SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1996
[ ] 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 0-23308
ARDEN INDUSTRIAL PRODUCTS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0980556
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
560 Oak Grove Parkway, Vadnais Heights, Minnesota 55127
- -------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(612) 490-6800
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 ____ .
APPLICABLE ONLY TO CORPORATE ISSUERS:
At February 10, 1997 there were 6,989,456 common shares outstanding.
ARDEN INDUSTRIAL PRODUCTS, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Page #
Condensed Balance Sheets
December 31, 1996 and June 30, 1996 3
Condensed Statements of Operations
For the Three and Six Months Ended December 31, 1996 and 1995 4
Condensed Statements of Cash Flows
Six Months Ended December 31, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ARDEN INDUSTRIAL PRODUCTS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, June 30,
1996 1996
UNAUDITED
----------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 49 $ 544
Trade receivables 8,371 11,852
Inventories 26,861 22,655
Prepaid expenses 190 321
Deferred income taxes 2,500 2,150
------- ------
Total Current Assets 37,971 37,522
------- ------
Property and Equipment, Net 5,237 5,778
------- ------
$43,208 $43,300
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank line of credit $ 3,086 $ 811
Accounts payable 6,720 7,275
Accrued expenses 3,221 4,049
------ ------
Total Current Liabilities 13,027 12,135
------ ------
Commitments and Contingencies -- --
Shareholders' Equity
Common stock - par value $.01; authorized 25,000 shares;
issued 6,989 shares 70 70
Additional paid-in capital 16,138 16,138
Retained earnings 13,973 14,957
------- ------
Total Shareholders' Equity 30,181 31,165
------- ------
$43,208 $43,300
======= =======
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
ARDEN INDUSTRIAL PRODUCTS, INC.
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE PERIODS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended For the Six Months Ended
December 31, December 31,
1996 1995 1996 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 20,162 $ 20,951 $ 43,853 $ 40,867
Cost of goods sold 15,054 15,012 32,250 29,100
-------- -------- -------- --------
Gross Profit 5,108 5,939 11,603 11,767
Operating expenses 6,529 5,926 13,214 11,841
-------- -------- -------- --------
Operating Income (Loss) (1,421) 13 (1,611) (74)
Other income (expense), net (28) 10 (4) 55
-------- -------- -------- --------
Income (Loss) Before Income Taxes (1,449) 23 (1,615) (19)
Federal and state income tax expense (benefit) (566) 3 (631) (3)
-------- -------- -------- --------
Net Income (Loss) $ (883) $ 20 $ (984) $ (16)
======== ======== ======== ========
Net Income (Loss) Per Common and
Common Equivalent Shares Outstanding $ (.13) $ .00 $ (.14) $ .00
======== ======== ======== ========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 6,989 6,989 6,989 6,989
======== ======== ======== ========
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
</TABLE>
ARDEN INDUSTRIAL PRODUCTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1996 1995
---- ----
Operating Activities
Net loss $ (984) $ (16)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 938 718
Provision for doubtful accounts 15 15
Provision for inventory obsolescence 1,365 954
Deferred income taxes (350) (280)
Changes in operating assets and liabilities
Trade receivables 3,466 1,515
Inventories (5,571) (3,246)
Trade payables (555) (2,366)
Accrued expenses and other (697) (175)
------- -------
Net Cash Used For Operating Activities (2,373) (2,881)
------- -------
Investing Activities
Purchases of property and equipment (397) (888)
------- -------
Financing Activities
Borrowings on line of credit, net 2,275 3,190
------- -------
Net Decrease in Cash and Cash Equivalents (495) (579)
Cash and Cash Equivalents at Beginning of Period 544 602
------- -------
Cash and Cash Equivalents at End of Period $ 49 $ 23
======= =======
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
ARDEN INDUSTRIAL PRODUCTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - UNAUDITED
1. Basis of Financial Statement Presentation
The accompanying unaudited condensed balance sheet as of December 31, 1996, and
the condensed statements of income for the three and six months ended December
31, 1996 and 1995, and the condensed statements of cash flows for the six months
ended December 31, 1996 and 1995, reflect all adjustments, consisting of only
normal recurring adjustments which, in the opinion of Arden Industrial Products,
Inc.'s (the "Company") management, are necessary for a fair statement of
financial position, results of operations and cash flows for the periods
presented. These financial statements are condensed and do not include all
information required by generally accepted accounting principles. These
condensed financial statements should be read in conjunction with the Company's
fiscal year ended June 30, 1996 audited financial statements and notes thereto.
