FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
__________to____________
______________________________________________
Commission file number 1-7737
ARROW AUTOMOTIVE INDUSTRIES, INC.
________________________________________________________________________
(Exact name of registrant as specified in its charter)
____________MASSACHUSETTS_________ ___________04-1449115__________
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
3 SPEEN STREET, FRAMINGHAM, MASSACHUSETTS ___01701____
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 872-3711
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,873,083 shares of the
Company's Common Stock ($.10 par value) were outstanding as of May 6, 1996.
Page 1 of 18
ARROW AUTOMOTIVE INDUSTRIES, INC.
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Balance Sheets -
March 30, 1996 and June 24, 1995 ................. 3
Condensed Statements of Operations -
Three Months Ended March 30, 1996 and
March 25, 1995 ................................... 4
Nine Months Ended March 30, 1996 and
March 25, 1995 ................................... 5
Condensed Statements of Cash Flows -
Nine Months Ended March 30, 1996 and
March 25, 1995 ................................... 6
Notes to Condensed Financial Statements ........... 7
ITEM 2. Management's Discussion and Analysis of the
Financial Condition and Results of Operations .... 8 - 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................. 11
ITEM 2. Changes in Securities ............................. 11
ITEM 3. Default upon Senior Securities .................... 11
ITEM 4. Submission of Matters to a Vote of Security
Holders .......................................... 11
ITEM 5. Other Information ................................. 11
ITEM 6. Exhibits and Reports on Form 8-K .................. 11
SIGNATURES .................................................... 12
Page 2
PART I. - ITEM 1 -- FINANCIAL INFORMATION
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
March 30, June 24,
1996 1995
_____________ _____________
ASSETS
CURRENT ASSETS
Cash and equivalents $ 446,352 $ 753,010
Accounts receivable, less
allowances 14,875,271 12,535,646
Inventories - Note B 37,841,565 36,307,861
Prepaid expenses and other
current assets 3,283,367 4,200,578
____________ ____________
TOTAL CURRENT ASSETS 56,446,555 53,797,095
PROPERTY, PLANT AND EQUIPMENT 36,062,131 35,459,351
Less allowances for depreciation 23,163,715 22,174,393
____________ ____________
12,898,416 13,284,958
OTHER ASSETS 2,028,662 1,923,519
____________ ____________
TOTAL ASSETS $ 71,373,633 $ 69,005,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of advances under
revolving line of credit $ 1,519,152 $ 2,729,975
Accounts payable 6,488,540 3,089,034
Cash overdrafts 2,778,378 1,216,348
Other current liabilities 5,428,634 5,237,342
Current portion of long-term debt 1,379,342 1,372,486
____________ ____________
TOTAL CURRENT LIABILITIES 17,594,046 13,645,185
LONG-TERM DEBT 18,321,009 19,265,190
DEFERRED INCOME TAXES 1,634,000 1,634,000
ACCRUED RETIREMENT BENEFITS 1,905,467 1,721,867
STOCKHOLDERS' EQUITY
Common stock 296,887 296,887
Other stockholders' equity 32,071,548 32,891,767
Less cost of Common Stock in treasury 449,324 449,324
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 31,919,111 32,739,330
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 71,373,633 $ 69,005,572
============ ============
See accompanying notes to the condensed financial statements.
Page 3
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
_____________________________
MARCH 30, MARCH 25,
1996 1995
(13 weeks) (12 weeks)
_____________ _____________
Net sales $ 26,226,073 $ 19,820,409
Cost and expenses:
Cost of products sold 20,742,553 15,037,720
Selling, administrative and general 5,486,176 5,524,400
Interest 532,587 467,885
____________ ____________
26,761,316 21,030,005
____________ ____________
Loss before income taxes (535,243) (1,209,596)
Benefit from income taxes (176,000) (461,000)
____________ ____________
NET LOSS $ (359,243) $ (748,596)
============ ============
Weighted average number of shares
outstanding 2,873,083 2,872,395
============ ============
NET LOSS PER SHARE $(0.13) $(0.26)
====== ======
See accompanying notes to the condensed financial statements.
Page 4
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED
_____________________________
MARCH 30, MARCH 25,
1996 1995
(39 weeks) (39 weeks)
_____________ _____________
Net sales $ 79,101,309 $ 81,800,935
Cost and expenses:
Cost of products sold 62,842,821 62,243,079
Selling, administrative and general 15,971,539 18,363,833
Interest 1,567,500 1,413,353
____________ ____________
80,381,860 82,020,265
____________ ____________
Loss before income taxes (1,280,551) (219,330)
Benefit from income taxes (460,000) (84,000)
____________ ____________
NET LOSS $ (820,551) $ (135,330)
============ ============
Weighted average number of shares
outstanding 2,873,083 2,872,201
============ ============
NET LOSS PER SHARE $(0.29) $(0.05)
====== ======
See accompanying notes to the condensed financial statements.
