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 28, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
to
Commission file number 1-7737
ARROW AUTOMOTIVE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1449115
(State or other jurisdiction of (I.R.S. Employee 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
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: 2,873,083 shares of the
Company's Common Stock ($.10 par value) were outstanding as of May 8, 1998.
ARROW AUTOMOTIVE INDUSTRIES, INC.
INDEX
Page NUMBER
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Balance Sheets -
March 28, 1998 and June 28, 3
1997..........................................
Condensed Statements of Operations - Three Months Ended
March 28, 1998 and March 29, 4
1997.......................................
Condensed Statements of Operations - Nine Months Ended
March 28, 1998 and March 29, 5
1997........................................
Condensed Statements of Cash Flows - Nine Months Ended
March 28, 1998 and March 29, 6
1997........................................
Notes to Condensed Financial 7 - 8
Statements.................................
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of 9 - 13
Operations.......................................
PART II OTHER INFORMATION
ITEM 1. Legal 14
Proceedings......................................................................
ITEM 2. Changes in Securities and Use of 14
Proceeds...............................
ITEM 3. Default upon Senior 14
Securities...................................................
ITEM 4. Submission of Matters to a Vote of Security 14
Holders..................
ITEM 5. Other 14
Information........................................................................
ITEM 6. Exhibits and Reports on Form 8- 14
K..............................................
SIGNATURES .................................................................................................... 15
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PART I - ITEM 1 -- FINANCIAL INFORMATION
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS March 28, 1998 June 28,
1997
CURRENT ASSETS
Cash and equivalents $ 141,249 $ 240,291
Accounts receivable, less allowances 12,838,129 12,538,853
Inventories 31,530,955 30,920,184
Prepaid expenses and other current assets 525,814 1,705,746
TOTAL CURRENT ASSETS 45,036,147 45,405,074
PROPERTY, PLANT AND EQUIPMENT 29,868,824 33,989,146
Less allowances for depreciation 21,106,993 22,362,518
8,761,831 11,626,628
OTHER ASSETS 2,500,364 2,300,956
TOTAL ASSETS $ 56,298,342 $ 59,332,658
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of advances under revolving
line of credit $ 3,543,401 $ 3,836,680
Accounts payable 8,875,685 8,523,743
Cash overdrafts 1,176,547 764,113
Other current liabilities 4,259,881 4,864,374
Current portion of long-term debt 1,129,461 1,166,111
TOTAL CURRENT LIABILITIES 18,984,975 19,155,021
LONG-TERM DEBT 17,195,918 16,819,166
OTHER NONCURRENT LIABILITIES 3,521,605 3,315,105
STOCKHOLDERS' EQUITY
Common stock 296,887 296,887
Other stockholders' equity 16,748,281 20,195,803
Less cost of common stock in treasury 449,324 449,324
TOTAL STOCKHOLDERS' EQUITY 16,595,844 20,043,366
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 56,298,342 $ 59,332,658
See accompanying notes to the condensed financial statements.
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
March 28, 1998 March 29, 1997
Net sales $ 19,506,927 $ 22,480,645
Cost and expenses:
Cost of products sold 16,768,128 22,517,273
Selling, administrative and general 4,371,898 5,396,339
Restructuring charge (205,000) (100,000)
Interest 610,836 618,317
21,545,862 28,431,929
Loss before income taxes (2,038,935) (5,951,284)
Provision from income taxes 0 169,000
NET LOSS $ (2,038,935) $ (6,120,284)
Weighted average number of shares used
to calculate basic and diluted loss per 2,873,083 2,873,083
share
NET LOSS PER BASIC AND DILUTED SHARE $ (0.71) $ (2.13)
See accompanying notes to the condensed financial statements.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
March 28, 1998 March 29, 1997
Net sales $ 64,055,844 $ 68,191,970
Cost and expenses:
Cost of products sold 51,752,584 58,563,196
Selling, administrative and general 14,127,692 15,110,583
Restructuring charge (205,000) 1,100,000
Interest 1,828,089 1,726,808
67,503,365 76,500,587
Loss before income taxes (3,447,521) (8,308,617)
Benefit from income taxes 0 (585,000)
NET LOSS $ (3,447,521) $ (7,723,617)
Weighted average number of shares used to
calculate basic and diluted loss per share 2,873,083 2,873,083
NET LOSS PER BASIC AND DILUTED SHARE $ (1.20) $ (2.69)
See accompanying notes to the condensed financial statements.
