-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jn5QNO0EDE9VfshrSls+pCSdBaXy++pFwoMtMD2OJspyfSciyTalvKpslYdaNYwk 4F27gjKGRNNje3prgDXdfA== 0000007533-96-000009.txt : 19961004 0000007533-96-000009.hdr.sgml : 19961004 ACCESSION NUMBER: 0000007533-96-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19961003 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARROW AUTOMOTIVE INDUSTRIES INC CENTRAL INDEX KEY: 0000007533 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 041449115 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07737 FILM NUMBER: 96639078 BUSINESS ADDRESS: STREET 1: 3 SPEEN ST CITY: FRAMINGHAM STATE: MA ZIP: 01701 BUSINESS PHONE: 5088723711 MAIL ADDRESS: STREET 1: 3 SPEEN STREET CITY: FRAMINGHAM STATE: MA ZIP: 01701 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF - THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 29, 1996 ------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) - OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 1-7737 ------ ARROW AUTOMOTIVE INDUSTRIES, INC. --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-1449115 ---------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 3 Speen Street, Framingham, Massachusetts 01701 ----------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 872-3711 --------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------- Common Stock, $.10 Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 -- -- Exhibit Index begins on Page 43 of this Report. 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of September 23, 1996: $7,756,463 Number of shares of Common Stock, $.10 Par Value, outstanding as of September 23, 1996: 2,873,083 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 2 PART 1 ITEM 1. BUSINESS. ------------------ General ------- Arrow Automotive Industries, Inc. (the "Company") was founded in 1929, incorporated in 1946 as a Massachusetts corporation and became a public company in 1972. The Company's Common Stock has been traded on the American Stock Exchange since 1978 under the symbol AI. The Company is primarily engaged in the remanufacture of automotive parts, which includes replacement parts for domestic and imported passenger cars, light and heavy duty trucks, farm vehicles and heavy duty industrial and construction equipment. Products are manufactured at and distributed from the Company's three manufacturing facilities, located in Spartanburg, South Carolina, Morrilton, Arkansas and Santa Maria, California. The Company also maintains distribution facilities in Hammond, Indiana and in Toronto and Vancouver, Canada. The Company's corporate headquarters are in Framingham, Massachusetts, and its operations headquarters are in Conway, Arkansas. The Company operates in one industry segment as a remanufacturer and distributor of replacement parts for automotive vehicles and trucks. Recent Developments ------------------- On September 26, 1996, the Company announced a restructuring plan to consolidate its manufacturing operations. The plan contemplates the closing of the Company's California production facility effective December 6, 1996, and the relocation of the manufacturing operations presently conducted at that facility to the Company's Morrilton, Arkansas facility. The action was taken to enhance profit margins by streamlining the Company's productive capacity to better match its production requirements. A discussion of the financial impact to the Company of the restructuring appears in Item 7 (Management's Discussion and Analysis) of this report under the caption "Management's Plan and Subsequent Event". Product Information ------------------- The Company remanufactures and distributes a broad range of electrical and mechanical automotive parts, such as alternators, starters, water pumps, clutches, master brake cylinders, power steering pumps, power brakes, smog pumps, brake calipers, distributors, wiper motors, blower motors, crankshafts, rack and pinion steering units, radiator cooling motors, generators and carburetors. The Company also distributes new clutch kits which complement its existing line of remanufactured clutches. The Company does not consider its business to be seasonal, however, demand for certain products may be affected by extreme weather. 3 Manufacturing Operations ------------------------ The Company's manufacturing operations consist principally of the collection, disassembly, cleaning, examination and reconditioning of used parts (referred to in the industry as "cores") and the reassembly of their components, together with new replacement components where necessary, into remanufactured products. The principal raw materials used by the Company in its operations are cores, which are obtained primarily from customers on a trade-in basis and to a lesser extent from concerns which sell cores, and new component parts which are obtained from a wide variety of suppliers. The Company's raw materials are available in adequate supply in the open market. Production of remanufactured parts is carried on in an assembly-line operation. When first received, cores are sorted and disassembled into their component parts. The major components are then further sorted and examined for suitability for further processing, and, if suitable, are cleaned, reconditioned and refinished. Components that are not reconditioned are replaced with new materials which are purchased from outside vendors. The metal components of cores not utilized in the manufacturing process are sold for scrap. Distribution ------------ The Company sells its products nationwide primarily through its own direct sales force. The Company currently maintains a direct sales force of 39 full-time salesmen. The Company also employs sales agencies in certain market areas. The majority of the Company's sales (approximately 72 percent in fiscal 1996) are to warehouse distributors. The balance of the Company's sales are to retailers (approximately 22 percent in fiscal 1996) and other customers. During fiscal 1996, sales to the Company's largest customer, General Parts, Inc., accounted for 20% of net sales. No other customer accounted for more than 10% of the Company's net sales. Substantially all of the Company's warehouse distributor customers are members of program distribution associations. These associations use the collective buying power of their members to negotiate price and other terms with vendors, which has the effect of encouraging competition in the automotive aftermarket. The associations do not purchase directly from vendors, and members of these associations are not obligated to purchase solely from association approved vendors. The evolution of these associations and the emergence of high volume retail chains in the automotive aftermarket have combined to create additional price competition among manufacturers. The Company utilizes its own truck fleet, and to a lesser extent independent trucking services, to handle most of its product deliveries and other shipping requirements. Special order and delivery options are also made available to customers, such as overnight direct parts service. Marketing --------- The Company markets its products under its Arrow( and Lance( labels, as well as under a variety of private labels. The Arrow( line consists of the Company's premium quality parts often containing a number of new components. The Lance( line consists of higher volume units whereby manufacturing economies of scale permit reduced pricing to customers. The Lance( line is available in starters and alternators. In fiscal 1996, approximately 57 percent of the Company's sales were made under various private labels, and the balance were made under the Company's own labels. The Company markets its remanufactured products with frequent contact by sales representatives, merchandising bulletins, direct mailing campaigns, advertising, participation in trade shows and complete catalog coverage. The Company also offers a subscription basis service bulletin program, which provides periodic technical information. The Company receives the majority of its product orders through an automated communication system called TRANSNET(, which enables customers to submit orders to the Company directly by computer. The TRANSNET( computerized system is made available through the Motor Equipment Manufacturers Association. The Company can also accept orders through other proprietary electronic data interchange (EDI) networks for its customers' convenience upon request. Working Capital Items --------------------- Inventories are kept at a sufficient level to service customer orders. The Company provides customers with the right to return goods where the conditions of the Company's obsolescence and warranty return policies are met. These policies are consistent with industry practice, whereby under certain circumstances when the conditions of the return policies are met, remanufacturers accept product returns from current customers regardless of whether the product was actually purchased from the remanufacturer. Also, consistent with industry practice, the Company does not accept product returns from customers that no longer purchase from the Company. Competition ----------- The Company competes with other national, regional and local remanufacturers, with rebuilders of automotive parts and with manufacturers of new parts, including the leading automobile manufacturers. The Company believes it is one of the largest companies engaged primarily in the production and sale of remanufactured automotive parts, although there may be other companies whose sales of such products exceed those of the Company. The automotive aftermarket is highly competitive. The Company considers the key factors determining the ability to compete in this highly competitive industry to be product quality, a complete product offering, current product catalogs, direct factory sales service, price and serving customers with a high order fill rate. Employees --------- On June 29, 1996, the Company employed 1,512 full-time employees and 71 part-time employees. 