in union wages and benefits combined with intense pricing
pressure, the Company's inability to recover significantly increased fuel costs
and the Company's low levels of capacity utilization in certain markets offset
reductions in expenses that were achieved as part of the Company's profit
improvement plan and TQM program.
Compensation expense remained consistent as a percentage of revenue (57.9% in
1997 versus 57.5% in 1996), with a decrease due to corporate downsizing offset
by contractually increased union wages and benefits.
Fuel and fuel taxes as a percentage of revenue decreased from 9.1% to 8.8% for
the comparable six month periods, reflecting the decrease from 9.3% to 8.6% for
the comparable second quarters. The decreases are primarily due to recent
decreases in fuel prices.
11
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Depreciation and amortization expense decreased $122,000 and $236,000 for the
comparable second quarters and six month periods, respectively. The decrease
reflects the sale of 43 power units in 1996 as part of the Company's fleet
downsizing, and a change in classification of certain leases for 1997 as part of
the restructuring of the Company's fleet financing in December 1996.
Selling and administrative expenses decreased $285,000 for the six months ended
June 30, 1997 when compared to the same period in 1996. This decrease includes a
$278,000 decrease for the comparable second quarters due to changes in
professional fees incurred and some general cost reductions. During 1996, the
Company was implementing a TQM program and was incurring legal fees related to
various claims or contingencies. These 1996 expenses were classified as selling
and administrative expenses. During 1997, the Company has primarily incurred
extraordinary professional fees in correlation with its bankruptcy filing. These
1997 expenses are classified as extraordinary items.
Rent and purchased transportation increased $93,000 to 5.5% of revenue compared
to 4.3% in 1996. The increase is primarily attributable to a change in
classification of certain leases for 1997 as part of the restructuring of the
Company's fleet financing in December 1996.
Communication and utilities decreased $52,000 and $79,000 for the comparable
quarters and six month periods primarily due to the discontinuance of cellular
phones as the primary mode of communication between the Company's dispatchers
and its drivers.
Interest Expense
Interest expense for the comparable six month periods decreased $135,000 from
1996 to 1997 primarily due to the fleet downsizing and restructuring of the
Company's long-term debt and capital lease obligations. Bankruptcy laws provide
that interest is not payable to a lender where that lender is undersecured, so
the Company has made estimates of the value of certain of its fixed assets which
are encumbered with loans and capital leases. In those instances where the
Company estimates that the lender is undersecured, interest expense has not been
accrued for the post bankruptcy filing period. Detailed appraisals of assets,
future court decisions and/or future stipulated agreements with the respective
lenders and lessors may in the future cause these estimates to be altered and
the filing of a plan of reorganization may also likely result in the restatement
of the related indebtedness.
Non-operating Income
Non-operating income increased $27,000 for the first six months of 1997 versus
1996. This increase includes a net gain of $48,000 on the disposal of equipment
in 1997.
12
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Income Taxes
The effective rate of income tax benefit decreased from 39% in 1996 to 0% in
1997 as the Company is not recording an income tax benefit in 1997.
Extraordinary items
Extraordinary items include a $500,000 charge to reflect a summary judgement
ruling by the District Court judge in favor of the former CEO for the Company,
in his action for breach of an employment agreement. The other $112,000 of
extraordinary items primarily represents professional fees incurred due to the
Company's bankruptcy filing (see Note 1 to the consolidated financial
statements).
Net Loss
The Company was able to reduce its operating loss by 55% from 1996 to 1997, but
extraordinary charges increased the net loss by $612,000 or $.14 per share from
1996 to 1997. Decreased business volume caused primarily by terminal closures
impacted revenues.
Liquidity and Capital Resources
On June 2, 1997, Arrow's wholly-owned operating subsidiary, Arrow Transportation
Co. of Delaware, filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States District Court for the
District of Oregon ("the Court"). The company is operating as a
debtor-in-possession subject to the jurisdiction of the Court. At June 30, 1997
the Company had a working capital deficiency of approximately $4,405,000.
Operating activities provided $971,000 of net cash for the six months ended June
30, 1997 primarily due to the decrease in bank overdrafts being reflected as a
financing activity and the extraordinary items. Net cash of $179,000 provided by
investing activities represented proceeds of $219,000 from the disposal of
excess equipment, offset by $40,000 of capital expenditures.