ARROW AUTOMOTIVE INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
March 28, 1998 March 29, 1997
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities $ (2,390,275) 3,106,638
INVESTING ACTIVITIES
Net proceeds from the sale of property,
plant
and equipment 2,555,920 0
Purchase of property, plant and
equipment (186,907) (495,196)
Other (124,603) 125,503
Net cash provided by (used in) investing
activities 2,244,410 (369,693)
FINANCING ACTIVITIES
Payment of long-term debt and capital
lease obligations (2,980,898) (1,034,385)
Decrease in advances under
revolving line of credit (293,279) (2,172,682)
Replacement financing proceeds 3,321,000 0
Net cash provided by (used in) financing
activities 46,823 (3,207,067)
DECREASE IN CASH AND EQUIVALENTS (99,042) (470,122)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
240,291 850,537
CASH AND EQUIVALENTS AT END OF PERIOD $ 141,249 380,415
See accompanying notes to the condensed financial statements.
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
the fair presentation have been included. Operating results for the nine month
period ended March 28, 1998 are not necessarily indicative of the results that
may be expected for the year ending June 27, 1998. 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 28, 1997. The
balance sheet at June 28, 1997 has been derived from the audited financial
statements at that date.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
March 28, 1998 June 28,
1997
Stated at cost on the first-in, first-out
(FIFO)
method:
Finished goods $ 11,083,261 $ 10,507,186
Work in process and materials 25,684,694 25,649,998
36,767,955 36,157,184
Less reserve required to state inventory on
the
last-in, first-out (LIFO) method (5,237,000) (5,237,000)
$ 31,530,955 $ 30,920,184
NOTE C -- EARNINGS (LOSS) PER SHARE:
In the second quarter of fiscal year 1998, the Company adopted Statement
of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS
128 requires disclosure of basic and diluted earnings per share. Diluted
earnings per share assumes the conversion of all diluted securities. The
adoption of SFAS 128 has no effect on the Company's earnings per share.
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NOTE D -- RESTRUCTURING CHARGE
In fiscal 1997, the Company restructured its operations by closing its
California production facility and transferring its manufacturing operations to
its Arkansas facility. For the 1997 fiscal year, the restructuring charge
amounted to $1.1 million, consisting of $413,000 of employee termination
benefits and $687,000 related to the facility closing and other expenses.
In the third quarter of fiscal 1998, the Company sold its California
production facility. The transaction price was greater than anticipated in the
restructuring charge and as a result $204,000 of the restructuring charge was
reversed in the third quarter of fiscal year 1998.
NOTE E -- LONG TERM DEBT
On October 7, 1997, the Company restructured its bank agreements via an
amendment. The new agreements consist of a $7,500,000 term loan and a $20
million revolving line of credit. The interest rate on amounts outstanding
under the revolving line of credit will change depending upon the achieved debt
service coverage ratio and can range from the lender's base rate to 1.50% over
the lender's base rate. The revolving credit loan maturity date is July 31,
2000. Similarly, the interest rate on the replacement term loan on a given
date can range from 0.25% to 1.75% over the lender's base rate depending upon
the achieved debt service coverage ratio. The term loan has a maturity date of
July 31, 2000. The amendment resulted in $3,321,000 of incremental cash
proceeds of the replacement term loan over the outstanding balance of the prior
term loan. The Company's obligations under these agreements continue to be
secured by substantially all of its assets.
In the third quarter of fiscal year 1998, $2,000,000 of the cash proceeds from
the sale of the California facility reduced the term note to the Company's bank
lenders as required by the existing bank agreements.
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PART 1
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto. All forward looking statements
contained in the following discussion and analysis and elsewhere in this report
are qualified in their entirety by the cautionary statement appearing at the
end of the discussion and analysis.
On January 2, 1998, Arrow Automotive Industries the "Company" announced
its engagement of an investment banking firm, Advest Inc., to act as its
exclusive financial advisor to identify and investigate strategic opportunities
for the Company. The Company continues to work closely with Advest to explore
and evaluate various strategic opportunities, including, but not limited to, a
possible merger or sale of the Company.
