UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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 1-4433.
ARMATRON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1052250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Main Street
Melrose, Massachusetts 02176
(Address of principal executive offices) (Zip Code)
(781) 321-2300
(Registrant's telephone number, including area code)
N/A
(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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock (par value $1) outstanding at January
31, 1998 is 2,459,749 shares.
1
ARMATRON INTERNATIONAL, INC.
File No. 1-4433
_________________
PAGE(S)
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
December 31, 1997 and 1996, September 30, 1997 3 - 4
Consolidated Condensed Statements of
Operations for the three months ended
December 31, 1997 and 1996 5
Consolidated Condensed Statements of
Cash Flows for the three months
ended December 31, 1997 and 1996 6
Notes to Consolidated Condensed Financial
Statements 7 - 9
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
PART II - OTHER INFORMATION
Item 4
Results of Votes of Security Holders 13
Item 6b
Reports on Form 8-K 13
SIGNATURES 14
2
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Balance Sheets
December 31, 1997 and 1996, and September 30, 1997
(Dollars in Thousands)
(Unaudited) (Audited)
December 31, September 30,
----------------- -------------
1997 1996 1997
---- ---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,455 $ 1,522 $ 1,126
Trade accounts receivable,net 967 1,156 2,389
Inventories 2,933 2,513 2,711
Deferred taxes 113 130 113
Prepaids and other current assets 255 335 165
------- ------- -------
Total Current Assets 5,723 5,656 6,504
PROPERTY AND EQUIPMENT, NET 564 610 589
OTHER ASSETS 107 107 171
------- ------- -------
Total Assets $ 6,394 $ 6,373 $ 7,264
======= ======= =======
The accompanying notes are an integral part
of the consolidated condensed financial statements.
3
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Balance Sheets
December 31, 1997 and 1996, and September 30, 1997
(Dollars in Thousands)
(Unaudited) (Audited)
December 31, September 30,
----------------- -------------
1997 1996 1997
---- ---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 601 $ 875 $ 695
Other current liabilities 1,814 1,261 1,825
Current portion under capital
lease obligations 18 - 18
------- ------- -------
Total Current Liabilities 2,433 2,136 2,538
------- ------- -------
LONG-TERM DEBT, related parties 4,715 4,715 4,715
------- ------- -------
LONG-TERM CAPITAL LEASE OBLIGATIONS,
net of current portion 26 - 30
------- ------- -------
DEFERRED RENT, net of current portion 33 71 38
------- ------- -------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, par value $1 per
share, 6,000,000 shares author-
ized; 2,606,481 shares issued
at December 31, 1997, 1996, and
September 30, 1997 2,606 2,606 2,606
Additional paid-in capital 6,770 6,770 6,770
Accumulated deficit (9,803) (9,539) (9,047)
------- ------- -------
(427) (163) 329
Less:
Treasury stock at cost - 146,732
at December 31, 1997, 1996 and
September 30, 1997 386 386 386
------- ------- -------
Total Stockholders' Equity
(Deficiency) (813) (549) (57)
------- ------- -------
Total Liabilities and
Stockholders' Equity
(Deficiency) $ 6,394 $ 6,373 $ 7,264
======= ======= =======
The accompanying notes are an integral part
of the consolidated condensed financial statements.
4
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Statements of Operations
for the Three Months ended December 31, 1997 and 1996
(Dollars in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
December 31
------------------
1997 1996
---- ----
Net sales $ 1,215 $ 1,215
Cost of products sold 1,399 1,385
Selling, general and
administrative expenses 461 508
Interest expense-related parties 120 120
Interest expense-third parties 9 7
Other (income) expense - net (18) (27)
------- -------
Net loss $ 756 $ 778
======= =======
Per Share:
Net loss $ .31 $ .32
======= =======
Weighted average number of
common shares outstanding 2,459,749 2,459,749
========= =========
The accompanying notes are an integral part
of the consolidated condensed financial statements.
5
ARMATRON INTERNATIONAL, INC.
Consolidated Condensed Statements of Cash Flows
for the Three Months ended December 31, 1997 and 1996
(Dollars in Thousands)
(Unaudited)
Three Months Ended
December 31,
------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $( 756) $( 778)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Depreciation and amortization 92 76
Loss on disposal of equipment - (1)
Changes in operating assets
& liabilities 1,059 427
------- -------
Net cash flow from (used for)
operating activities: 395 (276)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for machinery and equipment (62) (51)
------- -------
Net cash flow used for
investing activities: (62) (51)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations (4) -
------- -------
Net cash flow used for
financing activities: (4) -
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 329 (327)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,126 1,849
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,455 $ 1,522
======= =======
SUPPLEMENTAL INFORMATION:
Interest paid - related parties $ - $ -
Interest paid - third parties $ 7 $ 7
Income taxes $ - $ -
The accompanying notes are an integral part of the
consolidated condensed financial statements.
