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 March 31, 1997
[ ] 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.
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(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
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(Address of Principal Executive Office) (Zip Code)
(612) 490-6800
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(Registrant's telephone number, including area code)
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(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 May 5, 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
March 31, 1997 and June 30, 1996 3
Condensed Statements of Operations
For the Three and Nine Months Ended March 31, 1997 and 1996 4
Condensed Statements of Cash Flows
Nine Months Ended March 31, 1997 and 1996 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)
March 31, June 30,
1997 1996
UNAUDITED
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 28 $ 544
Trade receivables 10,722 11,852
Inventories 23,757 22,655
Prepaid expenses 268 321
Deferred income taxes 2,450 2,150
------- -------
Total Current Assets 37,225 37,522
------- -------
Property and Equipment, Net 4,937 5,778
------- -------
$42,162 $43,300
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank line of credit $ 4,046 $ 811
Accounts payable 5,145 7,275
Accrued expenses 2,760 4,049
------- -------
Total Current Liabilities 11,951 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 14,003 14,957
------- -------
Total Shareholders' Equity 30,211 31,165
------- -------
$42,162 $43,300
======= =======
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
ARDEN INDUSTRIAL PRODUCTS, INC.
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 21,482 $ 25,223 $ 65,335 $ 66,090
Cost of goods sold 15,438 17,845 47,688 46,945
-------- -------- -------- --------
Gross Profit 6,044 7,378 17,647 19,145
Operating expenses 5,932 7,022 19,146 18,863
-------- -------- -------- --------
Operating Income (Loss) 112 356 (1,499) 282
Other income (expense), net (59) 5 (63) 60
-------- -------- -------- --------
Income (Loss) Before Income Taxes 53 361 (1,562) 342
Federal and state income tax expense (benefit) 22 135 (609) 132
-------- -------- -------- --------
Net Income (Loss) $ 31 $ 226 $ (953) $ 210
======== ======== ======== ========
Net Income (Loss) Per Common and
Common Equivalent Shares Outstanding $ .00 $ .03 $ (.14) $ .03
======== ======== ======== ========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 6,989 6,989 6,989 6,989
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
ARDEN INDUSTRIAL PRODUCTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
------- -------
Operating Activities
Net Income (Loss) $ (953) $ 209
Adjustments to reconcile net income (loss) to cash
provided by (used) in operating activities:
Depreciation 1,399 1,098
Provision for doubtful accounts 30 30
Provision for inventory obsolescence 1,670 1,494
Deferred income taxes (300) (605)
Changes in operating assets and liabilities
Trade receivables 1,100 (2,076)
Inventories (2,772) (793)
Trade payables (2,130) (149)
Accrued expenses and other (1,237) 1,348
------- -------
Net Cash Provided By (Used) In Operating Activities (3,193) 556
------- -------
Investing Activities
Purchases of property and equipment (558) (1,138)
------- -------
Financing Activities
Borrowings on line of credit, net 3,235 --
------- -------
Net Decrease in Cash and Cash Equivalents (516) (582)
Cash and Cash Equivalents at Beginning of Period 544 602
------- -------
Cash and Cash Equivalents at End of Period $ 28 $ 20
======= =======
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 March 31, 1997, and the
condensed statements of operations for the three and nine months ended March 31,
1997 and 1996, and the condensed statements of cash flows for the nine months
ended March 31, 1997 and 1996, 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.
2. Bank Line of Credit
On April 30, 1997, the Company renewed its $10.0 million unsecured revolving
credit agreement extending the maturity from November 30, 1997 to April 30,
1999. Amounts outstanding under this agreement bear interest at 1.8% over the
LIBOR with interest paid monthly. The commitment fee is one-fourth of one
percent per annum on the unused portion of the commitment. The amount
outstanding was $4.0 million as of March 31, 1997.
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 MARCH 31, 1997
Sales for the three months ended March 31, 1997 were $21.5 million with
operating income of $112,000 and net income of $31,000, or $0.0 per share. Sales
for the three months ended March 31, 1996 were $25.2 million with operating
income of $356,000 and net income of $226,000, or $.03 cents per share.
Reduced operating income for the period was a result of lower sales and gross
margin which was partially offset by reduced operating expenses. The decline in
sales for the period was primarily a result of decreased sales to the Company's
major customer and traditional customers. The decline in gross margin was a
result of pricing pressures and higher freight costs partially offset by lower
obsolescence. Reduced operating expenses were a result of productivity
improvements and less contract labor costs.