In the third quarter of fiscal 1998, the Company sold its California
production facility. As required by the existing debt agreement, $2,000,000 of
the cash proceeds were applied against the term note to the Company's bank
lenders. The transaction price was greater than anticipated in the
restructuring charge and as a result, $204,000 of the restructuring charge was
reversed in the third quarter of fiscal 1998.
During the third quarter, the Company discontinued the remanufacture of
carburetors. The Company sold its carburetor inventory to a third-party
carburetor remanufacturer in the third quarter of fiscal 1998 for approximately
$225,000, payable as a credit against future carburetor purchases by the
Company from such carburetor remanufacturers. The Company will continue to
sell carburetors purchased from third party remanufacturers. The Company
concluded a similar transaction subsequent to the third quarter of fiscal 1998
with its rack and pinion product line selling $400,000 of its rack and pinion
inventory to a third-party remanufacturer. Again, the Company will continue to
distribute rack and pinion purchased from third party remanufacturers. The
Company will continue to review its product lines to maximize profitability.
OPERATING RESULTS
Operations during the third quarter of fiscal 1998 resulted in a net loss
of $2,039,000 compared to a net loss of $6,120,000 for the third quarter of
fiscal 1997. The nine months ended March 28, 1998, resulted in a net loss of
$3,448,000 compared to a net loss of $7,724,000 for the comparable period in
the prior fiscal year. The nine month operating loss before income taxes for
fiscal 1997 includes: a) a first quarter restructuring charge relating to the
closure of the Company's California production facility of $1,100,000, b) a
third quarter inventory provision of $4,000,000 to write down certain
inventories to net realizable value and c) other non-recurring period costs
related to the closure the California plant closing of $10,000, $880,000 and
$720,000 in the first three quarters of fiscal 1997, respectively.
SALES
Net sales for the third quarter of fiscal 1998 of $19,507,000 declined
$2,974,000 or 13.22% compared to net sales for the comparable period in fiscal
1997. Unit sales for the third quarter in the current fiscal year were down
12.91% compared to the third quarter of the prior fiscal year. For the nine
months ended March 28, 1998, net sales of $64,056,000 were down 6.07% from net
sales of
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the first nine months in the prior fiscal year. Unit sales for the first nine
months in the current fiscal year were down 10.81% from unit sales of the same
period in fiscal 1997.
The third quarter of fiscal 1998 experienced a decline in the sale of
electrical products. In the current quarter, the electrical units sold
represented 52.5% of total units sold compared to 57.1% of total units sold in
the third quarter of fiscal 1997. The decline in electrical business in the
third quarter of fiscal 1998 was attributable in part to the unseasonably mild
winter weather experienced in North America which resulted in fewer part
failures and reduced the demand for many of the Company's products. Because
electrical products on average have a higher selling price than mechanical
products, this decline in electrical units sold as a percentage of total units
sold by the Company contributed to a greater decline in net sales of the
quarter relative to the unit decline.
The decline in net sales in the nine months ended March 28, 1998, is
related to the mild winter weather discussed above and reduced demand from our
traditional warehouse distributors ("WD"). The consolidation in the
distribution sector of the automotive aftermarket and resultant excess
inventory levels found throughout the chain of distribution has been a
significant factor contributing to the decline in sales to WD's. See the
INDUSTRY CHANGE DISCUSSION IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FORM 10-Q for the period ended
December 27, 1997 for further discussion about changes in the industry.
GROSS MARGIN
The Company's gross margin percentage for the third quarter of fiscal 1998
was 14.04%. The Company experienced a negative gross margin percentage for the
corresponding period last fiscal year of 0.16%. For the nine months ended
March 28, 1998, the gross margin percentage was 19.21% compared to a 14.12%
gross margin for the same period in fiscal 1997. The cost of goods sold in the
second and third quarters of the current fiscal year include one-time period
costs of $260,000 and $316,000, respectively, related to the consolidation of
the starter line production to the Company's Arkansas manufacturing facility.