6
ARMATRON INTERNATIONAL, INC.
Notes to Consolidated Condensed Financial Statements
1. NATURE OF BUSINESS
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron leaf-
eaters, bugkillers, yard carts, storage sheds and dog houses which comprised
82% and 97% of the Company's sales for the three months ended December 31,
1997 and for the year ended September 30, 1997, respectively. The Company
distributes its consumer products primarily to major retailers throughout
the United States, with some products distributed under customer labels.
Substantially all of this segment's sales and accounts receivable related to
business activities with such retailers. The Industrial Products segment
markets electronic obstacle avoidance systems for transportation and
automotive applications. There are no intercompany sales between
segments.
2. OPINION OF MANAGEMENT
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments(including normal
recurring adjustments) necessary to present fairly the consolidated
financial position as of December 31, 1997 and 1996, and September 30, 1997,
and the consolidated statements of operations for the three months ended
December 31, 1997 and 1996 and the consolidated statements of cash flow for
the three months ended December 31, 1997 and 1996. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1997. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
The year-end balance sheet data was derived from audited financial
statements, but does not include disclosures required by generally accepted
accounting principles. The accompanying unaudited, consolidated condensed
financial statements are not necessarily indicative of future trends or the
Company's operations for the entire year.
3. REVENUE RECOGNITION
Revenue from product sales is recognized at the time the products are
shipped. Sales terms for the Industrial Products segment are 30 days net.
Following industry trade practice, the Company's Consumer Products segment
offers extended payment terms for delivery of seasonal items.
4. USE OF ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade account
receivables. If any of the Company's major customers fail to pay the
Company on a timely basis, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
7
For the three months ended December 31, 1997, two customers accounted for
approximately 41% of the Company's net sales. At December 31, 1997, these
customers accounted for approximately 51% of the Company's trade accounts
receivable balance.
For the year ended September 30, 1997, two customers accounted for
approximately 42% of the Company's net sales. At September 30, 1996, these
customers accounted for approximately 57% of the Company's trade accounts
receivable balance.
For the three months ended December 31, 1996, two customers accounted for
approximately 51% of the Company's net sales. At December 31, 1996, these
customers accounted for approximately 42% of the Company's trade accounts
receivable balance.
6. MAJOR SUPPLIERS
The Company currently purchases its plastic storage sheds, yard carts and
dog houses from one supplier. This supplier manufactures these products in
accordance with the Company's designs and specifications. The Company
believes that other suppliers could provide the required products although
comparable terms may not be realized. A change in suppliers could cause a
delay in scheduled deliveries of the products to the Company's customers and
a possible loss of revenue, which would adversely affect the Company's
results of operations.
7. CASH
The Company maintains its cash in bank deposit accounts which, at times, may
exceed Federally insured limits and in deposit accounts at its commercial
finance company. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
8. INVENTORIES
Inventories are stated on a first-in, first-out (FIFO) method at the lower
of cost or market.
Inventories consisted of the following:
(In Thousands)
(Unaudited) (Audited)
December 31, September 30,
--------------- -------------
1997 1996 1997
---- ---- ----
Raw Materials $ 1,924 $ 1,626 $ 1,680
Work in Process 16 100 21
Finished Goods 993 787 1,010
------- ------- -------
$ 2,933 $ 2,513 $ 2,711
======= ======= =======
9. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment are stated at cost. Depreciation is computed based
upon the estimated useful lives of the various assets using the straight-
line method with annual rates of depreciation of 10 to 33 1/3%. Capitalized
tooling costs are amortized over three years. Leasehold improvements are
amortized over the lesser of the term of the lease or the estimated useful
life of the related assets. Tooling and molding costs are charged to a
deferred cost account, prepaid tooling, as incurred, until the tool or mold
is completed. Upon completion the costs are transferred to a
property/equipment account.
8
Maintenance and repairs are charged to operations as incurred. Renewals and
betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated
depreciation are removed from their respective accounts. Any resulting gain
or loss is reflected in earnings.
10. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of:
(In thousands)
(Unaudited) (Audited)
December 31, September 30,
---------------- -------------
1997 1996 1997
---- ---- ----
Salaries, commissions
and benefits $ 386 $ 328 $ 399
Sales allowances and incentives 152 - 163
Professional fees 90 98 78
Warranty costs 40 42 37
Advertising costs 65 129 82
Interest 1,037 559 917
Other 44 105 149
------ ------ ------
$1,814 $1,261 $1,825
====== ====== ======
11. DEBT
Long-term Debt
The Company has a $7,000,000 line of credit with a realty trust operated for
the benefit of the Company's principal shareholders. This line of credit,
with interest at 10%, requires monthly payments of interest only, is payable
in full in October 1998, and is collateralized by all assets of the Company.
