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, 1997
[ ] 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, 1997
- -------------------------- -----------------------------
Common stock, no par value 4,217,274 Shares
1
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Form 10-Q -- For the Quarter Ended March 31, 1997
INDEX
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
a) Consolidated Balance Sheets -- March 31, 1997 and 3
December 31, 1996
b) Consolidated Statements of Operations -- Three Months 4
Ended March 31, 1997 and March 31, 1996
c) Consolidated Statements of Shareholders' Equity -- 5
December 31, 1996 and March 31, 1997
d) Consolidated Statements of Cash Flows -- Three Months 6
Ended March 31, 1997 and March 31, 1996
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Balance Sheets
(Amounts in thousands)
March 31,
1997 December 31,
(Unaudited) 1996
----------- -----------
ASSETS
Cash $ 9 $ 64
Accounts receivable, net 3,087 2,758
Other receivables 41 52
Repair parts and supplies 232 236
Prepaid expenses and other 876 744
Prepaid tires 479 483
Deferred income taxes 58 58
---------- ----------
Total current assets 4,782 4,395
Equipment and property, net 11,256 11,877
Other assets 59 60
Deferred income taxes 307 307
---------- ----------
Total assets $ 16,404 $ 16,639
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of credit borrowings $ 2,365 $ 1,915
Note payable to shareholder 100 -
Accounts payable 1,596 1,673
Accrued expenses 2,002 2,034
Current portion of debt and capital leases 2,336 2,140
---------- ----------
Total current liabilities 8,399 7,762
Long-term debt 4,102 4,280
Obligations under capital leases 3,279 3,534
Claims and contingencies - -
Shareholders' equity:
Preferred stock, $5.00 par value (authorized 500,000
shares; issued and outstanding 50,000 shares) 250 250
Common stock, no par value (authorized 10,000,000
shares; issued and outstanding 4,217,274 in 1997
and 4,150,314 in 1996) 4,923 4,909
Accumulated deficit (4,549) (4,096)
---------- ----------
Total shareholders' equity 624 1,063
---------- ----------
Total liabilities and shareholders' equity $ 16,404 $ 16,639
========== ==========
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,
1997 1996
---------- ----------
Operating revenues $ 6,193 $ 6,739
---------- ----------
Compensation 3,562 3,967
Supplies and maintenance 729 816
Fuel and fuel taxes 551 601
Depreciation and amortization 499 613
Taxes and licenses 243 253
Insurance and claims 228 201
Selling and administration 297 306
Rent and purchased transportation 345 263
Communication and utilities 117 144
---------- ----------
Total operating expenses 6,571 7,164
---------- ----------
Loss from operations (378) (425)
Interest expense 225 302
Non-operating income (150) (94)
---------- ----------
Loss before income taxes (453) (633)
Income tax benefit - (243)
---------- ----------
Net loss $ (453) $ (390)
========== ==========
Net loss per share $ (.11) (.09)
========== ==========
Shares used in per share calculation 4,210 4,150
========== ==========
See notes to consolidated financial statements.
4
ARROW TRANSPORTATION CO. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
(Unaudited)
(Amounts in thousands)
Total
Preferred Common Accumulated Shareholders'
Stock Stock Deficit Equity
--------- --------- --------- ---------
Balance, December 31, 1996 $ 250 $ 4,909 $ (4,096) $ 1,063
Issuance of stock for ESPP (1) - 14 - 14
Net loss - - (453) (453)
--------- --------- --------- ---------
Balance, March 31, 1997 $ 250 $ 4.923 $ (4,549) $ 624
========= ========= ========= =========
(1) ESPP is the Employee Stock Purchase Plan
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,
---------- ----------
1997 1996
---------- ----------
Cash flows from operating activities:
Net loss $ (453) $ (390)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 499 623
Deferred income taxes 0 (243)
Gain on sale of equipment, net (72) -
Changes in operating assets and liabilities:
Receivables (318) (146)
Repair parts and supplies 4 27
Prepaid expenses and other (132) 13
Prepaid tires - 93
Accounts payable and accrued expenses 254 (32)
Other 1 (22)
---------- ----------
Net cash used in operating activities (217) (77)
---------- ----------
Cash flows from investing activities:
Capital expenditures (20) (22)
Proceeds from sale of assets held for sale and equipmen 219 479
---------- ----------
Net cash provided by investing activities 199 457
---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts (364) 98
Net borrowing on line of credit 450 417
Proceeds from shareholder note 100 -
Proceeds from employee stock purchase plan 14 11
Repayments:
Long-term debt (92) (244)
Capital lease obligations (145) (665)
---------- ----------
Net cash used in financing activities (37) (383)
---------- ----------
Net decrease in cash (55) (3)
---------- ----------
Cash at beginning of period 64 33
---------- ----------
Cash at end of period $ 9 $ 30
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the three months for interest $ 192 $ 275
See notes to consolidated financial statements.