The operating results for the interim periods are not necessarily indicative of
the operating results to be expected for a full fiscal year.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward looking statements. Future operating
results are subject to fluctuations not within the control of the Company. This
discussion should be read in conjunction with the Company's financial statements
and other information contained in this and other reports filed by the Company
with the Securities & Exchange Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996
Sales for the three months ended December 31, 1996 were $20,162,000 with an
operating loss of $1,421,000 and a net loss of $883,000, or $.13 per share.
Sales for the three months ended December 31, 1995 were $20,951,000 with an
operating income of $13,000 and net income of $20,000, or zero cents per share.
The operating loss for the period was a result of reduced sales and gross
margin, and increased operating costs. The decline in sales for the period was a
result of decreased sales to the Company's major customer which more than offset
increased sales to its other customers. The decline in gross margin and
operating costs in excess of historical levels were the result of procurement
processes which haven't kept pace with the customers' changing demands and
ensuring a high service level to its customers. We are addressing these issues.
Sales for the three months ended December 31, 1996 decreased 4%, or $789,000,
compared to the same period last year. Sales to the Company's major customer
decreased 44%, or $1.7 million, for the period. This decline in sales was
partially offset by a 5%, or $.9 million increase in sales to the Company's
other customers. The primary reason for the decrease in sales to the Company's
major customer was due to a four week facility shut-down during the holiday
season. The company's major customer represented 11% of sales for the three
months ended December 31, 1996, down from 18% for the same period last year.
Sales to inventory management accounts, excluding the Company's major customer,
represented 32% of sales for the three months ended December 31, 1996 compared
with 24% for the same period last year. Traditional customer sales represented
57% of sales and 58% of sales for the quarters ended December 31, 1996 and 1995,
respectively. The Company anticipates flat or a slight decline in sales
throughout the remainder of the fiscal year.
Inventory management accounts differ from the Company's traditional customer
base in that they generate greater sales volumes and include value-added
services in the cost of the product. Value-added services reduce the customer's
overall fastener-related procurement, handling, assembly and administrative
costs. The traditional customer generally purchases fasteners based on product
availability and price.
Gross margin for the three months ended December 31, 1996 and 1995 were 25.3%
and 28.3% of sales, respectively. The decrease in gross margin was primarily due
to competitive pricing pressures, and increased inventory obsolescence and
freight costs. Competitive pricing pressures from the Company's larger customers
resulted in a 1.4% decline in gross margin. Inventory obsolescence was 4.3% of
sales compared to 2.8% of sales for the same period last year. The increase in
obsolescence was attributable to low inventory turns and procurement processes
that haven't kept pace with customer changing demands. Higher freight costs,
which decreased gross margin by .9%, were the result of an increased number of
customer expedited orders. Gross margin may not move back to historical levels
in the foreseeable future.
As a result of the Company's high inventory levels, low turns and material
handling processes, there is a possibility of an inventory write-down for
increased obsolescence by the end of the fiscal year. At this time, the
magnitude of the write-down is not quantifiable, but it could be material.
Management is currently analyzing its purchasing practices, its material
planning philosophies, and the characteristics of the Company's inventory
against better information to be derived on the customers' current and
anticipated demand.
Operating expenses for the three months ended December 31, 1996, increased
$603,000 or 10% to $6,529,000, or 32.4% of sales from $5,926,000, or 28.3% for
the same period last year. The increased operating expenses were primarily the
result of higher employee expenses and costs associated with the new information
system implemented in April, 1996. The increased employee expenses were a result
of the use of additional employees in customer service and warehousing
operations to ensure high service levels. Employee related expenses were
$4,035,000, or 20.0% of sales for the three months ended December 31, 1996
compared with $3,744,000, or 17.9% of sales for the same period last year. The
new information system has resulted in an increase in operating expenses,
including depreciation, licensing fees and consulting expenses.
SIX MONTHS ENDED DECEMBER 31, 1996
Sales for the six months ended December 31, 1996 were $43,853,000 with an
operating loss of $1,611,000 and a net loss of $984,000, or $.14 per share.
Sales for the six months ended December 31, 1995 were $40,867,000 with an
operating loss of $74,000 and a net loss of $16,000 or zero cents per share.
The operating loss for the period was a result of decreased gross margin, and
increased operating costs. The decline in gross margin and operating costs in
excess of historical levels were the result of procurement processes which
haven't kept pace with the customers' changing demands and ensuring a high
service level to its customers.
Sales for the six months ended December 31, 1996 increased 7%, or $2,986,000
compared to the same period last year. The primary reason for the increased
sales was due to additional sales to its existing customers. The Company's major
customer represented 15% of sales for the six months ended December 31, 1996,
down from 17% for the same period last year. Sales to inventory management
accounts, excluding the Company's major customer, represented 31% of sales for
the six months ended December 31, 1996 compared with 23% for the same period
last year. Traditional customer sales represented 54% of sales and 60% of sales
for the quarters ended December 31, 1996 and 1995, respectively.