Sales for the three months ended March 31, 1997 decreased $3.7 million, or 15%,
compared to the same period last year. Sales to the Company's major customer
decreased $3.2 million, or 62%, for the period due to the customer's temporary
facility shut-down during March, reduced production, and to a lesser extent the
loss of the customer's water craft business in March 1996. Sales to inventory
management accounts, excluding the Company's major customer, increased $1.2
million, or 18%. This increase was offset with decreased sales to traditional
accounts of $1.7 million, or 13%. The Company's major customer represented 9% of
sales for the three months ended March 31, 1997, down from 20% for the same
period last year. Sales to inventory management accounts, excluding the
Company's major customer, represented 36% of sales for the three months ended
March 31, 1997 compared with 26% for the same period last year. Traditional
customer sales represented 55% of sales for the three months ended March 31,
1997 compared with 54% of sales for the same period last year. The Company
anticipates flat 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 margins for the three months ended March 31, 1997 and 1996 were 28.1% and
29.3% of sales, respectively. The decrease in gross margin was primarily due to
competitive pricing pressures and increased freight costs which were partially
offset by decreased obsolescence expense. Competitive pricing pressures from the
Company's larger customers resulted in a 1.4% decline in gross margin. Higher
freight costs, which decreased gross margin by 0.7%, were the result of
processing errors whereby freight costs were not properly charged to the
customer. This problem has been resolved. Inventory obsolescence decreased 43.4%
compared to the quarter ended March 31, 1996 primarily due to the initiatives
underway to reduce the Company's obsolescence exposure.
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 March 31, 1997, decreased $1.1
million or 16% to $5.9 million, or 27.6% of sales from $7.0 million, or 27.8%
for the same period last year. The reduction was primarily due to increased
productivity which lowered payroll expense, lower contract labor costs
associated with the April 1996 information system implementation, and certain
non-recurring charges incurred last year. These reductions were partially offset
by increased depreciation and software licensing fees related to the new
information system. Employee related expenses were $3.6 million, or 16.5% of
sales for the three months ended March 31, 1997 compared with $4.0 million, or
15.8% of sales for the same period last year. Operating expenses for the quarter
ended March 31, 1996 included charges of $260,000 for the close-down of a
distribution center, $145,000 for replacement warranty contingencies, and
$200,000 for employment matters.
During April 1997, the Company closed its distribution center in Milwaukee to
reduce its operating costs while servicing its customers from the Chicago
distribution center. No material costs will be incurred by the Company.
NINE MONTHS ENDED MARCH 31, 1997
Sales for the nine months ended March 31, 1997 were $65.3 million with an
operating loss of $1.5 million and a net loss of $953,000, or $.14 per share.
Sales for the nine months ended March 31, 1996 were $66.1 million with operating
income of $282,000 and net income of $210,000 or $.03 per share.
The operating loss for the period was a result of decreased sales and gross
margin, and increased operating costs. The decrease in sales was primarily a
result of reduced sales to the Company's major customer and traditional
customers which more than offset increased sales to other customers. The decline
in gross margin and higher operating costs were the result of procurement
processes which haven't kept pace with the customers' changing demands while
ensuring a high service level to its customers.
Sales for the nine months ended March 31, 1997 decreased $755,000, or 1%,
compared to the same period last year. Sales to the Company's major customer
decreased $3.4 million, or 29%, primarily as a result of the customer's two
temporary facility shut-downs, reduced production, and to a lesser extent the
loss of the customer's water craft business in March 1996. The Company's major
customer represented 13% of sales for the nine months ended March 31, 1997, down
from 18% for the same period last year. Sales to inventory management accounts,
excluding the Company's major customer, increased $5.0 million, or 31%, and
represented 32% of sales for the nine months ended March 31, 1997 compared with
24% for the same period last year. Traditional customer sales decreased $2.4
million, or 6%, and represented 55% of sales for the nine months ended March 31,
1997 and 58% of sales for the same period last year. The Company has focused its
efforts toward serving larger traditional and inventory management accounts.
Gross margins for the nine months ended March 31, 1997 and 1996 were 27.0% of
sales and 29.0% of sales, respectively. The decrease in gross margin was
primarily the result of competitive pricing pressures and inventory shrinkage.
Competitive pricing pressures from the Company's larger customers resulted in a
1.0% decline in gross margin. Inventory shrinkage resulted in a 0.7% 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 corrected.
Operating expenses for the nine months ended March 31, 1997 increased $283,000,
or 1.5% to $19.1 million, or 29.3% of sales from $18.9 million or 28.5% of sales
for the same period last year. The increased operating expenses were primarily
the result of costs associated with the information system. These costs were
partially offset by certain non-recurring charges incurred last year. The
information system has resulted in an increase in certain expenses, including
depreciation, software licensing fees and consulting expenses. Consulting
expense was significantly reduced in the third quarter of fiscal 1997 due to the
completion of contract work on the systems conversion which is now implemented.
