UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-21922
ARROW TRANSPORTATION CO.
(Exact name of Registrant as specified in its charter)
Oregon 93-1103182
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
10145 N. Portland Road, Portland, Oregon 97203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503)286-3661
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.
Class Outstanding at March 31, 1996
Common stock, no par value 4,150,314 Shares
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ARROW TRANSPORTATION CO. AND SUBSIDIARY
Form 10-Q -- For the Quarter Ended March 31, 1996
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets -- March 31, 1996 and
December 31, 1995
b) Consolidated Statements of Operations -- Three
Months Ended March 31, 1996 and March 31, 1995
c) Consolidated Statements of Stockholders' Equity --
December 31, 1995 and March 31, 1996
d) Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 1996 and March 31, 1995
e) Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Balance Sheets
(Amounts in thousands)
3/31/96
ASSETS (Unaudited) 12/31/95
----------- --------
Cash $ 30 $ 33
Accounts receivable, net 3,132 2,976
Notes and other receivables 59 69
Repair parts and supplies 558 585
Prepaid expenses and deposits 723 736
Prepaid tires 537 630
Assets held for sale 322 785
Deferred income taxes 367 367
------- -------
Total current assets 5,728 6,181
Property and equipment, net 13,631 14,218
Assets held for sale 317 317
Other assets 122 131
------- -------
TOTAL ASSETS $19,798 $20,847
======= =======
Accounts payable $ 1,545 $ 1,350
Accrued expenses 1,555 1,684
Current portion of long-term debt and
capital leases 3,155 3,338
----- -----
Total current liabilities 6,255 6,372
Line of Credit 2,242 1,825
Long-term debt 4,799 4,959
Obligations under capital leases 3,913 4,480
Insurance reserves, claims and contingencies 25 25
Deferred income taxes 384 627
------- -------
TOTAL LIABILITIES 17,618 18,288
------- -------
Stockholders' equity:
Common stock 4,879 4,868
Accumulated deficit (2,699) (2,309)
------- -------
TOTAL STOCKHOLDERS' EQUITY 2,180 2,559
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,798 $20,847
======= =======
See notes to consolidated financial statements.
3
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
For the Three Months Ended
March 31, March 31,
1996 1995
OPERATING REVENUES $6,739 $7,912
OPERATING EXPENSES:
Compensation 3,967 4,309
Supplies and maintenance 816 979
Fuel and fuel taxes 601 610
Depreciation and amortization 613 690
Taxes and licenses 253 344
Insurance and claims 201 174
Selling and administration 306 417
Rent and purchased transportation 263 300
Communication and utilities 144 119
------ ------
Total operating expenses 7,164 7,942
------ ------
OPERATING LOSS (425) (30)
OTHER (INCOME) EXPENSE:
Interest expense 302 288
Other (income) expense (94) (11)
------ ------
Total other expense 208 277
------ ------
INCOME (LOSS) BEFORE INCOME TAXES (633) (307)
INCOME TAX EXPENSE (BENEFIT) (243) (122)
------ ------
NET INCOME (LOSS) $ (390) $ (185)
====== ======
NET INCOME (LOSS) PER COMMON
AND EQUIVALENT SHARE $ (.09) $ (.04)
SHARES USED IN PER SHARE CALCULATION 4,150 4,178
====== ======
See notes to consolidated financial statements.
4
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Amounts in thousands)
Total
Common Stock Accumulated Stockholders'
Shares Amount Deficit Equity
------ ------ ------- ------
Balance, December 31, 1995 4,141 $4,868 $(2,309) $2,559
Net loss (390) (390)
Issuance of stock for
Employee Stock
Purchase Plan 9 11 11
----- ------ ------- ------
Balance, March 31, 1996 4,150 $4,879 $(2,699) $2,180
===== ====== ======= ======
See notes to consolidated financial statements.