Gross margin for the six months ended December 31, 1996 and 1995 were 26.5% of
sales and 28.8% of sales, respectively. The decrease in gross margin was
primarily the result of inventory shrinkage and inventory obsolescence.
Inventory shrinkage resulted in a 1.2% decline in gross margin. The shrinkage
was a result of inadequate processes in recording inventory movement upon
conversion to the new information system. These processes have been addressed
and corrected. Inventory obsolescence was 3.1% of sales compared to 2.3% of
sales last year. The increase in obsolescence is attributable to the higher
inventory levels at December 31, 1996.
Operating expenses for the six months ended December 31, 1996 increased
$1,373,000, or 12% to $13,214,000, or 30.1% of sales from $11,841,000 or 29.0%
of sales for the same period last year. The increased operating expenses were
primarily the result of higher employee expenses and costs associated with the
new information system. The increased employee expenses were a result of the use
of additional employees in customer service and warehousing operations to ensure
high service levels. Employee related expenses were $8,016,000, or 18.3% of
sales for the six months ended December 31, 1996 compared with $7,517,000, or
18.4% of sales for the same period last year. The new information system has
resulted in an increase in certain expenses, including depreciation, software
licensing fees and consulting expenses.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 1996, the Company funded operations with
cash generated from operations and borrowed from the Company's revolving credit
facility. The Company used $2,373,000 of net cash for operations compared with
net cash used of $2,881,000 for the same period last year.
Accounts receivable decreased $3,466,000 in the six months ended December 31,
1996 due to improved collection efforts and the impact of lower sales in
December, 1996 compared to the same period last year.
Inventory increased $5,571,000 in the six months ended December 31, 1996 due to
procurement processes which haven't kept pace with customers' changing demands.
The Company has a $10 million unsecured revolving credit line for working
capital needs, maturing November 30, 1997. The Company plans to renew the
revolving credit line. Amounts outstanding under this agreement bear interest at
1.8% over the LIBOR. The Company utilized up to $4,586,000 of the line of credit
in the six months ended December 31, 1996.
Management considers its cash needs to fund operations and capital requirements
for the next twelve months to be adequately covered by its operations and
available borrowing under the revolving credit agreement.
PART II: OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities. As disclosed in the
registrant's Form 8-K filing, reference in Item 6(b) below, in
consideration of joining the registrant as its Chief Executive Officer,
Michael J. Lindseth was granted five-year option to purchase up to
350,000 shares of the registrant's Common Stock at an exercise price of
$5.00 per share, 50,000 of which will vest 90 days after his
commencement of employment of November 11, 1996, and 75,000 of which
will vest on each of the first through fourth anniversary dates of his
commencement of employment. Mr. Lindseth is entitled to accelerated
vesting of his options in the event of certain future changes of
control of the Company. In addition, the Company has agreed to register
the shares underlying Mr. Lindseth's options under the Securities Act
of 1933, as amended. The registrant is relying of Section 4(2) of the
Securities Act of 1933, as amended, as the exemption for the issuance,
based on the issuance having been made to one person.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) The registrant filed one report on Form 8-K on November 13,
1996, relating to the appointment, on November 11, 1996, of
Michael J. Lindseth as its Chief Executive Officer and a
director (Items 5 and 7 of the report).
SIGNATURES
In accordance with 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.
ARDEN INDUSTRIAL PRODUCTS, INC.
By /s/ Michael J. Lindseth Date: February 13, 1997
----------------------------------
Michael J. Lindseth
Chief Executive Officer and President
By /s/ Kim B. Erickson Date: February 13, 1997
----------------------------------
Kim B. Erickson
Vice President, Finance and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Balance Sheet and Statement of Operations found on pages 3 & 4 of the
Company's Form 10-Q for the six months ended December 31, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 49,000
<SECURITIES> 0
<RECEIVABLES> 8,721,000
<ALLOWANCES> 350,000
<INVENTORY> 26,861,000
<CURRENT-ASSETS> 37,971,000
<PP&E> 12,191,000
<DEPRECIATION> 6,954,000
<TOTAL-ASSETS> 43,208,000
<CURRENT-LIABILITIES> 13,012,000
<BONDS> 0
0
0
<COMMON> 70,000
<OTHER-SE> 30,111,000
<TOTAL-LIABILITY-AND-EQUITY> 43,208,000
<SALES> 43,853,000
<TOTAL-REVENUES> 43,853,000
<CGS> 32,250,000
<TOTAL-COSTS> 32,250,000
<OTHER-EXPENSES> 13,209,000
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 96,000
<INCOME-PRETAX> (1,615,000)
<INCOME-TAX> (631,000)
<INCOME-CONTINUING> (984,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (984,000)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