Page 5
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
_____________________________
MARCH 30, MARCH 25,
1996 1995
(39 weeks) (39 weeks)
_____________ _____________
Operating Activities
Net cash provided by operating
activities $ 2,618,020 $ 2,808,215
____________ ____________
Investing Activities
Purchase of property, plant and
equipment (502,409) (1,456,023)
Other (174,081) (79,759)
____________ ____________
Net cash used in investing activities (676,490) (1,535,782)
____________ ____________
Financing Activities
Payment of long-term debt and capital
lease obligations (1,037,697) (1,024,138)
Decrease in advances under revolving
line of credit (1,210,823) (393,070)
Proceeds from exercise of stock option 332 5,188
____________ ____________
Net cash provided by financing
activities (2,248,188) (1,412,020)
____________ ____________
Decrease in cash and equivalents (306,658) (139,587)
____________ ____________
Cash and equivalents at beginning of
period 753,010 445,320
____________ ____________
CASH AND EQUIVALENTS AT END OF PERIOD $ 446,352 $ 305,733
============ ============
See accompanying notes to the condensed financial statements.
Page 6
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended March 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 29, 1996. For further information, refer to
the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended June 24, 1995. The balance
sheet at June 24, 1995 has been derived from the audited financial statements
at that date.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
March 30, June 24,
1996 1995
_____________ _____________
Stated at cost on first-in, first-out
(FIFO) method:
Finished goods $ 11,906,751 $ 10,471,077
Work in process and materials 32,749,814 32,651,784
____________ ____________
44,656,565 43,122,861
Less reserve required to state
inventory on the last-in, first-out
(LIFO) method 6,815,000 6,815,000
____________ ____________
$ 37,841,565 $ 36,307,861
============ ============
Page 7
PART I
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net sales in the first nine months of fiscal year 1996 were $79,101,000, down
3.3% from net sales for the first nine months of fiscal 1995. Net sales in
fiscal 1996 were $29,137,000, $23,738,000 and $26,226,000, for the first,
second and third quarters, respectively. Net sales dipped in the second
quarter of the current fiscal year due to a sudden downturn in orders early in
the quarter. The Company attributes the lower demand during the period, at
least in part, to restrained purchasing by our customers in anticipation of a
mild winter similar to fiscal 1995. The return of more typical weather
patterns saw net sales increase in the third quarter of fiscal 1996 compared
to the previous quarter and, more significantly, compared to the third quarter
of fiscal 1995.
The third quarter of fiscal 1996 contained thirteen weeks, in comparison to
the third quarter of fiscal 1995, which contained twelve weeks. When adjusted
for the one week differential, third quarter net sales in the current year of
$26,226,000 still represented a significant increase (22%) over the same
period last year. Approximately 45% of the increase in net sales was due to
the acquisition of new customers. The remaining increase is primarily the
result of the prior year's third quarter sales level being lower than normal
because of the unseasonably warm winter of 1995.
The results of operations for the third quarter, while improved over the same
period last year, did not achieve management's expectations. For the three
months ended March 30, 1996, operations resulted in a net loss of $359,000,
compared to a net loss of $749,000 for the third quarter in the prior year.
The current fiscal year's third quarter operating results contributed to the
year to date net loss of $821,000, compared to fiscal 1995's year to date net
loss of $135,000.
The gross profit margin on net sales in the third quarter of the current
fiscal year was 20.9%, down from the same period last year of 24.1%. Numerous
factors contributed to the lower gross profit percentage in the quarter.
One factor that contributed to the higher costs in the current quarter, was
start-up costs incurred to service the new customers mentioned above. To
service properly the large initial orders of this new business, material
sourcing expenses were incurred. Freight expense increased as initial
shipments for new west coast business were supplemented by shipments from our
South Carolina and Arkansas facilities. Further, it was necessary to add a
second shift, at one location, to produce this new business. The second shift
represented an approximate 20% increase in labor requirements at this
location, which resulted in temporary labor inefficiencies and additional
costs during
Page 8
the training period. Company-wide labor levels have not increased, but have
shifted among the three plant locations. The Company scrutinizes labor
requirements on a weekly basis and makes adjustments as necessary.
During the current quarter, the Company continued to experience additional
costs due to down time and inefficient output from certain new manufacturing
related equipment and the necessity of running parallel systems. While some
start-up issues remain with the new equipment, the operation of parallel
systems concluded by quarter end and more efficient operations are expected.
Continuing the efforts begun in the second quarter of the fiscal year to
improve manufacturing efficiencies, the Company has been in the process of
consolidating the production of certain product lines to specific
manufacturing facilities as opposed to the Company's previous practice of
manufacturing most product lines at all manufacturing facilities. This
consolidation process has resulted in temporary labor inefficiencies which to
some degree will continue into the fourth quarter of fiscal 1996.