6
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, 1997.
(2) New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued FAS No. 128,
Earnings per Share, which simplifies EPS determination and brings U.S. practice
for earnings per share (EPS) in closer conformity with international practices
by replacing primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic EPS is based on outstanding stock, without regard to common stock
equivalents (which currently must be considered in the calculation of primary
EPS). Diluted EPS is similar to fully diluted EPS as currently computed. The
effective date is for financial statements ending after December 15, 1997. the
adoption of this standard is not expected to have a material effect on the
company's financial statements as the Company's common stock equivalents
currently have an anti-dilutive effect on EPS.
(3) Credit Arrangement
The Company's combined credit arrangement provides for a line of credit at an
interest rate of 1.5% over the lender's reference rate (8.25% at March 31,
1997). Maximum borrowing under the line is limited to the lesser of $4,000,000
or 85% of eligible accounts receivable which were $2,775,000 at March 31, 1997.
The unused portion of the line of credit was $18,000 at March 31, 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, 1997.
The combined credit arrangement includes various restrictive covenants
including, a prohibition on dividends and minimum adjusted net worth. At March
31, 1997, the Company was in compliance with all of the debt covenants relating
to this credit arrangement.
7
(4) Claims and Contingencies
The Company is party to four potentially material actual or pending proceedings:
(a) The Washington Department of Ecology ("Ecology") has named the Company as a
potentially responsible party and 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 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. Ecology has settled claims with a number of other
potentially responsible parties at this site, but thus far the Company has not
been able to settle this claim on a basis acceptable to the Company. If the
Company is unable to reach a separate settlement, the Company may be potentially
liable for remediation costs that are not recovered from the settling parties
and for contribution. Given the current status and inherent uncertainties in
this matter 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. The settlements thus far proposed by Ecology would have had material
adverse effects on the Company's financial condition and cash flows.
(b) In 1991, 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
in 1995. In May 1996, the case was restyled Rex W. Allen et al vs. Arrow
Transportation Company. The action, as to the Company, now involves 30 current
and former Company employees. Eight plaintiffs reached a settlement with the
Company in 1996. The remaining plaintiffs seek unspecified overtime pay,
interest and attorney's fees.
The plaintiff has indicated that it intends 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 future
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.
8
(c) The Washington Department of Natural Resources ("DNR") filed an action
against the Company and several other parties in November 1995. It sought 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. The Company has
reached an agreement in principle with DNR to settle this claim for $47,500. The
Company recognized the cost of this settlement in the fourth quarter of 1996.
(d) 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. On October 18, 1996, Mr.
Cincotta filed a motion for summary judgement in this action, seeking $458,139
in total damages. On February 11, 1997, a Magistrate Judge entered a Proposed
Findings and Recommendation in favor of Mr. Cincotta, including an award of
pre-judgement interest. The Company strongly objected to the Proposed Findings
and Recommendation and appealed the issue to a District Court Judge. The Company
continues to vigorously defend the matter. 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. A ruling by the District Court Judge in favor of Mr. Cincotta, unless
stayed and reversed on appeal would have a material adverse effect on the
Company's financial condition and 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 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements of the Company and notes thereto appearing elsewhere herein.