The Company had $4,715,000 outstanding under this line of credit at December
31, 1997. Repayment of this line of credit is subordinated to the repayment
of any and all balances outstanding on the revolving line of credit from a
commercial finance company which is further described below. At December
31, 1997, interest payments of $1,037,000, associated with this line were in
arrears for the period November 1, 1995 to December 31, 1997.
Note Payable
The Company has a revolving line of credit agreement with a commercial
finance company which permits combined borrowings up to $3,500,000 in cash
and letters of credit. This line of credit is collateralized by all the
assets of the Company and expires in December 1999. The terms of this
agreement include a borrowing limit which fluctuates depending on the levels
of accounts receivable and inventory which collateralize the borrowings.
The agreement contains various covenants pertaining to maintenance of
working capital, net worth, restrictions on dividend distributions and other
conditions. Interest on amounts outstanding is payable on a monthly basis
at 1 3/4% over the commercial base rate. The commercial base rate was 8.5%
at December 31, 1997. As of December 31, 1997, the Company had outstanding
letters of credit amounting to approximately $137,000 and approximately
$1,081,000 was available, pursuant to the borrowing formula, under this
credit agreement.
9
ITEM 2: ARMATRON INTERNATIONAL, INC.
Management's Discussion and Analysis of Financial Conditions
and Results of Operations
OVERVIEW
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron leaf-
eaters, bugkillers, yard carts, storage sheds, and dog houses which
comprised 82% and 97% of the Company's sales during the three months ended
December 31, 1997 and for the year ended September 30, 1997, respectively.
The Company distributes its consumer products primarily to major retailers
throughout the United States, with some products distributed under customer
labels. Substantially all of this segment's sales and accounts receivable
related to business activities with such retailers. The Industrial Products
segment markets electronic obstacle avoidance systems for transportation and
automotive applications. There are no intercompany sales between segments.
For the three months ended December 31, 1997, two customers accounted for
approximately 41% of the Company's net sales. At December 31, 1997, these
customers accounted for approximately 51% of the Company's trade accounts
receivable. If any of the Company's major customers fail to pay the Company
on a timely basis, it could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company
currently purchases its plastic storage sheds, yard carts and dog houses
from one supplier. This supplier manufactures the products in accordance
with the Company's designs and specifications. The Company believes that
other suppliers could provide the required products although comparable
terms may not be realized. A change in suppliers could cause a delay in
scheduled deliveries of the products to the Company's customers and a
possible loss of revenue, which would adversely affect the Company's results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
including labor costs, raw material purchases and funding of accounts
receivable. Historically, the Company's sources of cash have been
borrowings from banks and finance companies and notes from related parties.
During the three months ended December 31, 1997, operating activities
provided $395,000 in cash primarily due to a decrease in trade accounts
receivable of $1,422,000 offset by an increase in inventories of $222,000,
a decrease in accounts payable of $94,000 and the net loss of $756,000.
The Company has a revolving line of credit agreement with commercial finance
company which permits combined borrowings up to $3,500,000 in cash and
letters of credit. This line of credit is collateralized by all the assets
of the Company and expires in December 1999. The terms of this agreement
include a borrowing limit which fluctuates depending on the levels of
accounts receivable and inventory which collateralize the borrowings. The
agreement contains various covenants pertaining to maintenance of working
capital, net worth, restrictions on dividend distribution and other
conditions. Interest on amounts outstanding is payable at 1 3/4% over the
commercial base rate. The commercial base rate was 8.5% at December 31,
1997. At December 31, 1997, the Company had outstanding letters of credit
amounting to approximately $137,000 and approximately $1,081,000 was
available, pursuant to the borrowing formula, under this credit agreement.
10
The Company has a $7,000,000 line of credit with a realty trust operated for
the benefit of the Company's principal shareholders. This line of credit,
with interest at 10%, requires monthly payments of interest only, is payable
in full in October 1998, and is collateralized by all assets of the Company.
The Company had $4,715,000 outstanding under this line of credit at December
31, 1997. Repayment of this line of credit is subordinated to the repayment
of any and all balances outstanding on the revolving line of credit from a
commercial finance company. At December 31, 1997, interest payments of
$1,037,000 associated with this line were in arrears for the period November
1, 1995 to December 31, 1997.
Sales terms for the Industrial Products segment are 30 days net. Following
industry trade practice, the Consumer Products segment offers extended
payment terms for delivery of seasonal product items such as the bugkillers,
electric leaf-eater, biomister, compost bin, yard carts and storage sheds,
resulting in fluctuating requirements for working capital.