Operating expenses, for the nine months ended March 31, 1996, included charges
of $260,000 for the close-down of a distribution center, $145,000 for
replacement warranty contingencies, and $200,000 for employment matters.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 1997, the Company funded operations with
cash generated from operations and borrowed from the Company's revolving credit
facility. The Company used $3.2 million of net cash for operations compared with
net cash provided of $556,000 for the same period last year.
Accounts receivable decreased $1.1 million in the nine months ended March 31,
1997 due to improved collection efforts and the impact of lower sales in March
1997 compared to the same period last year.
Inventory increased $2.8 million in the nine months ended March 31, 1997 due to
procurement processes which haven't kept pace with customers' changing demands.
Inventory decreased $2.8 million between December 31, 1996 and March 31, 1997
and the downward trend is expected to continue, at a lesser rate, as management
actively reduces surplus inventory and analyzes its purchasing practices and its
material planning processes.
The Company renewed its $10.0 million unsecured revolving credit line for
working capital needs, extending the maturity date to April 30, 1999. Amounts
outstanding under this agreement bear interest at 1.8% over the LIBOR. The
Company utilized up to $5.5 million of the line of credit in the nine months
ended March 31, 1997. The Company subsequently reduced the amount outstanding to
$2.0 million as of April 30, 1997.
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 5. Other Information
In April 1997, the Company took various actions relating to stock options for
certain employees and directors of the Company. First, the Company amended its
November 1996 employment agreement with Michael J. Lindseth, the Company's Chief
Executive Officer, to provide that in the event, during the tenure of Mr.
Lindseth's employment with the Company and on or prior to November 5, 1997, of a
sale of all or substantially all of the assets of the Company or a change in the
beneficial ownership of at least a majority of the Company's Common Stock, Mr.
Lindseth would vest on an accelerated basis in an additional 150,000 of his
options to purchase Common Stock of the Company, instead of 75,000 of such
options. Mr. Lindseth currently is vested in 50,000 of his 350,000 options. The
Company also amended the exercise price applicable to Mr. Lindseth's options to
$3.75 per share.
Second, the Company amended the exercise price applicable to Common Stock
purchase options previously granted under the Company's 1993 Stock Option Plan
(the "Plan") on a formula basis to certain of the Company's non-employee
directors, namely Joseph Levesque (10,000 options), David Koentopf (8,542
options) and Ann Jackson (7,917 options). The new exercise price for such
options is $3.75 per share. The remaining provisions of the options are
unchanged.
Third, the Company granted 219,500 Common Stock purchase options under the Plan
at $3.75 per share to an aggregate of 62 employees, including 30,000 options to
Kim Erickson, the Company's Chief Financial Officer. Further, the Company
granted an additional 67,000 options under the Plan at $3.75 per share to eleven
employees, including 15,000 options to Mr. Erickson, in replacement of a like
number of options previously granted at higher exercise prices. All of the new
and replacement options are intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended. The options
will vest at a rate of 25% per each full year of service to the Company from and
after the date of grant, and are exercisabe, once vested, for 10 years from and
after the date of grant. However, in the event that during the tenure of an
employee's employment with the Company, there is a sale of all or substantially
all of the assets of the Company or a change in the beneficial ownership of at
least a majority of the Company's Common Stock, the employee's options will
fully vest.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 1997.
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: May 14, 1997
----------------------------------
Michael J. Lindseth
Chief Executive Officer and President
By /s/ Kim B. Erickson Date: May 14, 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 NINE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 28,000
<SECURITIES> 0
<RECEIVABLES> 11,100,000
<ALLOWANCES> 378,000
<INVENTORY> 23,757,000
<CURRENT-ASSETS> 37,225,000
<PP&E> 12,352
<DEPRECIATION> (7,415)
<TOTAL-ASSETS> 42,162,000
<CURRENT-LIABILITIES> 11,951,000
<BONDS> 0
0
0
<COMMON> 70,000
<OTHER-SE> 30,211,000
<TOTAL-LIABILITY-AND-EQUITY> 42,162,000
<SALES> 65,335,000
<TOTAL-REVENUES> 65,335,000
<CGS> 47,688,000
<TOTAL-COSTS> 47,688,000
<OTHER-EXPENSES> 19,131,000
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 63,000
<INCOME-PRETAX> (1,562,000)
<INCOME-TAX> (609,000)
<INCOME-CONTINUING> (953,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (953,000)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