This report contains forward looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Factors that might cause
such differences include but are not limited to those discussed below and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The Company made significant changes in 1996 and continues to make changes to
its operations in order to achieve reductions to its operating cost structure.
The Company recently began implementation of phase II of its profit improvement
plan. The phase II plan includes reductions in corporate and support staff,
selected fleet downsizing, operating cost reductions, redeployment of equipment
and the restructuring of certain term debt and lease arrangements. The changes
the Company is making are meant to focus the Company on its core competencies,
to reduce waste and redundancies in its processes, and improve cash flow.
9
Although the changes the Company has made and continues to make have reduced its
operating cost structure and are expected to produce improved results, the full
benefit of the many actions the Company has taken have yet to be realized.
The Company's leverage position requires business volume to improve before
profitability will return. The Company did not achieve adequate business volume
in its target markets in the first quarter of 1997 and in 1996 to effectively
utilize its fleet. Business volume has been impacted by intense competition due
to industry over-capacity, terminal closures and severe winter weather
conditions. In addition, the Company's union labor costs, which are higher than
its non-union competitors, limited the Company's ability to obtain new business.
Operating costs were adversely impacted by sharply higher fuel prices,
especially on the west coast, and higher union wage and benefit rates. These
factors contributed significantly to the losses experienced during 1997 and
1996. Competition in the tank truck industry remains intense with business
increasingly becoming price sensitive. The Company is holding discussions with
the Teamsters Union to address improving its competetive postion, and the
Company's marketing focus will continue to be on its core western market where
the Company believes it has a competitive edge.
Results of Operations
Operating Revenues
Revenue for the first quarter of 1997 decreased 8.1% compared to the first
quarter of 1996. During 1996, as part of its restructuring plan, the Company
closed terminals in Baton Rouge, LA, Chattanooga, TN, Port Neches, TX and Tulsa,
OK. The Company also downsized and refocused its Houston, TX terminal on those
lanes of traffic upon which it could achieve balanced freight demand.
Total shipments in the first quarter of 1997 were 6,970 compared to 7,051 in the
first quarter of 1996. Average miles per shipment decreased to 382 from 445 in
1996, average revenue per shipment decreased to $889 from $956 in 1996, and
revenue per mile increased from $2.15 to $2.32 for 1997. These changes reflect
the elimination of some non-contributory long-haul business associated with the
company's terminals in Texas and the Southern U.S. The effect of industry
over-capacity on pricing also effected revenue per shipment.
Operating Expenses
Operating expenses as a percentage of revenue ("operating ratio") decreased to
106.1% in 1997 from 106.3% in 1996. Contractual increases in union wages and
benefits combined with intense pricing pressure, the Company's inability to
recover significantly increased fuel costs and the Company's low levels of
capacity utilization in certain markets offset reductions in expenses that were
achieved as part of the Company's profit improvement plan and TQM program.
Compensation expense decreased as a percentage of revenue to 57.5% from 58.9% in
1996. The decrease reflects corporate downsizing offset by contractually
increased union wages and benefits.
Fuel and fuel taxes remained consistent at 8.9% of revenues for both periods.
The Company has not been able able to fully recapture higher fuel costs due to
market conditions.
Depreciation expense decreased $114,000 to 8.1% of revenue from 9.1% of revenue
in 1996. The decrease primarily reflects the sale of 43 power units in 1996 as
part of the Company's fleet downsizing.
10
Rent and purchased transportation increased $82,000 to 5.6% of revenue compared
to 3.9% in 1996. The increase is primarily attributable to a change in
classification of certain leases for 1997 as part of the restructuring of the
Company's fleet financing in December 1996.
Interest and Other
Interest expense decreased $77,000 from 1996 to 1997 primarily due to the fleet
downsizing and restructuring of the Company's long-term debt and capital lease
obligations.