5
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Three Months Ended
March 31, March 31,
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(390) $ (185)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 623 694
Deferred income taxes (243) (122)
Changes in operating assets and
liabilities:
Receivables (146) 87
Repair parts and supplies 27 75
Prepaid expenses and deposits 13 4
Prepaid tires 93 17
Accounts payable and accrued
expenses (32) (125)
Insurance reserves and claims -- (20)
Other (22) --
----- ------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (77) 425
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22) (851)
Proceeds from sale of assets held
for sale and equipment 479 --
----- ------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 457 (851)
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank
overdrafts 98 (144)
Net borrowing on line of credit 417 155
Proceeds from issuance of long-term debt -- 1,233
Repayments:
Notes payable to bank -- (219)
Long-term debt (244) (262)
Capital lease obligations (665) (368)
Issuance of common stock 11 35
----- ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (383) 430
----- ------
NET INCREASE (DECREASE) IN CASH (3) 4
CASH AT BEGINNING OF PERIOD 33 $ 32
----- ------
CASH AT END OF PERIOD $ 30 $ 36
===== ======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the three months
for interest $ 275 $ 313
See notes to consolidated financial statements.
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ARROW TRANSPORTATION CO. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) FINANCIAL STATEMENTS:
The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
The accompanying unaudited consolidated financial statements reflect in the
opinion of management all adjustments considered necessary for a fair
presentation as of March 31, 1996.
(2) PROPERTY AND EQUIPMENT:
As part of the Company's profit improvement plan, the Company removed from
its fleet and placed for sale 43 power units. These power units were
reclassified to current assets as Assets held for sale at December 31,
1995. As of March 31, 1996 the Company had 15 units remaining to be sold.
(3) CREDIT ARRANGEMENT:
In November 1995 the Company refinanced its combined credit arrangement
with another lender. The new arrangement provides for a $4,000,000 line of
credit at an interest rate of 1.5% over the lender's reference rate (8.25%
at March 31, 1996). Maximum borrowing under the line is limited to the
lesser of $4,000,000 or 85% of eligible accounts receivable which were
$2,275,000 at March 31, 1996. The line of credit matures in November 1997.
The combined credit arrangement includes a $2,000,000 revolving to term
loan facility to allow for the purchase of new and used revenue equipment
on a revolving basis, converting to term loans. Any outstanding balance on
this facility after six months from the initial funding will be converted
to a term note with a maturity of three years from the date of conversion.
Borrowings under the revolving to term loan will bear interest at 1.5% over
the lender's reference rate. There was no balance outstanding under the
revolving to term loan facility at March 31, 1996.
The combined credit arrangement includes various restrictive covenants
including, a prohibition on dividends and minimum adjusted net worth. At
March 31, 1996, the Company was in compliance with all of the debt
covenants relating to this credit arrangement.
(4) CONTINGENCIES, CLAIMS AND INSURANCE RESERVES:
The Company is party to five actual or pending proceedings, the materiality
of which the Company is presently unable to assess:
(a) The Washington Department of Ecology ("Ecology") has served an
administrative enforcement order on the Company and 16 other companies
associated with the Yakima Railroad Area ("YRRA") in Yakima, Washington.
Ecology alleges in the order that all 17 of the companies have some
connection with the presence of the chemical Perchloroethylene ("PCE") in
the ground water underlying the YRRA. The Company used carbon filtration
to treat wash water from its trucks.
The spent carbon was taken by an independent transporter to the Cameron
Yakima facility located within the YRRA. This transporter directly
contracted with the Cameron-Yakima recycling facility. Ecology claims that
Cameron-Yakima is a source of PCE contamination, along with other
facilities located within the YRRA. The principal parties with respect to
the
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enforcement order are Ecology, the Company and the 16 other companies that
were served with the order. There are many other parties, not named on the
order, who used Cameron-Yakima and are potentially liable for contamination
at the site. The order directs the respondent parties to develop and
implement a remedial investigation/feasibility study ("RI/FS") of the YRRA
to identify the nature and extent of PCE contamination in the ground water.
The order further directs the respondents to provide bottled drinking water
to certain households within the YRRA, if PCE is detected in sampled
domestic tap water. It is possible that, upon completion of the RI/FS,
Ecology could order the Company and other parties to take further action,
including remediation. Because of the preliminary status of this
investigation, the Company is unable to determine or quantify in any
meaningful way its potential liability, and therefore, cannot determine
whether it will have a material effect on the Company's financial
condition, results of operations, or cash flows.