4 ITEM 2. PROPERTIES. -------------------- The Company's corporate headquarters are located in Framingham, Massachusetts; its operations headquarters are located in Conway, Arkansas; and it occupies industrial and warehouse space in Spartanburg, South Carolina, Morrilton, Arkansas, Santa Maria, California, Hammond, Indiana, and Toronto and Vancouver, Canada. The Company leases approximately 15,000 square feet of office space in Framingham, Massachusetts, for its corporate headquarters under a lease expiring in 1998. Approximately 9,500 square feet of this space is subleased under an agreement which also expires in 1998. The Company also leases approximately 7,000 square feet of office space for its operations headquarters in Conway, Arkansas, under a lease expiring in November of 1996. The Company operates manufacturing facilities in Spartanburg, South Carolina (occupying approximately 315,000 square feet of floor space), Morrilton, Arkansas (occupying approximately 209,000 square feet of floor space) and Santa Maria, California (occupying approximately 98,000 square feet of floor space). The Spartanburg, Morrilton and Santa Maria facilities are all owned by the Company, subject to mortgages which, together with other collateral, secure the Company's obligations to its principal lender. As discussed above under the caption "Recent Developments", the Company recently announced its plan to close its Santa Maria, California production facility and transfer the manufacturing operations presently conducted at that facility to its Morrilton, Arkansas plant. Following its termination of manufacturing operations at the Santa Maria, California facility, the Company plans to use the property as a distribution warehouse until the property is sold. In addition, the Company leases warehouse space of approximately 11,000 square feet in Hammond, Indiana, 51,000 square feet in Morrilton, Arkansas, 45,000 square feet in Spartanburg, South Carolina, and 10,000 square feet in Toronto, Canada. All facilities are well maintained and in good operating condition. ITEM 3. LEGAL PROCEEDINGS. --------------------------- The Company is, from time to time, party to routine litigation incidental to the business. The amounts claimed in these matters are either covered by insurance or are not, in the aggregate, material in amount. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ------------------------------------------------------------- The Company did not submit any matters to a vote of security holders during the fourth quarter of fiscal 1996. 5 PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED -------------------------------------------------------------- STOCKHOLDER MATTERS. -------------------- The common stock of the Company is traded on the American Stock Exchange under the trading symbol AI. The approximate number of holders of record of the Company's common stock at September 23, 1996 was 305. The following table sets forth the high and low sale price on the American Stock Exchange of the Company's common stock, at the end of each fiscal quarter during the last two fiscal years:
Fiscal Fiscal 1996 1995 ------------------- --------------------- High Low High Low --------- -------- --------- -------- First Quarter $ 7 3/8 $ 5 1/2 $ 8 3/8 $ 7 Second Quarter 6 7/8 4 3/4 8 1/2 7 Third Quarter 7 1/2 5 3/4 8 5 5/8 Fourth Quarter 6 1/8 5 1/16 6 9/16 5 1/2
The Company did not pay any dividends during the 1996 or 1995 fiscal years. Operating covenants in the Company's loan agreement with its principal lender prohibits the Company from paying dividends unless the following conditions are met: (i) the Company is not then in default, and after giving effect to the dividend would not be in default, under the loan agreement; (ii) the aggregate amount of such dividends does not exceed the greater of (a) during any period of four (4) consecutive fiscal quarters an amount equal to fifty percent (50%) of the net income of the Company for the immediately preceding four (4) consecutive fiscal quarter periods, or (b) an amount equal to the excess of (i) twenty-five percent (25%) of the net income of the Company for the period commencing June 27, 1993 and ending with the last day of the fiscal quarter next preceding the proposed date of the dividend, treated as a single accounting period, over (ii) all dividends made subsequent to June 27, 1993. 6 ITEM 6. SELECTED FINANCIAL DATA. --------------------------------- FOR THE FISCAL YEARS ENDED IN JUNE (Amounts in Thousands Except Per Share Amounts and Financial Ratio Data)
1996 1995 1994 1993 1992 (53 wks) (52 wks) (52 wks) (52 wks) (52 wks) -------- --------- -------- -------- ------- Net sales $103,603 $106,574 $108,055 $100,654 $95,282 Gross profit 21,441 25,092 27,861 26,622 26,447 Selling, administrative & general expense 21,597 23,505 23,334 23,147 21,890 Interest expense - net 2,113 1,935 1,614 1,830 2,014 (Loss) income before income taxes and extraordinary items (2,269) (348) 2,914 1,654 4,413 (1) (Benefit) provision for income taxes (825) (103) 1,113 628 1,765 (Loss) income before extraordinary items (1,444) (245) 1,801 1,017 2,648 Loss on refinancing of debt, net of income tax benefit -- -- (276) -- -- Utilization of income tax net operating loss carryforwards -- -- -- -- 400 Net (loss) income (1,444) (245) 1,525 1,017 3,048 (1) (Loss) income per share before extraordinary items (.50) (.09) .64 .36 .95 (1) Loss per share on refinancing of debt, net of income tax benefit -- -- (.10) -- -- Utilization of income tax net operating loss carryforwards per share -- -- -- -- .15 Net (loss) income per share (.50) (.09) .54 .36 1.10 (1) Cash dividends declared per share -- -- -- -- -- Capital expenditures 828 2,574 670 648 657 Depreciation and amortization $ 1,373 $ 1,412 $ 1,546 $ 1,692 $1,918 Average shares outstanding 2,873 2,872 2,821 2,814 2,777
(1) Includes the gain on termination of supplemental benefit arrangements with certain executives, which increased income before income taxes and extraordinary items by $1,871,000 and increased net income by $1,104,000 or $.40 per share. FOR THE FISCAL YEARS ENDED IN JUNE (Amounts in Thousands Except Per Share Amounts and Financial Ratio Data)
1996 1995 1994 1993 1992 (53 wks) (52 wks) (52 wks) (52 wks) (52 wks)
--------- --------- --------- -------- --------- AT YEAR END
Working capital $ 38,126 $ 40,152 $ 33,702 $ 31,675 $ 30,175 Total assets 73,112 68,778 71,121 62,026 62,990 Long-term debt 17,969 19,265 11,732 12,487 12,418 Stockholders' equity 31,296 32,739 32,974 31,175 30,155 Equity per common share $ 10.89 $11.40 $ 11.69 $ 11.08 $ 10.86
FINANCIAL RATIOS (%) Gross profit 20.70 23.54 25.78 26.45 27.76 Net profit margin (1.39) (.23) 1.41 1.01 3.20 Return on equity (4.51) (.74) 4.75 3.32 10.72 Current ratio (to 1) 2.94 3.99 2.46 3.04 2.76
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION -------------------------------------------------------------------- AND RESULTS OF OPERATION. ------------------------- 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 this discussion and analysis. MANAGEMENT'S PLAN AND SUBSEQUENT EVENT During the first quarter of fiscal 1997, after completing an evaluation of the Company's historical operating results, sales forecast and cost structure, the Board of Directors of the Company approved a plan to restructure its operations by closing its Santa Maria, California production facility and transferring its manufacturing operations formerly conducted at that facility to the Morrilton, Arkansas plant. As a result, a $1.2 million restructuring charge will be recorded in the first quarter of fiscal 1997. Of the total charge, $300,000 relates to termination benefits for displacement of its 350-employee workforce and $900,000 relates to closing of the facility. The action was taken to enhance profit margins by streamlining the Company's productive capacity to better match its production requirements. In addition to recording the restructuring charge, the Company anticipates that during fiscal 1997 it will incur non-recurring period costs relating to the restructuring estimated to range from $1.0 to $1.5 million. These costs relate to ongoing operations and include such costs as the shipment of inventory and equipment, employee relocation and anticipated initial labor and production inefficiencies as a result of the consolidation of production operations from three to two plant facilities. The consolidation of manufacturing operations is consistent with the Company's efforts begun in fiscal 1996 to streamline its operations. In fiscal 1996, product line consolidations were completed as well as the consolidation of the customer service function. In fiscal 1997, customer billing and vendor payment functions will also be centralized. These actions are being taken to enhance operating efficiencies and the financial performance of the Company. RESULTS OF OPERATIONS The Company incurred net losses of $1,444,000 and $245,000 for the respective fiscal years ended June 29, 1996 and June 24, 1995. For the fiscal year ended June 25, 1994, the Company earned net income of $1,525,000. Fiscal 1994 net income included an extraordinary charge of $276,000 (net of a tax benefit of $169,000) relating to the refinancing of the Company's bank debt. 8 SALES Net sales for fiscal 1996 (53 weeks) declined $3.0 million or 2.8% to $103,603,000, from net sales for fiscal 1995 (52 weeks). This compares with a decrease in net sales of $1.5 million, or 1.4% in fiscal 1995 from fiscal 1994 and an increase in net sales of $7.4 million, or 7.4% in fiscal 1994 from fiscal 1993. Unit sales for fiscal 1996 declined 5.8% from fiscal 1995. This compares with unit sales declines of 4.9% in fiscal 1995 from fiscal 1994 and 9.9% in fiscal 1994 from fiscal 1993. The decline in net sales in fiscal 1996 is attributable to several factors. In recent years, consolidations and mergers have been common within the distribution sector of the industry as it continues its turbulent evolution. This activity has generated excess inventory levels in the distribution sector of the industry, negatively impacting the Company's unit sales and resulting in increased product returns. During fiscal 1996, the Company sustained a higher level of customer deductions for product returns than in previous years. These returns, which are deductions in calculating net sales, are for re-usable "cores" (our basic raw material), warranty and stock adjustments received in the normal course of business. While over longer periods of time the relationship of returns to sales remains relatively constant, occasional fluctuations do occur. Due to the consolidation/merger activity noted above, many of our customers found themselves with excess inventories. To rectify their inventory surplus these businesses returned as much of the excess inventory as possible to their vendors. The adverse impact of the lower unit sales volume and the high level of customer returns was mitigated somewhat by a favorable mix of products sold and a price increase implemented in fiscal 1996. Furthermore, new business acquisitions during fiscal 1996 mitigated the impact of customer accounts lost in fiscal 1995 and the first quarter of fiscal 1996. The decline in net sales in fiscal 1995 compared to fiscal 1994 occurred primarily in the latter half of the year. The most significant factor was the mild winter weather pattern experienced throughout