Non-operating income increased $56,000 from 1996 to 1997. This increase includes
a net gain of $72,000 on the disposal of equipment in 1997.
Income Taxes
The effective rate of income tax benefit decreased from 38% in 1996 to 0% in
1997 as the Company is not recording an income tax benefit in 1997.
Net Loss
The Company incurred a net loss of $453,000 or $.11 per share in 1997 compared
to a net loss of $390,000 or $.09 per share in 1996. Decreased business volume
caused by industry overcapacity, terminal closures and severe winter weather
conditions impacted revenues. Operating costs were adversely impacted by sharply
higher fuel prices, especially on the west coast, and higher union wage and
benefit rates. These factors contributed significantly to the losses experienced
during 1997 and 1996.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $217,000 for the three month period
ended March 31, 1997. Net cash of $199,000 provided by investing activities
represented proceeds of $219,000 from the disposal of excess equipment, offset
by $20,000 of capital expenditures.
In order to finance its operations and fund capital expenditures, the Company
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 contribute to working capital
deficits. At March 31, 1997 the Company had a working capital deficiency of
approximately $3,617,000. The equipment modernization program and associated
financing combined with recent losses by the Company have created the working
capital deficit.
The Company's combined credit arrangement provides for a line of credit at an
interest rate of 1.5% over the lender's reference rate (8.25% at March 31,
1997). Maximum borrowing under the line is limited to the lesser of $4,000,000
or 85% of eligible accounts receivable which were $2,775,000 at March 31, 1997.
The unused portion of the line of credit was $18,000 at March 31, 1997.
11
The combined credit arrangement includes various restrictive covenants
including, a prohibition on dividends and minimum adjusted net worth. At March
31, 1997, the Company was in compliance with all of the debt covenants relating
to this credit arrangement.
During the first quarter of 1996, the Company, implemented a downsizing and
restructuring plan to reduce costs, improve operating efficiency and cash flow,
and to restore profitability. In September 1996, the Company began implementing
phase II of its profit improvement plan. The phase II plan included reductions
in corporate and support staff, selected fleet downsizing, operating cost
reductions, redeployment of equipment and the restructuring of certain term debt
and lease arrangements. 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.
To date the Company has not achieved business volume sufficient to effectively
utilize its fleet and as a result, the profit improvement plan has yet to
restore the Company to a positive cash flow position. 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 will not prove
to be sufficient to fund operations. The Company would then be required to seek
additional debt or equity financing or obtain relief from its creditors.
Although the Company obtained an additional $250,000 in capital during the
second quarter of 1996 and restructured many of its term debt and lease
obligations in the fourth quarter of 1996, 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 or accomodations from creditors, if required, will be
available to the Company on commercially reasonable terms, or at all.
In January 1997, the Company entered into a loan agreement ("the Agreement")
with the holder of the Company's preferred stock (the "Lender"). The Lender has
agreed to advance funds to the Company at the Company's request. The principal
balance of all funds advanced by the Lender shall bear interest at the rate of
10%, and all amounts loaned under the Agreement (including interest) shall be
payable within ten days of written demand by Lender. The Company borrowed
$100,000 from the Lender in January 1997.
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.
12
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.
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 and other
operating costs to increase. Unless freight rates could be increased on a timely
basis, operating results would be adversely affected. High fuel prices have
impacted the Company's results of operations in 1996 and 1997. Market conditions
did not allow the Company to fully recapture increased fuel costs.
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. Since January 1, 1995, deregulation has negatively impacted the
Company's business in the Northwest as the Company lost business to new entrants
into this market.
Contingencies
Information regarding contingencies is included in Note 4 to the financial
statements beginning on page 8 and incorporated herein by reference.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings Information regarding legal proceedings is
included in Note 4 paragraphs (a) thru (e) to
the financial statements beginning on page 8
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
13
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 13, 1997 By: /s/ William J. Stanners, Jr.
----------------------------
William J. Stanners, Jr.
Senior Vice President and Chief Financial Officer
14