(b) An action has been filed against the Company by a citizens group under
the citizens suits provision of the Federal Water Pollution Control Act
arising out of wastewater discharges at the Company's Portland facility.
The Company has substantially upgraded its wastewater treatment facilities
at the Portland terminal, acting in cooperation with the City of Portland.
On March 11, 1996, the court heard the parties arguments for summary
judgement. On April 24, 1996 the matter was decided in the Company's favor
as the court ordered the case dismissed due to the plaintiff's lack of
subject matter jurisdiction.
(c) The Company was added as a defendant to a case entitled Department of
Labor & Industries vs. Puget Sound Trucklines, et al., in King County,
Washington Superior Court, that alleges the Company, among others, has
violated the overtime pay provisions of Washington state law. Puget Sound
Truck Lines reached an out of court settlement with the Department of Labor
and Industries. The case is now titled Rex W. Allen et al vs. Arrow
Transportation Company. The action, as to the Company, involves 37 current
and former Company employees, and seeks unspecified overtime pay, interest
and attorney's fees.
The plaintiff recently indicated that it intended to amend its claim
against the Company to include the Company's payment practices since 1991.
If permitted and proven, this expansion would have the effect of increasing
the Company's potential liability to the plaintiffs, and might affect the
Company's employment practices in the State of Washington. The Company is
unable at this time, however, to determine what effect, if any, this
litigation will have on the Company's financial condition, results of
operations, or cash flows.
(d) The Washington Department of Natural Resources filed an action against
the Company and several other parties in November 1995. It seeks to
recover cleanup costs totaling $389,000 from Arrow and the other parties,
who all at various times leased a site in Seattle which was later acquired
by the Department. Arrow leased a portion of the site for five years.
Negotiations to apportion the liability are in the early stages. In light
of the uncertainties inherent in this kind of action, the company is unable
to determine at this time whether the action will have a material effect on
the company's financial condition, results of operations, or cash flows.
The Company is a defendant in various claims and other legal proceedings
arising in the ordinary course of business. While resolution of these
matters cannot be predicted with certainty, management believes that the
ultimate outcome of such litigation will not have a materially adverse
effect on the Company's financial position, results of operations or cash
flows. In
8
addition to legal contingencies, management estimates the Company's
liability for property, freight and workers' compensation claims based upon
prior claim experience and records such liabilities in its financial
statements.
(e) An action was filed against the Company on May 7, 1996, by Sal N.
Cincotta in the United States District Court for the District of Oregon
alleging breach of contract and unpaid wages. Mr. Cincotta was previously
employed by the Company as its President and Chief Executive Officer, and
was a director of the Company prior to his resignation on May 3, 1996. In
his complaint, Mr. Cincotta seeks damages in an unspecified amount in
excess of $50,000. Because of the recent nature of this action, the
Company cannot determine whether costs of defense or the probable result of
this litigation will have a material effect on the Company's financial
condition, results of operations, or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company has made significant changes over the last few months and
implemented a profit improvement plan which is expected to have a positive
impact on the Company's results. The profit improvement plan, which was
implemented during the first quarter of 1996, included management changes,
corporate downsizing, terminal closures, fleet downsizing, strict spending
controls, a refocussed marketing effort and the installation of an
integrated total quality management ("TQM") program. The plan was
structured to improve customer satisfaction and to achieve improvement in
four key areas of the Company's operations: business volume, equipment
utilization, non productive time and loaded mile ratio. The implementation
of the profit improvement plan has been well received by the Company's
associates and customers.
Although customer reaction to the changes at Arrow have been positive, this
does not, however, translate into new and increased business volume or
improvements in operating costs overnight. The rebuilding process takes
time. The Company has taken steps to reduce operating costs, but our
leverage position requires business volume to improve as well before
profitability will return. During the first quarter of 1996 business
volume was below the levels we would have liked to see. The first quarter
was impacted by severe winter weather conditions, industry overcapacity due
to sluggish freight demand and sharply higher fuel prices, especially on
the west coast, our primary market. The Company, due to competitive
conditions was not able to implement a fuel surcharge until May 1,1996.