On June 2, 1997, the Company entered an agreement to modify and extend its
current credit arrangement during the Company's reorganization. The arrangement
provides for a line of credit at an interest rate of 1.5% over the lender's
reference rate (8.5% at June 30, 1997). Maximum borrowing under the line is
limited to the lesser of $3,000,000 or 85% of eligible accounts receivable which
were $2,586,000 at June 30, 1997. The unused portion of the line of credit was
$469,000 at June 30, 1997.
13
<PAGE>
The Company's authority to borrow money under the arrangement terminates upon
the earliest of November 15, 1997, the effective date of a plan of
reorganization confirmed in the Company's Chapter 11 case, the conversion of the
Company's case to a case under Chapter 7 of the Unites States Bankruptcy Code,
the appointment of a trustee for the Company, or the occurrence of an event of
default under the terms of the arrangement.
Other than the Company's current credit arrangements, the Company has no current
arrangements with respect to other sources of additional financing at this time.
There can be no assurance that additional financing or accomodations from
creditors, if required, will be available to the Company on commercially
reasonable terms, or at all.
Seasonality
Seasonality causes variations in the operations of the Company as well as
industry-wide. Demand for the Company's services is generally highest during the
summer and fall months. Historically, expenses are greater as a percentage of
revenues in the winter months as operating efficiency is lower because of lower
utilization rates and weather related costs.
Inflation
The effect of inflation on the Company has not been significant during the last
two years. However, an extended period of inflation could be expected to have an
impact on the Company's earnings by causing interest rates, fuel and other
operating costs to increase. Unless freight rates could be increased on a timely
basis, operating results would be adversely affected. High fuel prices have
impacted the Company's results of operations in 1996 and to a lesser degree in
1997. Market conditions did not allow the Company to fully recapture increased
fuel costs.
Deregulation
The Company has historically derived significant revenue from intrastate
shipments in the states of Oregon and Washington pursuant to operating
authorities granted, and tariff rates approved, by the regulatory bodies in
those states. Effective January 1, 1995, the authority of those states to
regulate entry into those markets and the rates charged for such intrastate
shipments were terminated by federal statute. This termination has resulted in
increased competition and downward pressure on rates charged by the Company in
these markets. Since January 1, 1995, deregulation has negatively impacted the
Company's business in the Northwest as the Company lost business to new entrants
into this market.
Contingencies
Information regarding contingencies is included in Note 8 to the financial
statements beginning on page 8 and incorporated herein by reference.
14
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings Information regarding legal
proceedings is included in Notes 3
and 8 to the financial statements
beginning on pages 7 and 8,
respectively, and incorporated
herein by reference.
Item 2. Changes in Securities NONE
Item 3. Defaults Upon Senior Securities NONE
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of shareholders on June 24, 1997 the
shareholders elected five directors, each for terms expiring at the 1998 Annual
Meeting. Votes cast in relation to this matter are summarized as follows:
AGAINST OR ABSTENTIONS AND
NAME FOR WITHHELD BROKER NON-VOTES
- ---- --- ---------- ----------------
William R. Blosser 3,591,301 483,830 -0-
James N. Cutler, Jr. 3,573,406 501,725 -0-
Robert H. Cutler 3,571,706 503,425 -0-
Jerry A. Parsons 3,591,301 483,830 -0-
Thomas D. Taylor 3,585,601 489,530 -0-
The shareholders also ratified the appointment of Deloitte & Touche LLP to serve
as independent auditors to the Company for the Year 1997. Votes cast in relation
to this matter are summarized as follows:
Against or Abstentions and
For Withheld Broker Non-Votes
- --- ---------- ----------------
3,599,400 475,731 -0-
Item 5. Other Information NONE
Item 6. Exhibits and Reports on Form 8-K
Arrow Transportation Company filed a Form 8-K on June 2, 1997 to report
that its wholly-owned operating subsidiary, Arrow Transportation Co. of
Delaware, filed a petition for bankruptcy under Chapter 11 of the
United States Bankruptcy Code in the United States District Court for
the District of Oregon. The company is operating as a
debtor-in-possession subject to the jurisdiction of that court.
15
<PAGE>
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.
ARROW TRANSPORTATION CO.
(Registrant)
Dated: August 19, 1997 By: /s/ William J. Stanners, Jr.
----------------------------
William J. Stanners, Jr.
Senior Vice President and Chief Financial Officer
16
<PAGE>
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