most of the country in fiscal 1995 which resulted in fewer part failures and reduced the demand for many of the Company's products. In addition, the Company lost several customer accounts during fiscal 1995, as noted above. The increase in net sales in fiscal 1994 over fiscal 1993 was due primarily to the mix of products sold, as the Company experienced increased demand for its higher-priced, late model electrical products. CHANGING PRICES Management is conscious of the impact of inflation and, when possible, will compensate by increasing selling prices. Retail outlets have become a significant factor in the distribution of automotive parts, while at the same time most traditional warehouse distributors have joined large buying groups. These "power buyers" have dramatically increased pricing pressures at a time when over-capacity of manufacturers and distributors throughout the industry remains prevalent. Price increases on the Company's products in the last several years have been limited due to the competitive pricing pressures of the automotive aftermarket. In spite of these pressures the Company's average selling price in fiscal 1996 increased over fiscal 1995. This increase was primarily due to the mix of products sold reflecting higher proportionate sales of electrical products, which typically have a higher average selling price than the mechanical product offering. Also, the Company implemented an overall 4% price increase in its electrical product offering in the first quarter of fiscal 1996. The Company refrained from passing on all of the increased costs in fiscal 1995 and fiscal 1994 through pricing because of the competitive climate. In both fiscal 1995 and 1994, the overall average gross price of products sold increased over the respective prior fiscal years due primarily to the mix of products sold. COST OF GOODS SOLD Net sales generated a gross margin of 20.7% in fiscal 1996, compared to 23.5% in fiscal 1995 and 25.8% in fiscal 1994. Several factors contributed to the decline in the gross margin in fiscal 1996. Beginning in the second quarter of fiscal 1996, the Company started the process of consolidating the production of certain product lines to specific manufacturing facilities, changing the previous practice of manufacturing most product lines at all manufacturing facilities. This consolidation process resulted in temporary labor inefficiencies as each product line was moved. Four product lines were consolidated between the second and fourth quarters of fiscal 1996. In the third quarter, increased expenses resulted from start-up costs incurred to service a new customer which was anticipated to provide additional annualized volume approximating 5% of the Company's total sales. Increased material sourcing expenses were incurred to properly service the large initial orders of this new business. Freight expenses increased as initial shipments for this new west coast business were supplemented by shipments from the Company's other manufacturing facilities. Further, it was necessary to add a second shift at the Company's west coast manufacturing facility. The second shift represented a 20% increase in that location's labor requirements, which resulted in temporary labor inefficiencies and additional costs during the training period. Throughout the current fiscal year, labor efficiency and the ability to absorb overhead costs were adversely impacted by swings in sales volume. A sudden downturn in sales volume occurred in the second quarter, specifically October and November. The Company believes that cautious inventory management practices were applied by our customers and their customers, in order to avoid investing heavily in a large winter season inventory and then repeating the fiscal 1995 experience of having inventory surpluses due to the low sales caused by a mild winter. In the fourth quarter of fiscal 1996, sales volume dropped again. The decline in sales was largely due to reduced orders from the customer newly acquired in the third quarter of the current year. Because purchases by this customer were substantially less than anticipated and future demand could not be reasonably predicted, the Company terminated the second shift at its west coast production facility that had been added to support this customer in the fourth quarter of fiscal 1996. Throughout most of the year, the Company experienced additional costs due to down time and inefficient output from certain new manufacturing related equipment and the necessity of running parallel systems. The start-up issues related to this equipment concluded in the third quarter of the fiscal year. As previously mentioned, the Company experienced higher than usual levels of customer product returns throughout most of fiscal 1996. In addition, the Company was inefficient in the "recovery" of good product from product returns and returning them to finished goods inventory. Recovery of returned product is an integral part of remanufacturing and significantly mitigates the negative financial impact of product returns. In the fourth quarter of fiscal 1996, the recovery departments at all manufacturing locations were expanded to maximize the recovery of product returns. Finally, the Company realized a 13% increase in the cost to provide medical benefits to its employees in fiscal 1996 compared to fiscal 1995, of which approximately 85%, or $445,000, was reported as increased cost of goods sold. The gross margin percentage declined to 23.5% in fiscal 1995 from 25.8% in fiscal 1994. A change in the mix of products sold contributed to the margin decline. Customer sales migrated to the Company's Lance product lines, which generate lower margins than the Company's traditional premium lines. Also, the Company's mix of products sold reflected proportionately more unit sales in newer vehicle applications. While generating higher sales dollars, these newer vehicle applications provided lower gross margins due to the higher costs to produce a product in the early stage of its product cycle. During fiscal 1995, the product mix was impacted by the decline in the sales of certain products which tend to have higher failure rates in severe winter weather. These products on average generate a gross profit margin percentage that exceeds the Company's average gross profit margin percentage. Finally, in fiscal 1995, the Company experienced increases in the cost of certain basic raw materials (e.g., copper, aluminum and linerboard products), increased unit costs due to lower plant utilization caused by the decline in sales volume and inefficiencies incurred during the installation of the new raw material cleaning systems mandated by environmental laws and regulations. IMPACT OF INFLATION The Company follows the LIFO method of determining inventory costs to better match current costs with current revenues. In fiscal 1996, the impact of deflation and operating factors, primarily improved material sourcing and usage, decreased cost of goods sold over the prior year by $345,000. In fiscal 1995 and 1994, the impact of inflation and operating factors increased cost of goods sold over the respective prior years by $795,000 and $121,000. Charges to operations for depreciation represent the allocation of historical cost incurred in prior years and are significantly less than if they were based on current or replacement cost of the Company's production capacity. In the normal course of business, the Company will replace its productive capacity over an extended period of time. Decisions concerning such replacements will be made in light of economic, regulatory and competitive conditions existing from time to time. These new assets will result in additional depreciation charges. In many cases, however, there will be offsetting cost savings from technological advances. 9 SELLING, ADMINISTRATIVE AND GENERAL EXPENSES Selling, administrative and general expenses as a percentage of sales were 20.8%, 22.1% and 21.6% for fiscal years 1996, 1995 and 1994, respectively. Spending in these areas of $21,597,000 declined $1.9 million in the current year compared to fiscal 1995. In comparison, spending in these areas increased $170,000 in fiscal 1995 over fiscal 1994 and $513,000 in fiscal 1994 over fiscal 1993. The Company's business acquisition costs in fiscal 1996 were $1.1 million less than similar expenses incurred in fiscal 1995. Further, in fiscal 1995, the Company incurred approximately $340,000 to develop marketing programs. These expenses were not repeated in fiscal 1996. The Company has implemented various cost reduction measures that have contributed to the reduced expenses in the current fiscal year. These measures included the discontinuation of certain administrative functions and a 10% reduction in administrative staff, as well as strict controls over discretionary spending. Beginning late in fiscal 1994 and continuing into the first three quarters of fiscal 1995, the Company incurred increased business acquisition costs. Such costs incurred in fiscal 1995 exceeded similar costs in fiscal 1994 by $357,000. Also during fiscal 1995, the Company invested in the development of new marketing programs which resulted in additional expense of approximately $340,000. NET INTEREST EXPENSE Net interest expense in fiscal 1996 of $2,113,000 increased $178,000, or 9%, over fiscal 1995. Net interest expense increased $321,000, or 20%, in fiscal 1995 over fiscal 1994. Fiscal 1994 net interest expense decreased $217,000, or 11.9%, compared to fiscal 1993. In both fiscal years 1996 and 1995, higher borrowing levels and higher interest rates resulted in the additional net interest expense. The reduction in net interest expense in fiscal year 1994 in comparison to fiscal 1993 was due primarily to the lower interest rates available under replacement financing obtained in the third quarter of fiscal 1994. INCOME TAXES The Company recorded a tax benefit in 1996 and 1995 which represented 36.4% and 29.6% of the pretax loss in 1996 and 1995, respectively. In 1994, the Company recorded a tax provision at an effective tax rate of 38.2%. The effective tax rate used to determine the 1995 tax benefit was lower than the 1996 effective tax rate due to the effect of certain nondeductible items in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $851,000 as of June 29, 1996, with a corresponding balance of $753,000 as of June 24, 1995. Working capital was reduced to $38.1 million from $40.2 million as of those same dates and cash provided by operations was reduced to $67,000 during fiscal 1996 from $2,871,000 during fiscal 1995. The decrease in cash generated from operating activities in fiscal 1996 compared to fiscal 1995 is attributable to net operating losses in fiscal 