Year to date, the current fiscal year's gross profit margin on net sales was
20.6%, down from 23.9% for the same period in fiscal 1995. The current year
has experienced lower profit margins throughout the entire year. The
previously mentioned product consolidation process adversely impacted the
second quarter as well as the third quarter. Furthermore, throughout most of
the fiscal year, the Company experienced higher than usual levels of customer
product returns. These returns are for warranty, stock adjustments and
rebuildable "cores" (our basic raw material) which are received in the normal
course of business. While over longer periods of time the relationship of
returns to gross sales remains relatively constant, occasional fluctuations do
occur. The softening of the market in the second quarter exacerbated this
situation when numerous customers "cleaned up" their inventory, by using the
means of returning inventory to the manufacturer to lower their inventory
levels. The Company has also determined that "recovery" from product returns
(i.e., restoration to finished goods inventory) has not been satisfactory.
Recovery of returned product is an integral part of remanufacturing and
significantly mitigates the negative financial impact of product returns.
Accordingly, the recovery departments at all plant locations are being
expanded to maximize recovery of product returns.
Selling, general and administrative expenses consistently declined both in
dollars and as a percentage of sales when compared to the prior year. For the
third quarter of fiscal 1996, selling, general and administrative expenses of
$5,486,000, or 20.9% of net sales are down from similar expenses in the
corresponding period last year of $5,524,000 or 27.87% of net sales. On a
year to date basis, the current
Page 9
year's selling, general and administrative expenses were $15,972,000 or 20.2%
of net sales compared to the prior year of $18,364,000 or 22.4% of net sales.
Interest expense was $533,000 in the third quarter of fiscal 1996, up 13.8%
from the same period last year of $468,000. Year to date, fiscal 1996's
interest expense was $1,568,000, an increase of 10.9% over the comparable
period of the previous fiscal year. Higher interest rates and higher average
borrowing levels combined to generate the higher interest expense in the
current fiscal periods.
The Company's obligations under its financing agreement with a commercial bank
contains certain provisions and covenants which, among other things, restrict
the amount of future indebtedness, the amount of cash dividends and capital
expenditures and require the Company to maintain specified levels of tangible
net worth, debt service and net worth ratios. Compliance with the debt
service covenant of this financing agreement was waived during the second and
third quarters of fiscal 1996 such that the loss sustained by the Company
during those periods did not result in a default under the agreement. The
revolving line of credit which allows the Company to borrow up to $20 million
through January 31, 1996 has been extended to June 30, 1997. Further, the
revolving line of credit has been amended such that the interest rate borne on
a given date will change depending upon the achieved debt service ratio. The
rate charged can range from the lender's base rate to 2.0% over such base
rate. If the Company achieves specified debt service ratios, a lending rate
becomes available which ranges from 2.0% to 2.5% above the Eurodollar rate.
Similarly, the term loan, which had outstanding borrowings as of March 30,
1996, of $6,429,000, has been amended such that the interest rate borne on a
given date will change depending upon the debt service ratio achieved by the
Company. The rate charged can range from 0.25% over the lender's base rate to
2.25% over such base rate. At specific debt service levels, a lending rate is
available ranging from 2.25% to 2.75% above the Eurodollar rate. All of the
foregoing rates are adjusted quarterly based on the Company's debt service
ratio.
Due to the foregoing amendments to the Company's financing agreement,
effective May 13, 1996, interest charged under the Company's revolving line of
credit will increase to the lender's base rate plus 1.0% (previously the
lender's base rate plus 0.5%) and interest under the Company's term loan will
increase to the lender's base rate plus 1.25% (previously the lender's base
rate plus 0.75%).
During the month of April, 1996, the Company experienced lower unit sales than
expected. April's sales resulted in a loss from operations during that
period. However, it is uncertain at this time if the sales and operating
results for the month of April will be indicative of the Company's performance
for its fourth quarter.
The Company anticipates that cash available from operations, combined with
available credit lines, will be adequate to provide for the Company's cash
requirements for the next twelve months.
Page 10
ARROW AUTOMOTIVE INDUSTRIES, INC.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
None.
ITEM 3. Default upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits
Exhibit 10.1 Fourth Amendment and Waiver Page 13
to Revolving Credit and Term
Loan Agreement with The
First National Bank of Boston
dated as of March 30, 1996
Exhibit 27. Financial Data Schedule Page 18
Page 11
ARROW AUTOMOTIVE INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARROW AUTOMOTIVE INDUSTRIES, INC.
(Registrant)
May 14, 1996 /s/ Jim L. Osment
_____________________________________
Jim L. Osment
President and Chief Executive Officer
May 14, 1996 /s/ James F. Fagan
_____________________________________
Executive Vice President, Treasurer
and Chief Financial Officer
Page 12