These factors lead to a loss in the first quarter of 1996, but it was
expected. Competition in our industry remains intense, with experts not
predicting improvement in freight demand to materialize until the second
half of 1996. Arrow's focus in 1996 is on its core western market where
the Company believes it has a competitive edge.
RESULTS OF OPERATIONS
Revenues for the first quarter of 1996 decreased 14.8% compared to the
first quarter of 1995. The decrease in revenues for the quarter was
primarily attributable to continued sluggish freight demand caused by a
slower economy, severe winter weather conditions and volume lost from
terminal closures. During the fourth quarter of 1995 and the first quarter
of 1996, the Company closed terminal facilities in Baton Rouge, Louisiana;
Chattanooga, Tennessee; and Tulsa, Oklahoma.
Reflecting lower revenue levels caused principally by weaker demand in the
quarter, total shipments in the first quarter were 7,051 compared to 8,484
for the three month period ended March 31, 1995, a decrease of 16.9% over
the same period a year ago. Average miles per shipment increased to 445
from 403 compared to the first quarter of 1995. Average revenue per
shipment increased to $938 from $916 in the first quarter of 1995. These
increases were attributable to an increasing number of higher mileage
shipments. Revenue per mile decreased to $2.11 from $2.27 for the same
period a year ago as a result of continued pricing pressure caused by weak
levels of freight demand and intense competition.
Operating expenses, as a percentage of revenue ("operating ratio"),
increased to 106.3% in the first quarter of 1996 from 100.4% in the first
quarter of
9
1995. Lower revenue levels, higher operating costs associated with severe
winter weather, higher fuel prices and a continued low level of capacity
utilization in the first quarter of 1996 were the principal reasons for the
increase in the Company's operating ratio.
Compensation expense increased as a percentage of revenue when compared to
the same period in 1995. The increase was primarily attributable to
increases in union wage rates and costs associated with union benefit
plans.
Fuel and fuel tax expense increased as a percentage of revenue when
compared to the same period in 1995. The increase was primarily
attributable to sharply higher fuel prices, especially on the west coast,
the Company's primary market. The Company, due to competitive market
conditions was not able to implement a fuel surcharge until May 1, 1996.
Depreciation and amortization as well as taxes and license expense have
decreased in 1996 compared to the same period in 1995. The decreases were
associated primarily with the Company's fleet downsizing program.
Insurance and claims expense increased as a percentage of revenue when
compared to the same period in 1995. The increase was primarily
attributable to higher liability insurance premiums.
Selling and administrative expenses decreased for the first quarter of 1996
when compared to the same period in 1995. The decrease was the result of
certain costs associated with the opening of new terminals in 1995 and
lower levels of legal fees offset by costs associated with the
implementation of the Company's integrated TQM program.
The estimated effective rate of income tax was approximately 38% for the
first quarter of 1996 and approximately 40% for the first quarter of 1995.
The Company had a net loss of $390,000 or $.09 per share for the first
quarter of 1996, compared to a net loss of $185,000 or $.04 per share for
the three months ended March 31, 1995. The factors that lead to the net
loss for the first quarter of 1996 were the low level of business volume
and capacity utilization. The higher operating costs associated with this
past winter's severe weather and higher fuel costs also impacted the
results for the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $77,000 for the three month
period ended March 31, 1996. Net cash provided by investing activities of
$457,000 for the three months ended March 31, 1996 represented proceeds of
$479,000 from the sale of assets held for sale and equipment, offset by
$22,000 of capital expenditures. As part of the Company's profit
improvement plan the Company embarked on a fleet downsizing program in
January 1996 with a goal of selling 43 power units. During the first
quarter of 1996, the Company sold 28 power units.
In order to finance its operations and fund capital expenditures, the
Company has obtained loans from its principal lender and loans, capital and
operating leases from equipment manufacturers and other asset based
lenders/lessors for its revenue equipment. The equipment loans/leases,
which are of shorter duration (four to five years for tractors, five to
seven years for trailers) than the economic useful lives of the equipment,
result in maturities that tend to create working capital deficits. At
March 31, 1996, the Company had a working capital deficiency of
approximately $527,000. The recent losses by the Company have increased its
working capital deficit. The Company will continue to obtain loans/leases
with shorter maturities than the economic
10
useful lives of the financed equipment. This method of financing can be
expected to produce working capital deficits in the future.