1996, coupled with increases in accounts receivable and inventories. Accounts receivable increased as a result of higher sales late in the fourth quarter of fiscal 1996 compared to the same period in the prior fiscal year. Inventories increased primarily at the Company's west coast manufacturing facility and at its Canadian distribution facility in anticipation of increased demand. Cash used for investing activities for fiscal 1996 was $958,000 and was used primarily to purchase property, plant and equipment. Capital expenditures were $725,000 in fiscal 1996 compared to $2,552,000 in fiscal 1995. The Company continues to invest in capital improvements and other long- term assets to enhance operations so as to maintain the highest standards of overall quality. During fiscal 1996, net cash provided by financing activities was approximately $1 million and consisted of advances under a revolving line of credit. Repayments of long-term debt and capital lease obligations in fiscal 1996 were $1.4 million. The Company has a revolving line of credit with a commercial bank which permits the Company to borrow up to $20 million ($18,100,000 outstanding at June 29, 1996). The Company's availability under this line of credit is based upon a formula applied to the balance of the Company's inventory and accounts receivable. In addition, the Company has a term loan with an outstanding balance of $6,100,000 with the same commercial bank. The Company's obligations under the line of credit and the term loan are secured by substantially all of its assets. The financing agreement contains certain provisions and covenants which, among other things restrict future indebtedness, cash dividends and capital expenditures, and require the Company to maintain specified levels of tangible net worth, operating performance and debt service and liabilities to worth ratios. Compliance with the debt service covenant of this financing agreement was waived during the second, third and fourth quarters of fiscal 1996 such that the loss sustained by the Company during those periods did not result in a default under the agreement. Compliance with the liabilities to worth covenant and limitations on capital expenditures under this financing agreement were also waived during the fourth quarter of fiscal 1996. The revolving line of credit expires on June 30, 1997. Effective June 29, 1996, the revolving line of credit was amended such that the interest rate borne on a given date will change depending upon the achieved debt service ratio. The rate charged can range from .5% over the lender's base rate to 3.0% over such base rate. If the Company achieves specified debt service ratios, a lending rate becomes available at 3.0% above the Eurodollar rate. Similarly, the term loan, which had outstanding borrowings as of June 29, 1996, of $6,100,000 was also amended such that the interest rate borne on a given date will change depending upon the debt service ratio achieved by the Company. The rate charged can range from 0.75% over the lender's base rate to 3.25% over such base rate. At specific debt service levels, a lending rate is available 3.25% above the Eurodollar rate. All of the foregoing rates are adjusted quarterly based on the Company's debt service ratio. The Company believes that existing cash balances, cash generated from operations, and borrowing ability under the Company's financing agreements will be sufficient to meet the Company's cash requirements for operations for the next twelve months and to complete the planned restructuring efforts. 10 OUTLOOK Arrow Automotive Industries' business objective is to be the leader in supplying a broad line of quality remanufactured automotive products to the automotive aftermarket. The Company announced, subsequent to the year ended June 29, 1996, a restructuring plan that it believes will result in a stronger foundation for profitable growth. The plan is to consolidate the Company's manufacturing facilities from three to two, providing a more streamlined and efficient production capability. This restructuring is consistent with the consolidation of certain administrative functions and the consolidation of the production of certain product lines that have occurred within the Company throughout the year. These changes will help the Company compete in today's highly competitive automotive aftermarket. During the last two fiscal years, the Company has experienced large swings in its quarterly sales volume. Furthermore, the timing of a customer's product return (which will reduce reported net sales) is beyond the control of the Company. These factors make revenue forecasting unpredictable, and could subject the Company to fluctuations in both revenues and earnings. While over longer periods of time the relationship of returns to sales remains relatively constant, occasional fluctuations do occur. Fluctuations in channel mix (retail versus traditional warehouse distributors, for example) and product mix in product sales can also be significant. All of these factors can have a significant impact on gross margins as a percentage of revenue and therefore earnings per share. Management believes that the streamlining of its manufacturing operations will position the Company competitively in the marketplace. Management believes that the industry will become increasingly competitive, creating downward pressures on gross margins, including those of the Company. The Company's goal is to offset this trend by decreasing unit costs, focusing on profitable business relationships and being the industry leader in providing a broad line of quality products with superior service to our customers. CAUTIONARY STATEMENT All statements made in the foregoing discussion and analysis and elsewhere in this report 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 statements made in this report or 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: the inability to realize the cost savings as estimated in the Company's plan to restructure its operations, lack of availability to the Company of adequate funding sources and cash from operations, reduced product demand and industry over-capacity, the loss of or a material reduction in orders from the Company's largest customer or other material loss of business, new business acquisition 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. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ----------------------------------------------------- The response to this item is included as part of Item 14 of this report. An index to the financial statements and schedules filed as a part of this report appears on page 18 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING -------------------------------------------------------------------- AND FINANCIAL DISCLOSURE. ------------------------- The Company has not reported on Form 8-K any disagreement with its public accountants on any matter of accounting principles or practices or financial statement disclosure. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; ------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION; --------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND ------------------------------------------------------------- MANAGEMENT; ----------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: --------------------------------------------------------- Information required under these items has been omitted, as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year a definitive proxy statement pursuant to Regulation 14A. The information concerning directors and executive officers of the Company, executive compensation, security ownership of certain beneficial owners and management, and certain relationships and related transactions is incorporated by reference to the Company's Annual Proxy Statement for its 1996 Annual Meeting of Stockholders. 12 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ----------------------------------------------------------------- FORM 8-K. --------- (a) 1. Financial Statements. The following financial --------------------- statements of the Company are included in Item 8:
Page ---- Report of Independent Auditors 20 Balance Sheets - June 29, 1996 and 21 June 24, 1995 Statements of Operations - Years 23 ended June 29, 1996, June 24, 1995, and June 25, 1994 Statements of Changes in Stockholders' 24 Equity - Years ended June 29, 1996, June 24, 1995, and June 25, 1994 Statements of Cash Flows - Years 25 ended June 29, 1996, June 24, 1995, and June 25, 1994 Notes to Financial Statements 27
2. Financial Statement Schedules. The following ------------------------------ financial statement schedules of the Company are included in Item 14(d):
Page ---- Schedule II - Valuation and Qualifying Accounts 42
All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto. 3. Listing of Exhibits. A listing of exhibits filed as -------------------- part of this Form 10-K begins on page 43 hereof. (b) The Company did not file any reports on Form 8-K during the fourth quarter of fiscal 1996. (c) The Company hereby files as a part of this Form 10-K the exhibits listed in Item 14(a)(3) above. (d) The Company hereby files as a part of this Form 10-K the financial statements and schedules listed in Items 14(a)(1) and (2) above. SIGNATURES ----------- Pursuant to the requirements of Section 13 or 15(d) 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. --------------------------------- Dated: September 27, 1996 By: /s/ Jim L. Osment --------------------------------- Jim L. Osment, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. President, Chief Executive /s/ Jim L. Osment Officer, (Principal September 27, 1996 ------------------------- Executive Officer) and Jim L. Osment Director Executive Vice President, September 27, 1996 /s/ James F. Fagan Chief Financial Officer ------------------------- (Principal Financial James F. Fagan Officer), Treasurer and Director /s/ Harry A. Holzwasser Chairman of the Board and September 27, 1996 ------------------------- Director Harry A. Holzwasser ------------------------- Director September 27, 1996 Mary S. Holzwasser /s/ Robert A. Holzwasser Director September 27, 1996 ------------------------- Robert A. Holzwasser /s/ Joel D. Holzwasser Director September 27, 1996 ------------------------- Joel D. Holzwasser /s/ Lawrence M. Levinson Director September 27, 1996 ------------------------- Lawrence M. Levinson ------------------------- Director September 27, 1996 Winthrop P. Rockefeller ------------------------- Director September 27, 1996 Alan Steinert, Jr. /s/ Kathaleen M. Vice President and September 27, 1996 Carroll-Coelho Controller ------------------------- Kathaleen M. Carroll-Coelho Report of Ernst & Young LLP, Independent Auditors To The Stockholders and Board of Directors Arrow Automotive Industries, Inc. We have audited the accompanying balance sheets of Arrow Automotive Industries, Inc. (the Company) as of June 29, 1996 and June 24, 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 29, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Arrow Automotive Industries, Inc. at June 29, 1996 and June 24, 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 29, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as whole, presents fairly, in all material respects, the information set forth therein. As discussed in Notes 10 and 11 to the financial statements in 1994, the Company changed its method of accounting for postretirement benefits and income taxes. ERNST & YOUNG LLP /s/ Ernst & Young LLP Boston, Massachusetts September 5, 1996, except for Notes 1 and 6, as to which the date is September 27, 1996 13 ARROW AUTOMOTIVE INDUSTRIES, INC. BALANCE SHEETS