These costs included expenses for personnel additions and training at the
Company's Arkansas facility while their counterparts at the Company's South
Carolina facility continued normal production levels. A parallel workforce of
approximately 100 production workers continued until the line shut down in
South Carolina in February 1998. This training period resulted in additional
labor costs in both the second and third quarters of fiscal 1998. Additional
labor costs were also incurred in the third quarter to ship the starter product
manufacturing equipment and inventory to Arkansas. The cost of goods sold in
the third quarter and first nine months of the prior fiscal year included one-
time period costs of $498,000 and $1,054,000, respectively, related to the
closing of the California manufacturing facility and a $4,000,000 charge to
provide a reserve for inventories for which quantities on hand exceeded
forecasted need.
A significant factor contributing to the decline in gross margin in the
third quarter of fiscal year 1998 was the decline in sales volume which
resulted in the inability to absorb fixed and semi-variable overhead costs into
production. Also during the current year's third quarter the Company incurred
unfavorable price and source variances. Early in fiscal 1998 the Company
extended payment terms with its vendors as a result of the tightened cash
situation. The Company has been paying premium prices for purchased components
as a result of the extended payment terms with its vendors. During the third
quarter of fiscal 1998, the Company incurred unfavorable price and source
variances of approximately $364,000 compared to $83,000 during the same period
last year. Year to date, the Company incurred unfavorable price and source
variances of $1,172,000 compared to favorable price and source variances of
$210,000 in the first nine months of the prior fiscal year.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses in the third quarter and
first nine months of fiscal 1998 were $4,491,000 (23.02% of net sales) and
$14,247,000 (22.24% of net sales), respectively. Selling, general and
administrative expenses in the third quarter and first nine months of fiscal
1997 were $5,396,000 (24.0% of net sales) and $15,111,000 (22.16% of net
sales), respectively. The expenses for the second and third quarters of the
prior fiscal year include non-recurring period costs related to the closing of
the California facility of $300,000 and $474,000, respectively. The reduction
in selling, general and administrative expenses in the current fiscal year is
primarily due to the reduction of personnel through the consolidation of
administrative functions.
RESTRUCTURING CHARGE
In fiscal 1997, the Company restructured its operations by closing its
California production facility and transferring its manufacturing operations to
its Arkansas facility. For the 1997 fiscal year, the restructuring charge
amounted to $1.1 million, consisting of $413,000 of employee termination
benefits and $687,000 related to the facility closing and other expenses.
In the third quarter of fiscal 1998, the Company sold its California
production facility. The transaction price was greater than anticipated in the
restructuring charge and as a result $204,000 of the restructuring charge was
reversed in the third quarter of fiscal year 1998.
INTEREST
Interest expense was $611,000 for the third quarter of fiscal 1998.
Interest expense for the same period in the prior fiscal year was $618,000.
The third quarter of fiscal 1998 had lower interest rates but higher borrowing
levels than compared to the third quarter of fiscal 1997. For the nine months
ended March 28, 1998, interest expenses of $1,828,000 increased $101,000 or
5.9% over the same period last fiscal year. The higher interest expenses in
the first nine months of fiscal 1998 is due to higher interest rates and higher
borrowing levels through the current fiscal year compared to last year.
TAX PROVISION
The Company has not recorded an income tax benefit in the current fiscal
year. In the prior fiscal year, the Company recorded an income tax benefit
which was realized with the carryback of the 1997 net operating loss. Net
operating loss carryforwards can be carried forward to fiscal year 2013.
CAPITAL RESOURCES
Net cash of $2,390,000 was used by operating activities during the nine
months ended March 28, 1998, compared to net cash provided by operations of
$3,107,000 during the first nine months of the prior fiscal year. The
Company's loss from operations had a significant impact on the cash position in
the third quarter of fiscal 1998. The increase in accounts receivable of
$392,000 and a decrease in accrued liabilities of $678,000 also used cash in
the period. The increase in accounts receivable was due primarily to the sales
volume in the month of March 1998 compared to sales volume in the month of June
1997. The decline in accrued liabilities related to the timing of payments
such as severance pay and casualty insurance. Cash was provided by the receipt
of a Federal income tax refund of $1,140,000 and an increase in trade payables
and cash overdrafts of $764,000. Trade payables increased due to the
lengthening of payment terms and higher average
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cost per unit purchased in the current year. Inventories, while lower during
the quarter, are up $611,000 in the nine months ended March 28, 1998. The
Company continues to dispose of inventory that was reserved for in the third
quarter of fiscal 1997. The Company expects that this disposal effort will
continue in the fourth quarter of fiscal 1998. Further, in the fourth quarter
of fiscal 1998 the Company's inventory of rack and pinion products will decline
due to its exit from the manufacture of this product discussed earlier.