In November 1995 the Company refinanced its combined credit arrangement
with another lender. The new arrangement provides for a $4,000,000 line of
credit at an interest rate of 1.5% over the lender's reference rate (8.25%
at March 31, 1996). Maximum borrowing under the line is limited to the
lesser of $4,000,000 or 85% of eligible accounts receivable which were
$2,275,000 at March 31, 1996. The line of credit matures in November 1997.
The combined credit arrangement includes a $2,000,000 revolving to term
loan facility to allow for the purchase of new and used revenue equipment
on a revolving basis, converting to term loans. Any outstanding balance on
this facility after six months from the initial funding will be converted
to a term note with a maturity of three years from the date of conversion.
Borrowings under the revolving to term loan will bear interest at 1.5% over
the lender's reference rate. There was no balance outstanding under the
revolving to term loan on facility at March 31, 1996.
The combined credit arrangement includes various restrictive covenants
including, a prohibition on dividends and minimum adjusted net worth. At
March 31, 1996, the Company was in compliance with all of the debt
covenants relating to this credit arrangement.
Given the losses the Company experienced in 1995, the Company, during the
first quarter of 1996, implemented a downsizing and restructuring plan
aimed at reducing costs, improving operating efficiency, profitability and
cash flow. In the opinion of management, provided the plan is successful
and the Company's results of operation improve, funds expected to be
generated from future operations, proceeds from its credit arrangements and
the Company's ability to rely upon secured borrowing/leases should provide
adequate liquidity.
In the event the Company's profit improvement plan is not successful and
its results of operations fail to demonstrate improvement, (due to
unanticipated expenses, delays, problems, difficulties or otherwise)
available cash and credit facilities may not prove to be sufficient to fund
operations. The Company would then be required to seek additional debt or
equity financing. Although the Company is currently in the process of
actively seeking additional equity financing, other than the Company's
current credit arrangements, the Company has no current arrangements with
respect to other sources of additional financing at this time. There can
be no assurance that additional financing, if required, will be available
to the Company on commercially reasonable terms, or at all.
SEASONALITY
Seasonality causes variations in the operations of the Company as well as
industry-wide. Demand for the Company's services is generally highest
during the summer and fall months. Historically, expenses are greater as a
percentage of revenues in the winter months as operating efficiency is
lower because of lower utilization rates and weather related costs. The
severe winter weather during the first quarter of 1996 had an adverse
impact on the Company's results.
INFLATION
The effect of inflation on the Company has not been significant during the
last two years. However, an extended period of inflation could be expected
to have an impact on the Company's earnings by causing interest rates, fuel
11
and other operating costs to increase. Unless freight rates could be
increased on a timely basis, operating results would be adversely affected.
During the first quarter of 1996, fuel prices increased significantly.
Negotiations with customers and market conditions did not allow the Company
to institute a fuel surcharge until May 1, 1996.
DEREGULATION
The Company has historically derived significant revenue from intrastate
shipments in the states of Oregon and Washington pursuant to operating
authorities granted, and tariff rates approved, by the regulatory bodies in
those states. Effective January 1, 1995, the authority of those states to
regulate entry into those markets and the rates charged for such intrastate
shipments were terminated by federal statute. This termination has
resulted in increased competition and downward pressure on rates charged by
the Company in these markets.
CONTINGENCIES
Information regarding contingencies is included in Note 4 to the financial
statements beginning on page 7 and incorporated herein by reference.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings Information regarding legal proceedings is
included in Note 4 paragraphs (a) through (e)
to the financial statements beginning on page
7 and incorporated herein by reference.
Item 2. Changes in Securities NONE
Item 3. Defaults 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 NONE
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 TRANSPORTATION CO.
(Registrant)
Dated: May 14, 1996 By: /s/ William J. Stanners, Jr.
----------------------------
William J. Stanners, Jr.
Vice President and Chief
Financial Officer
12