June 29, June 24, 1996 1995 ------------- ------------- Assets (Notes 1 and 6) Current assets: Cash and equivalents $ 850,537 $ 753,010 Accounts receivable, less allowance ($524,401 in 1996 and $477,286 in 1995) for doubtful accounts 16,468,224 12,535,646 Inventories (Note 3) 37,312,671 36,307,861 Deferred income taxes (Note 11) 2,291,000 1,778,000 Refundable income taxes 310,315 617,523 Other current assets 563,346 1,577,578 ------------ ------------ Total current assets 57,796,093 53,569,618 Property, plant and equipment (Note 9): Land 952,087 952,087 Buildings and building improvements 15,780,776 15,656,256 Leasehold improvements 247,670 258,221 Machinery and equipment 18,661,470 18,567,735 Construction in progress 85,253 25,052 ------------ ------------ 35,727,256 35,459,351 Less allowances for depreciation and amortization 22,912,356 22,174,393 ------------ ------------ Net property, plant and equipment 12,814,900 13,284,958 Other assets 2,500,718 1,923,519 ------------ ------------ $ 73,111,711 $ 68,778,095 ============ ============
The accompanying notes are an integral part of the financial statements. ARROW AUTOMOTIVE INDUSTRIES, INC. BALANCE SHEETS (continued)
June 29, June 24, 1996 1995 ------------- ------------- Liabilities and Stockholders' Equity Current liabilities: Current portion of advances under revolving line of credit (Note 6) $ 5,104,715 $ 2,729,975 Cash overdraft (Note 4) 1,260,165 1,216,348 Trade accounts payable 6,647,237 3,089,034 Accrued expenses (Note 5) 5,272,737 5,009,865 Current portion of long-term debt 1,385,672 1,372,486 ------------ ------------ Total current liabilities 19,670,526 13,417,708 Long-term debt, net of current portion (Note 6) 17,969,339 19,265,190 Deferred income taxes (Note 11) 1,748,000 1,634,000 Accrued retirement benefits (Note 10) 2,428,226 1,721,867 Stockholders' equity (Notes 7 and 8): Preferred stock, par value $.01 per share--authorized 1,000,000 shares, none issued Common stock, par value $.10 per share--authorized 5,000,000 shares, issued 2,968,870 in 1996 and 2,968,870 in 1995 296,887 296,887 Capital in excess of par value 7,428,586 7,428,254 Retained earnings 24,019,471 25,463,513 ------------ ------------ 31,744,944 33,188,654 Less cost of common stock in treasury (95,787 shares in 1996 and 95,787 in 1995) 449,324 449,324 ------------ ------------ Total stockholders' equity 31,295,620 32,739,330 Commitments and Contingency (Note 9) ------------ ------------ $ 73,111,711 $ 68,778,095 ============ ============
The accompanying notes are an integral part of the financial statements. 14 Arrow Automotive Industries, Inc. Statements of Operations
Fiscal Year Ended -----------------------------------------
June 29, June 24, June 25, 1996 1995 1994 (53 weeks) (52 weeks) (52 weeks) ------------ ------------ ------------- Net sales $103,602,534 $106,574,023 $108,054,720 ------------ ------------ ------------- Cost and expenses: Cost of products sold 82,161,642 81,482,460 80,193,327 Selling, administrative and general 21,597,047 23,504,545 23,334,056 Interest 2,112,887 1,934,722 1,613,508 ------------ ------------ ------------- 105,871,576 106,921,727 105,140,891 ------------ ------------ ------------- (Loss) income before income taxes and extraordinary item (2,269,042) (347,704) 2,913,829 (Benefit) provision for income taxes (Note 11) (825,000) (103,000) 1,113,000 ------------ ------------ ------------- extraordinary item (1,444,042) (244,704) 1,800,829 Extraordinary charge from refinancing of debt, net of income tax benefit of $169,000 (Note 6) (275,985) ------------ ------------ ------------- Net (loss) income $(1,444,042) $ (244,704) $ 1,524,844 ============ ============ ============= (Loss) income per share before extraordinary item $ (.50) $ (.09) $ .64 Extraordinary charge per share from refinancing of debt, net of income tax benefit of $.06 per share (.10) ------------ ------------ ------------- Net (loss) income per share $ (.50) $ (.09) $ .54 ============ ============ =============
The accompanying notes are an integral part of the financial statements. 15 Arrow Automotive Industries, Inc. Statements of Changes in Stockholders' Equity
Capital in Common Excess of Retained Treasury Stock Par Value Earnings Stock ---------- ----------- ----------- ----------- Balance at June 26, 1993 $ 290,957 $ 7,149,871 $24,183,373 $ 449,128 Income tax benefit resulting from disqualifying disposition of shares under stock option plans 20,780 Purchase of treasury stock 120 Exercise of stock options 5,810 247,353 Net income for the year 1,524,844 ---------- ----------- ----------- ---------- Balance at June 25, 1994 296,767 7,418,004 25,708,217 449,248 Income tax benefit resulting from disqualifying disposition of shares under stock option plans 3,920 Purchase of treasury stock 76 Exercise of stock options 120 6,330 Net loss for the year (244,704) ---------- ----------- ----------- ---------- Balance at June 24, 1995 296,887 7,428,254 25,463,513 449,324 Income tax benefit resulting from disqualifying disposition of shares under stock option plans 332 Net loss for the year (1,444,042) ---------- ----------- ----------- ---------- Balance at June 29, 1996 $ 296,887 $ 7,428,586 $24,019,471 $ 449,324 ========== =========== =========== ==========
The accompanying notes are an integral part of the financial statements. 16
Arrow Automotive Industries, Inc. Statements of Cash Flows Fiscal Year Ended ---------------------------------------- June 29, June 24, June 25, 1996 1995 1994 (53 weeks) (52 weeks) (52 weeks) ------------ ------------ ------------ Operating activities Net (loss) income $(1,444,042) $ (244,704) $ 1,524,844 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,373,132 1,411,722 1,546,047 Write off of deferred financing costs (Note 6) 344,985 Deferred income taxes (credits) (399,000) 144,000 (271,000) Provision for bad debts 109,840 41,376 105,008 (Increase) decrease in assets: Accounts receivable (4,042,418) 3,084,405 (3,003,313) Inventories (1,004,810) 1,125,159 (6,190,209) Refundable income taxes 307,208 (567,523) Other current assets 595,634 31,402 (366,993) Increase (decrease) in liabilities: Accounts payable, accrued expenses and other current liabilities 3,864,892 (1,261,460) 934,558 Income taxes payable (961,842) 765,106 Accrued retirement benefits 706,359 68,580 480,294 ------------ ------------ ------------ Cash provided by (used for) operating activities 66,795 2,871,115 (4,130,673) Investing activities Purchase of property, plant and equipment (724,744) (2,551,563) (437,563) Increase in net cash surrender value of life insurance policies (268,296) (139,599) (223,174) Other 34,735 84,898 (143,155) ------------ ------------ ------------ Cash used for investing activities $ (958,305) $(2,606,264) $ (803,892)
Arrow Automotive Industries, Inc. Statements of Cash Flows-(continued) Fiscal Year Ended ---------------------------------------- June 29, June 24, June 25, 1996 1995 1994 (53 weeks) (52 weeks) (52 weeks) ------------ ------------ ------------ Financing activities Replacement financing proceeds $21,456,514 Indebtedness repaid, principally with the proceeds from the replacement financing (20,134,246) Increase in advances under revolving line of credit $ 2,374,740 $ 1,410,529 4,763,770 Deferred financing costs of replacement financing (281,964) Repayments of other long- term debt and capital lease obligations (1,386,035) (1,377,984) (1,137,478) Proceeds from exercise of stock options and related tax benefits 332 10,370 273,943 Purchase of treasury stock (76) (120) ------------ ------------ ------------ Cash provided by financing activities 989,037 42,839 4,940,419 ------------ ------------ ------------ Increase in cash and equivalents 97,527 307,690 5,854 Cash and equivalents at beginning of year 753,010 445,320 439,466 ------------ ------------ ------------ Cash and equivalents at end of year $ 850,537 $ 753,010 $ 445,320 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 17 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 1. Management's Plan and Subsequent Event In fiscal 1996 and 1995, the Company has recorded operating losses caused by a number of factors, including a decrease in net sales, unit shipments and gross margins. During the first quarter of fiscal 1997, after completing an evaluation of the Company's historical operating results, sales forecast and cost structure, the Board of Directors of the Company approved a plan to restructure its operations by closing its Santa Maria, California production facility and transferring its manufacturing operations formerly conducted at that facility to the Morrilton, Arkansas plant. As a result, a $1.2 million restructuring charge will be recorded in the first quarter of fiscal 1997. Of the total charge, $300,000 relates to termination benefits for displacement of its 350-employee workforce and $900,000 relates to closing the facility. The action was taken to enhance profit margins by streamlining the Company's productive capacity to better match its production requirements. In addition to recording the restructuring charge, the Company anticipates that during fiscal 1997, it will incur non-recurring period costs relating to the restructuring, estimated to range from $1.0 to $1.5 million. These costs relate to ongoing operations and include such costs as the shipment of inventory and equipment, employee relocation and anticipated initial labor and production inefficiencies as a result of the consolidation of production operations from three to two manufacturing facilities. The Company's fiscal 1997 operating plan contemplates an improvement over the fiscal 1996 operating results before considering costs associated with the closure of the west coast manufacturing facility. This improvement is based on operational changes instituted during fiscal 1996 and the restructuring plan announced in September, 1996. Management believes that, based on the 1997 operating plan and the availability under its existing credit line, the Company will have sufficient cash to support operations and remain in compliance with the financial covenants of the credit agreement with its bank. The Company's ability to continue to meet its obligations as they become due is dependent upon achieving improved operating results and continued compliance with the covenants under its credit agreement. Note 2. Summary of Significant Accounting Policies The principal accounting policies of Arrow Automotive Industries, Inc. (the Company) are as follows: Fiscal Year: The Company's fiscal year ends on the last Saturday of June. Fiscal year 1996 contains 53 weeks and fiscal years 1995 and 1994 each contain 52 weeks. The number of weeks in fiscal quarters varies from twelve to fourteen. Business Segment: The Company is a remanufacturer and distributor of replacement parts for automotive vehicles and trucks, which is considered to be a single line of business. In fiscal 1996, sales to the Company's largest customer represented 20% of net sales and no other customer accounted for more than 10% of net sales. 