During the three months ending December 31, 1997, the Company made cash
investments of $62,000 in capital expenditures. As of January 31, 1998,
the Company has commitments of approximately $50,000 for future capital
expenditures primarily for tools and dies used in production.
In 1991, the California Department of Health Services (DHS) issued a
Corrective Action Order (CAO) against the Company and a former subsidiary.
The CAO requires the Company and a former subsidiary to comply with a
Cleanup and Abatement Order which was issued in 1990 against the Company for
soil contamination at the site of the former subsidiary. To date, no
determination has been made with regard to the extent of any environmental
damage and who may be liable. The Company does not believe, based on the
information available at this time, that the outcome of this matter will
have a material adverse effect on its financial position or results of
operation.
The Company believes that its present working capital, credit arrangements
with a commercial finance company and related party, and other sources of
financing will be sufficient to finance its seasonal borrowing needs,
operations and investment in capital expenditures in fiscal 1998. Other
sources of financing, provided by the Company's principal shareholder, are
available to finance any working capital deficiencies.
RESULTS OF OPERATIONS
The results of consolidated operations for the three months ended December
31, 1997 resulted in net loss of $756,000, or $.31 per share, as compared
with net loss of $778,000, or $.32 per share in the same period of the
previous year.
Sales remained at approximately $1,215,000 for the three months ended
December 31, 1997, as compared to the corresponding period in the previous
year. The Company's sales remained primarily at the same level for the three
months ended December 31, 1997, however the Consumer Products segment
experienced a decrease in sales of its sheds of approximately $180,000 and
this was offset by an increase in the sales of the Industrial Products
segment's Echovision systems of approximately $180,000.
11
The Company has experienced negative gross margins in the first quarter for
the past several years as product lines within the Consumer Products segment
are subject to seasonal fluctuations, with most shipments of products
occurring in the third and fourth quarters of the Company's fiscal year.
Sales during the first quarter for the past three years have not exceeded 10
percent of the annual sales volume due to the seasonal nature of the
Company's consumer product lines. The Company has deferred approximately
$30,000 of period costs during the three months ended December 31, 1997 for
absorption in subsequent quarters.
Gross margins for the three months ended December 31, 1997 and 1996 were
($184,000) and ($170,000) respectively.
Operating profit is the result of deducting operating expenses excluding
interest expense, general corporate expenses, and income taxes from total
revenue.
Sales and operating loss for the Consumer Products segment for the three
months end December 31, 1997 were approximately $1,002,000 and $472,000,
respectively, as compared to $1,182,000 and $437,000, respectively, in the
previous year. Sales decreased $180,000 primarily due to a decrease in
sales of sheds. Product lines within the Consumer Products segment are
subject to seasonal fluctuations, with most shipments occurring in the spring
and summer seasons.
Sales and operating loss for the Industrial Products segment for the three
months ended December 31, 1997 were $213,000 and $3,000 respectively, as
compare to sales of $33,000 and operating loss of $84,000, in the previous
year. The increase in sales was due to additional volume of shipments of
the Company's Echovision systems. The operating loss was due to the
underutilization of this segment's facilities.
Selling, general and administrative expenses decreased $47,000, or 9.2%, to
$461,000 for the three months ended December 31, 1997, as compared to
$508,000 for the same period of the previous year due to lower sales and
the Company's cost containment efforts.
Additional tax benefits from loss on operations for the three months ended
December 31, 1997 were offset by changes to the related valuation allowance.
12
ARMATRON INTERNATIONAL, INC.
PART II
Item 4. Results of Votes of Security Holders
The annual meeting of shareholders was held on January 16, 1998 in Melrose,
Massachusetts. Two proposals were submitted by shareholders as described in
the Company's Proxy Statement dated December 30, 1997 and were voted upon
and approved by shareholders at the meeting. The table below briefly
describes the proposals and results of the shareholder votes.
Votes Votes
In Favor Opposed Abstain
-------- ------- -------
Shareholder proposal to elect
one director, Charles J. Housman 1,446,240 420
Shareholder proposal to ratify
the selection of independent
auditors for the 1998
fiscal year 1,445,265 1,305 90
Messrs. Edward L. Housman and Elliot J. Englander are Directors of the
Company who continue to hold office.
Item 6b. Reports on Form 8-K
The Company did not file any reports on Form 8-K for the quarter ended
December 31, 1997.
13
ARMATRON INTERNATIONAL, INC.
File No. 1-4433
_________________
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
ARMATRON INTERNATIONAL, INC.
(Registrant)
Date: February 10, 1998 /s/ Charles J. Housman
Charles J. Housman, President
and Treasurer
Date: February 10, 1998 /s/ Edward L. Housman
Edward L. Housman, Director
Date: February 10, 1998 /s/ Elliot J. Englander
Elliot J. Englander, Director
14