In fiscal 1998, cash was provided from investing activities of $2,244,000
as a result of the sale of the California facility. Of the cash proceeds,
$2,000,000 reduced the term note to the Company's banks as required by existing
debt agreements. In fiscal 1997 cash of $370,000 was used in investing
activities.
Cash of $47,000 was provided by financing activities in the first nine
months of fiscal 1998 compared to cash used by financing activities of
$3,207,000 in the same period of last fiscal year. On October 7, 1997, the
Company restructured its bank agreements. Incremental cash proceeds of
$3,321,000 became available over the outstanding balance of the replaced credit
agreements.
Over the past few years, the Company has implemented actions to
consolidate operations and functions in order to reduce costs and improve
operating results. At the same time, ongoing consolidation, and intense
competition among automotive remanufacturers and distributors, coupled with
unfavorable warm weather conditions in fiscal 1998, have adversely impacted
operating results. It is anticipated that the Company will incur an operating
loss for its current fiscal year ended in June 1998. Additionally, it is
unclear whether the Company will be in compliance at June 1998 with certain
debt covenants under its existing financing agreements with its bank or, if the
Company does not meet its debt covenants, whether the Company's bank will waive
any such noncompliance. The Company will continue to closely monitor revenues
and cash flow, and manage its expenses and cost structure accordingly. The
Company believes its current cash position, plus available borrowings under it
revolving credit facility, will meet the Company's liquidity needs for the
remainder of fiscal 1998. However, if the Company's cash resources are
insufficient to fund its operations at any time, there can be no assurance that
the Company will be able to obtain additional capital or borrowings, or, if it
does so, that such capital or borrowings can be obtained at commercially
reasonable terms including, but not limited to the merger or sale of the
company.
CAUTIONARY STATEMENT
All statements in the foregoing discussion and analysis, which are not
historical fact, are forward looking statements. In connection with the "Safe
Harbor" provisions of the Private Securities Litigation Reform act of 1995, the
Company is providing the following cautionary statement to identify some (but
not necessarily all) of the important factors that could cause its actual
results to differ materially from those anticipated in any forward looking
statement made in this report otherwise by or on behalf of the Company.
Actual results of the Company may differ from those anticipated in any
forward looking statement made by or on behalf of the Company due to the
following factors, among other risks and uncertainties affecting the Company's
business: unwillingness of the Company's vendors to cooperate in agreements
that lengthen payment terms; reduced product demand; lack of availability of
adequate funding sources and cash from operations; a change in product sales
mix between electrical or mechanical products; the loss of or a material
reduction in orders from either of the Company's two largest customers or other
material loss of business; deterioration of vendor relationships adversely
impacting material supplies; month-to-month volatility in sales volumes or
customer returns which can result in additional labor and operating costs; new
business acquisition
8 of 62
costs; unseasonably mild weather patterns, the impact of inflation, and the
various other factors identified in the discussion appearing under the heading
"Outlook" above and elsewhere in this report.
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ARROW AUTOMOTIVE INDUSTRIES, INC.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities and
Uses of Proceeds.
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 Director and Officer Liability 16 - 62
Insurance Policy and Excess
Policy
Exhibit 27 Financial Data Schedule 63
B. Reports on Form 8-K The Company filed a report on
Form 8-K on January 14, 1998
to report its engagement of
the
investment banking firm
Advest, Inc. to act as its
exclusive financial advisor to
identify and investigate
strategic
opportunities for the Company.
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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 12, 1998 /s/ Jim L. Osment
Jim L. Osment
President and Chief Executive Officer
May 12, 1998 /s/ James F. Fagan
James F. Fagan
Executive Vice President, Treasurer
and Chief Financial Officer
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