18 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued) Use of Estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Inventories: Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. Property, Plant and Equipment: Property, plant and equipment is recorded on the basis of cost or, in the case of leased assets under certain capital leases (see Note 9), at the present value of future lease payments. Depreciation and amortization of plant and equipment are provided on a straight-line basis, based upon the following estimated useful lives of the assets: Buildings and building improvements 10-33 years Leasehold improvements 10-33 years Machinery and equipment 2-10 years The Company eliminates from its accounts the cost and accumulated depreciation of the assets when they are retired, sold or abandoned. Gains and losses are reflected in the statements of operations. Income Taxes: Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The amounts deductible in determining income taxes may exceed amounts charged to income as a result of tax deductions arising from disqualifying dispositions of stock acquired under the Company's qualified stock option plans. Any reduction in income taxes as a result of these differences is credited to capital in excess of par value. Earnings (Loss) Per Share: Earnings (loss) per share is computed based upon the weighted average number of common shares outstanding during each year, plus the dilutive effect, if any, of the assumed exercise of outstanding stock options. Weighted average shares used in the calculation of earnings (loss) per share were 2,873,083 for 1996, 2,872,309 for 1995 and 2,821,063 for 1994. Stock Based Compensation: The Company grants stock options for a fixed number of shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretation, and, accordingly, recognizes no compensation expense for the stock option grants. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less at the date acquired to be cash equivalents. 19 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued) Concentration of Credit Risk: The Company sells its products nationwide, primarily to warehouse distributors and to a lesser extent, to retailers. The Company performs ongoing credit evaluations of its customers and when appropriate registers UCC filings to provide a security interest in its customers' inventory. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. Impact of Recently Issued Accounting Standards: In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long- lived assets that are expected to be disposed of. The Company will adopt Statement No. 121 in the first quarter of fiscal 1997 and, based on current circumstances, does not believe the effect of adoption with be material. Reclassification: Certain amounts reported in prior years have been reclassified to conform to the 1996 presentation. Note 3. Inventories Inventories consist of the following:
1996 1995 ------------ ------------ Stated at cost on first-in, first out (FIFO) method (which approximates replacement cost): Finished goods $ 11,522,643 $ 10,471,077 Work in process and materials 32,260,028 32,651,784 ------------ ------------ 43,782,671 43,122,861 Less reserve required to state inventory on the last-in, first-out (LIFO) method (6,470,000) (6,815,000) ------------ ------------ $ 37,312,671 $ 36,307,861 ============ ============
20 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 4. Cash Management System Daily, under the Company's cash management system, the bank notifies the Company of checks presented for payment against imprest operating accounts. The Company transfers funds from other sources, such as short-term investments or available lines of credit, to cover the checks presented for payment. The Company reflects a book cash overdraft as a result of the checks outstanding. The cash (overdraft) balance consists of the following:
1996 1995 --------------- --------------- Bank balance $ 30,591 $ 39,223 Less outstanding checks (1,290,756) (1,255,571) --------------- --------------- $(1,260,165) $ (1,216,348) =============== ===============
Note 5. Accrued Expenses Accrued expenses consist of the following:
1996 1995 --------------- --------------- Compensation and taxes withheld therefrom $ 3,358,507 $ 3,390,337 Promotional allowances 629,246 497,133 Other 1,284,984 1,122,395 --------------- --------------- $ 5,272,737 $ 5,009,865 =============== ===============
Note 6. Long-Term Debt and Credit Arrangements Long-term debt consists of the following:
1996 1995 --------------- --------------- Term loans $ 6,107,143 $ 7,392,857 Noncurrent portion of advances under revolving line of credit 13,000,000 13,000,000 Other 247,868 244,819 --------------- --------------- 19,355,011 20,637,676 Less current portion (1,385,672) (1,372,486) --------------- --------------- $17,969,339 $19,265,190 =============== ===============
21 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 6. Long-Term Debt and Credit Arrangements (continued) Maturities of amounts classified as long-term debt are as follows: 1998-- $14,378,521; 1999--$1,326,085; 2000--$1,300,560; 2001--$964,173. Interest paid amounted to $2,034,098 during 1996, $1,960,718 during 1995 and $1,681,952 during 1994. On December 29, 1993, the Company entered into an agreement with a commercial bank to provide replacement financing of its existing credit line and term loan. The replacement financing consists of a $20 million revolving line of credit and a $9 million term loan. In connection therewith, the Company recorded an extraordinary charge of $275,985, net of income tax benefit of $169,000. Of this amount, $215,985, net of income tax benefit of $131,000, represents a non-cash charge to write off the unamortized balance of deferred financing costs and the balance relates to charges arising from the early termination of that debt. At June 29, 1996, the revolving line of credit enables the Company to borrow up to $20 million through June 30, 1997, based on a formula applied to the balances of the Company's inventory and accounts receivable. The interest rate borne on a given date on amounts outstanding under the line ($18,100,000 at June 29, 1996) will change depending upon the achieved debt service ratio. The rate charged can range from 0.5% over the lender's base rate to 3.0% over such base rate. If the Company achieves specified debt service ratios, a lending rate becomes available at 3.0% above the Eurodollar rate. A commitment fee of 0.25% per annum is due on the unused portion of the borrowing facility. The interest rate at June 29, 1996 on outstanding borrowings under the revolving line of credit was 9.25%. Optional prepayment is permitted. At June 29, 1996, the Company has classified $13 million of advances outstanding under the line as noncurrent, since it does not intend to reduce its advances under the credit line below this amount during fiscal 1997. Similarly, the term loan, which had outstanding borrowings as of June 29, 1996, of $6,100,000 has been amended such that the interest rate borne on a given date will change depending upon the debt service ratio achieved by the Company. The rate charged can range from 0.75% over the lender's base rate to 3.25% over such base rate. At specific debt service levels, a lending rate is available at 3.25% above the Eurodollar rate. The interest rate at June 29, 1996 on outstanding term loan borrowings was 9.5%. Principal is payable in equal quarterly installments which are intended to extinguish the debt by December 31, 2000. Optional prepayment is permitted. All of the foregoing rates are adjusted quarterly based on the Company's debt service ratio. 22 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 6. Long-Term Debt and Credit Arrangements (continued) The Company's obligations under these agreements are secured by substantially all of its assets. Both the term loan and revolving line of credit agreements contain certain provisions and covenants which, among other things, restrict the amount of future indebtedness, amount of cash dividends and capital expenditures and require the Company to maintain specified levels of tangible net worth, operating performance and debt service and liabilities to worth ratios. On September 27, 1996 the Company reached an agreement with the bank effective June 29, 1996, such that certain covenants under the Company's revolving line of credit agreement were waived so that the Company was in compliance at June 29, 1996. In addition, the financial covenants for the remaining term of the financing agreement were amended based on the Company's fiscal 1997 operating plan, as revised to reflect the estimated impact of the restructuring plan (see Note 1). Further, the Company is currently in discussion with its principal lender to extend the agreement beyond June 30, 1997. At June 29, 1996, the Company had $505,622 of outstanding letters of credit. Note 7. Preferred Stock The Board of Directors has the authority to issue Preferred Stock in one or more series, and to fix the dividend, redemption, liquidation, conversion and voting rights associated with each such series. Note 8. Stock Options Effective as of December 21, 1992, the Company adopted the 1993 Incentive Stock Option Plan. The 1993 Plan provides for grants of options to key employees to purchase up to 200,000 shares of common stock of the Company. Options under the 1993 Plan may be granted during a period of ten years beginning December 21, 1992, and are exercisable ratably over a period of five years from date of grant. The Company's Stock Option Plan for Non-Employee Directors provides for grants of options to purchase up to 20,000 shares of Common Stock of the Company. Options granted under the Non-Employee Directors' Plan become fully exercisable six months after the date of grant, and expire ten years from the date of grant. As of November 22, 1993, no further options could be granted under the Stock Option Plan for Non-Employee Directors. 23 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 8. Stock Options (continued) Information with respect to stock options is as follows:
1996 1995 ----------------------------------------------------- Number of Shares Price Per Share Number of Shares Price Per Share ----------------------------------------------------- Outstanding at beginning of year 121,500 $6.125-$8.750 128,700 $5.375-$8.750 Options cancelled or expired (6,000) $5.375-$6.625 Options exercised (1,200) $5.375 -------- -------- Outstanding at year end 121,500 $6.125-$8.750 121,500 $6.125-$8.750 ======== ======== Exercisable at year end 99,200 76,900 ======== ======== Available for future grant 87,500 87,500 ======== ========
At June 29, 1996, 209,000 shares of Common Stock were reserved for issuance under the Company's stock option plans. The weighted average exercise price for stock options outstanding at June 29, 1996 was $6.69. Note 9. Leases Property, plant and equipment includes the following amounts for leases of manufacturing facilities that have been capitalized:
1996 1995 --------------- --------------- Building, building improvements and machinery and equipment $ 446,308 $ 342,937 Less accumulated amortization (217,949) (148,629) --------------- --------------- $ 228,359 $ 194,308 =============== ===============
24 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 9. Leases (continued) Lease amortization is included in depreciation expense and amounted to $69,320 in 1996, $72,643 in 1995 and $79,510 in 1994. During 1996 and 1995, the Company acquired $103,371 and $10,888 respectively, of equipment under capital lease arrangements. The future minimum rental commitments as of June 29, 1996 for all noncancelable operating leases are as follows:
Trucks and Trailers Total Real Estate ------------ ------------ ------------ 1997 $ 498,218 $ 303,201 $ 195,017 1998 314,816 270,536 44,280 1999 74,654 54,359 20,295 2000 10,278 10,278 0 2001 0 0 0 ------------ ----------- ------------ Total $ 897,966 $ 638,374 $ 259,592 =========== ============ ============
Total rental expense for all operating leases was:
1996 1995 1994 ------------- ------------- ------------- Minimum rentals $ 1,322,209 $ 1,309,206 $ 1,267,108 Contingent rentals 616,760 592,707 690,606 Less: Sublease rentals (113,710) (114,629) (60,338) ------------- ------------- ------------- $ 1,825,259 $ 1,787,284 $ 1,897,376 ============= ============= =============
The contingent rentals are based on additional truck miles driven over a specified minimum. Note 10. Employee Benefit Plans The Company maintains the Arrow Automotive Industries Hourly and Sales Employees' Retirement Plan (Hourly Plan) for substantially all hourly paid employees and contract salesmen. Monthly benefits are based on years of benefit service multiplied by the applicable dollar rate. Annual Company contributions to the Hourly Plan are determined using the entry age normal actuarial cost method and are equal to or exceed the minimum required by law. 25 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 10. Employee Benefit Plans (continued) Pension fund assets of the Hourly Plan are invested primarily in stocks, bonds and cash by a financial institution that was hired as the investment manager of the plan assets. The Company maintains Supplemental Benefit Agreements (Supplemental Agreements) which provide retirement and death benefits to certain executive officers and their beneficiaries. The annual benefit is equal to a percentage of the executive's average final salary. The benefits will be funded by the proceeds of certain life insurance policies purchased by the Company on the lives of these executives. The Company is the beneficiary under these life insurance policies. The Company's obligation under the Supplemental Agreements are limited in all events to an amount not greater than the benefits available to the Company under these life insurance policies, less the aggregate net outlay by the Company on such policies. The following table sets forth the Hourly Plan and the Supplemental Agreements (Plans) funded status and amounts recognized in the Company's balance sheet at June 29, 1996 and June 24, 1995 (in thousands):
Plans in Which Accumulated Benefits Exceed Assets ----------------------------
1996 1995 ------------- ------------- Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $5,531 in 1996 and $4,986 in 1995 $ (6,081) $ (5,515) Recognition of future salary increases (349) (276) ------------ ------------ Projected benefit obligation for service rendered to date (6,430) (5,791) Plan assets of fair value 4,602 4,589 ------------ ------------- Projected benefit obligation in excess of plan assets (1,828) (1,202) Unrecognized transition asset (650) (715) Unrecognized net loss 382 194 Unrecognized prior service cost 517 313 Adjustment to record minimum liability (531) (65) ------------ ------------ Accrued pension cost included in the balance sheet $ (2,110) $ (1,475) ============ ============
26 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 10. Employee Benefit Plans (continued) Net pension expense includes the following components (in thousands):
1996 1995 1994 --------- --------- --------- Service cost--benefits earned during the period $ 259 $ 237 $ 242 Interest cost on projected benefit obligation 490 434 402 Return on plan assets (441) (412) 96 Deferred asset gain (loss) 95 78 (420) Amortization of transition assets (65) (65) (65) Amortization of unrecognized net gain (3) (22) (16) Amortization of unrecognized prior service costs 37 23 22 ------- ------- ------- Total pension expense $ 372 $ 273 $ 261 ======= ======= =======
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation for the Plans was 8%. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation under the Supplemental Agreements was 6%. The expected long-term rate of return on plan assets of the Hourly Plan was 8%. The Company maintains The Arrow Automotive Industries, Inc. Salaried and Clerical Employees' Profit Sharing Plan (Profit Sharing Plan) for substantially all clerical and salaried employees. Under the terms of the Profit Sharing Plan, the amount of the Company's contribution is determined at the sole discretion of the Board of Directors. There were no amounts charged to operations under the Plan in 1996 and 1995. During 1994, the Company accrued a contribution of $107,000 to the Plan. 27 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 10. Employee Benefit Plans (continued) The Company also maintains The Arrow Automotive Industries, Inc.'s 401(K) Plan for all employees. Effective as of July 1, 1994, the Company instituted a matching contribution based on participants' elective deferrals to the 401(K) Plan. The cost of providing the matching contributions for the year ended June 29, 1996 was $45,314. The Company provides for the continuation of health care and life insurance benefits upon retirement for certain of its active and retired employees. Effective June 27, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). The Company elected to recognize the FAS 106 liability of $2.4 million on a prospective basis to be amortized over 20 years as a part of the future annual postretirement benefit cost. The effect of adopting FAS 106 increased 1994 net periodic postretirement benefit cost by approximately $65,000. The following represents the unfunded accumulated postretirement benefit obligation reconciled with amounts recognized in the Company's balance sheet on June 29, 1996 and June 24, 1995 (in thousands):
1996 1995 ---------- ---------- Accumulated postretirement benefit obligation: Retirees $ (1,602) $ (1,388) Fully eligible active plan participants (220) (266) Other active plan participants (353) (378) --------- --------- Accumulated postretirement benefit obligation (2,175) (2,032) Unrecognized transition obligation 2,048 2,169 Unrecognized net gain (316) (458) --------- --------- Accrued postretirement benefit cost $ (443) $ (321) ========= =========
28 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 10. Employee Benefit Plans (continued) Net periodic postretirement benefit cost includes the following components (in thousands):
1996 1995 1994 --------- --------- --------- Service cost--benefits earned during the period $ 19 $ 20 $ 20 Interest cost on projected benefit obligation 168 156 191 Amortization of transition obligation over 20 years 121 121 121 Amortization of unrecognized gain (7) (18) -------- -------- -------- Net periodic postretirement benefit cost $ 301 $ 279 $ 332 ======== ======== ========
The cost of covered health care benefits was assumed to increase 9.5% for retirees less than 65 years old and 6.5% for retirees 65 years and older for fiscal 1996. These rates are assumed to decrease incrementally to 5.75% in 2001 and remain at that level thereafter. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8%. An increase of 1% in the assumed medical trend rates would result in an accumulated postretirement benefit obligation of $2.2 million at June 29, 1996 and a 1996 net periodic postretirement benefit cost of $172,000. The Company maintains a severance pay plan for its clerical and salaried employees. The Company's obligation for these postemployment benefits as of June 29, 1996 is not currently material. Note 11. Income Taxes Effective June 27, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). The adoption of FAS 109 in fiscal year 1994 did not have a material impact on the Company's accounting for income taxes. 29 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 11. Income Taxes (continued) The (benefit) provision for income taxes consists of the following:
1996 1995 1994 ------------- ------------- ------------- Current: Federal $ (426,000) $ (225,000) $ 1,022,000 State (22,000) 193,000 Deferred (399,000) 144,000 (271,000) ------------- ------------- ------------ $ (825,000) $ (103,000) $ 944,000 ============= ============= ============
The Company recorded a current income tax benefit which will be realized with the carry back of the 1996 net operating loss. A reconciliation of the statutory federal income tax rate to the annual effective income tax rate follows:
1996 1995 1994 ------------- ------------- ------------- Income tax (benefit) at statutory rate (34.0)% (34.0)% 34.0% State income tax benefit, net of federal tax benefit (2.6) 4.0 Nondeductible portion of travel and entertainment expenses 0.2 4.4 0.3 Officers' life insurance expense 0.3 Other (0.4) ------------- ------------- ------------- (36.4)% (29.6)% 38.2% ============= ============= =============
30 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 11. Income Taxes (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of June 29, 1996 and June 24, 1995 are as follows:
1996 1995 ---------------- ---------------- Deferred tax assets: Inventory $ 1,543,000 $ 1,439,000 Accrued retirement benefits 653,000 643,000 Accrued medical benefits 376,000 Accounts receivable 210,000 191,000 Other 161,000 148,000 ---------------- ---------------- Total deferred tax asset 2,943,000 2,421,000 ---------------- ---------------- Deferred tax liabilities: Book/tax depreciation 2,296,000 2,166,000 Other 104,000 111,000 ---------------- ---------------- Total deferred tax liabilities 2,400,000 2,277,000 ---------------- ---------------- Net deferred tax asset $ 543,000 $ 144,000 ================ ================
Income taxes paid (refunded) amounted to $(645,554) during 1996, $1,365,465 during 1995, and $429,115 during 1994. 31 Arrow Automotive Industries, Inc. Notes to Financial Statements Note 12. Selected Quarterly Financial Data (Unaudited)
Fiscal Quarter 1996 -------------------------------------------
1st 2nd 3rd 4th (14 wks) (13 wks) (13 wks) (13 wks) --------- --------- --------- --------- (Amounts in thousands, except per share data) Net sales $29,137 $23,738 $26,226 $24,502 Gross margin 6,271 4,504 5,484 5,182 Net(loss) income 332 (793) (359) (624) Net (loss) income per share $ .12 $ (.28) $ (.13) $ (.22) Weighted average shares outstanding 2,873 2,873 2,873 2,873
Fiscal Quarter 1995 ------------------------------------------- 1st 2nd 3rd 4th (13 wks) (14 wks) (12 wks) (13 wks) --------- --------- --------- -------- (Amounts in thousands, except per share data) Net sales $32,818 $29,163 $19,820 $24,773 Gross margin 7,700 7,075 4,783 5,534 Net(loss)income 544 69 (749) (109) Net(loss) income per share $ .19 $ .02 $ (.26) $ (.04) Weighted average shares outstanding 2,872 2,872 2,872 2,873
32 Arrow Automotive Industries, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDING JUNE 1996, 1995 AND 1994 ADDITIONS --------------------- Charged Charged Balance at to Costs to Other (1) Balance Beginning and Accounts- Deductions- at End of Description of Period Expenses Describe Describe Period ------------------------------------------------------------- --------- Allowance for Doubtful Accounts- Accounts Receivable: Year Ended June 25, 1994 $ 479,312 $ 105,008 $ 0 $ 31,698 $ 552,622 Year Ended June 24, 1995 $ 552,622 $ 41,376 $ 0 $ 116,712 $ 477,286 Year Ended June 29, 1996 $ 477,286 $ 109,840 $ 0 $ 62,725 $ 524,401 (1) Uncollectible accounts written off, net of recoveries. 33 LIST AND INDEX OF EXHIBITS
Filed with This Item Incorporated by Form 10-K at Number Description Reference To or Page Indicated ------- --------------------- --------------------- ---------------- 3.1 Restated Articles of Organization Form 10-Q for quarter ended as amended to date December 31, 1983, Exhibit 3.1 3.2 By-Laws as amended to date Form 10-Q for quarter ended December 31, 1983, Exhibit 3.2 4. Copies of Stock Certificates Form 10-K for year ended June 29, 1991, Exhibit 4 9.1 Arrow Automotive Industries, Inc. Form 10-K for year ended June Voting Trust Agreement 29, 1991, Exhibit 9 9.2 Extension of Term of Arrow Form 10-K for year ended June Automotive Industries, Inc. 27, 1992, Exhibit 9.2 Voting Trust Agreement Dated May 20, 1992 10.1 Agreement and Lease Amendment Form 10-K for year ended June dated March 15, 1984 with 30, 1984, Exhibit 10.2 Holzwasser Realty Trust 10.2* Exec-U-Care Participation Form 10-K for year ended June Agreement dated December 22, 1982 30, 1984, Exhibit 10.21 10.3* Arrow Automotive Industries, Inc. Proxy Statement for 1983 Special Stock Option Plan for Non- Meeting of Stockholders in Lieu Employee Directors of Annual Meeting
* Indicates management contract or compensation plan, contract or arrangement. Filed with This Item Incorporated by Form 10-K at Number Description Reference To or Page Indicated ------- --------------------- --------------------- ---------------- 10.4* Supplemental Benefit Form 10-K for year ended June 28, 1985 Plan Agreement Exhibit 10.15 10.5 $450,000 demand promissory note Form 10-K for year ended June from Harry A. Holzwasser 29, 1985, Exhibit 10.25 10.6* Executive Life Insurance Plan Form 10-K for year ended June Agreement 27, 1987, Exhibit 10.28 10.7 Lease with CFMS General Form 10-Q for quarter ended Partnership dated July 14, 1987 December 30, 1995, Exhibit 10.2 re: 8000 New Jersey Avenue, Hammond, Indiana 10.8 Lease Agreement with Point West Form 10-K for year ended June Office Center Limited Partnership 25, 1988, Exhibit 10.29 Associates dated July 15, 1988 re: 3 Speen Street, Framingham, Massachusetts 10.9* Employment Agreement with Jim L. Form 10-K for year ended June Osment dated May 14, 1991 29, 1991, Exhibit 10.15 10.10* Employment Agreement with James Form 10-K for year ended June F. Fagan dated May 14, 1991 29, 1991, Exhibit 10.16 10.11* Arrow Automotive Industries, Inc. Registration Statement No. 33- 1993 Incentive Stock Option Plan 64990 on Form S-8 filed June 25, 1993 10.12* Employment Agreement with William Form 10-K for year ended June J. Ledbetter dated April 28, 1993 26, 1993, Exhibit 10.17
* Indicates management contract or compensation plan, contract or arrangement.
Filed with This Item Incorporated by Form 10-K at Number Description Reference To or Page Indicated ------- --------------------- --------------------- ---------------- 10.13 Financing Agreement with The Form 10-Q for quarter ended First National Bank of Boston December 25, 1993, Exhibit 10.1 dated December 29, 1993 10.14* Employment Agreement with Harry Form 10-Q for quarter ended A. Holzwasser dated as of June December 25, 1993, Exhibit 10.2 28, 1993 10.15* Directors and Officers Liability Form 10-Q for quarter ended Insurance Policy and Excess December 30, 1995, Exhibit 10.2 Policy 10.16* Amendment No. 1 to Employment Form 10-K for year ended June Agreement with Jim L. Osment 25, 1994, Exhibit 10.17 dated May 3, 1994 10.17* Amendment No. 1 to Employment Form 10-K for year ended June Agreement with James F. Fagan 25, 1994, Exhibit 10.18 dated May 3, 1994 10.18 First Amendment to Lease with Form 10-K for year ended June Point West Office Center Limited 25, 1994, Exhibit 10.19 Partnership Associates dated March 31, 1994 re: 3 Speen Street, Framingham, MA 10.19 Sublease Agreement by and between Form 10-K for year ended June Arrow Automotive Industries, Inc. 25, 1994, Exhibit 10.20 and Carlson Design/Construct Corp dated October 28, 1993 re: 3 Speen Street, Framingham, MA
* Indicates management contract or compensation plan, contract or arrangement. 34
Filed with This Item Incorporated by Form 10-K at Number Description Reference To or Page Indicated ------- --------------------- --------------------- ---------------- 10.20 First Amendment to Form 10-Q for quarter Financing Agreement ended March 25, 1995, with The First National Exhibit 10.1 Bank of Boston dated December 29, 1993 10.21 Amendment No. 1 to Form 10-K for year Employment Agreement ended June 24, 1995, with Harry A. Exhibit 10.21 Holzwasser dated August, 1995 10.22 Second Amendment to Form 10-K for year Revolving Credit and ended June 24, 1995, Term Loan Agreement Exhibit 10.22 with The First National Bank of Boston dated as of June 24, 1995 10.23 Third Amendment and Form 10-Q for quarter Waiver to Revolving ended December 30, Credit and Term Loan 1995, Exhibit 10.1 Agreement with the First National Bank of Boston dated as of December 30, 1995 10.24 Fourth Amendment and Form 10-Q for quarter Waiver to Revolving ended March 30, 1996, Credit and Term Loan Exhibit 10.1 Agreement with The First National Bank of Boston dated as of March 30, 1996. 10.25 Fifth Amendment and Waiver to Revolving Credit and Term Loan Agreement with The First National Bank of Boston dated as of June 29, 1996 Page 48
35
Filed with This Item Incorporated by Form 10-K at Number Description Reference To or Page Indicated ------- --------------------- --------------------- ---------------- 11. Statement re Note 1 to Notes to Computation of per Financial Statements share earnings (loss) filed herewith 23. Consent of Independent Page 53 Auditors 99. Press Release dated September 26, 1996 related to the restructuring and plant Page 54 closing. 27. Financial Data Schedule Page 56
36 EX-1 2 2:08 PM EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS WE CONSENT TO THE INCORPORATION BY REFERENCE IN THE REGISTRATION STATEMENTS (FORM S-8 NOS.2-76091, 2-89977, 33-47000 AND 33-64990 OF ARROW AUTOMOTIVE INDUSTRIES, INC.OF OUR REPORT DATED SEPTEMBER 5, 1996, EXCEPT FOR NOTES 1 AND 6 AS TO WHICH THE DATE IS SEPTEMBER 27, 1996, WITH RESPECT TO THE FINANCIAL STATEMENTS AND SCHEDULE OF ARROW AUTOMOTIVE INDUSTRIES, INC., INCLUDED IN THE ANNUAL REPORT (FORM 10-K) FOR THE YEAR ENDED JUNE 29, 1996. ERNST & YOUNG LLP BOSTON, MASSACHUSETTS SEPTEMBER 27, 1996 \S\ ERNST & YOUNG LLP EX-2 3 ARROW AUTOMOTIVE INDUSTRIES, INC. FIFTH AMENDMENT AND WAIVER TO REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS FIFTH AMENDMENT AND WAIVER (this "Amendment"), dated as of June 29, 1996, by and between Arrow Automotive Industries, Inc. (the "Borrower") and The First National Bank of Boston (the "Bank") as parties to a certain Revolving Credit and Term Loan Agreement, dated as of December 29, 1993, as amended by the First Amendment to Revolving Credit and Term Loan Agreement, dated as of March 24, 1995, the Second Amendment to Revolving Credit and Term Loan Agreement, dated as of June 24, 1995, the Third Amendment to Revolving Credit and Term Loan Agreement, dated as of December 30, 1995, and the Fourth Amendment and Waiver to Revolving Credit and Term Loan Agreement dated as of March 30, 1996, (the "Credit Agreement"). Capitalized terms not otherwise defined herein shall have the same meanings ascribed thereto in the Credit Agreement. WHEREAS, the Borrower has requested the Bank to make certain amendments to the Credit Agreement; WHEREAS, the Borrower has informed the Bank that for the fiscal quarter ended June 29, 1996, the Borrower has failed to comply with the financial covenant set forth in Section 11.1 - 11.3 of the Credit Agreement and has requested that the Bank waive to the limited extent necessary to permit such non-compliance as of June 29, 1996, the provisions of Section 11.1 - 11.3 of the Credit Agreement; and WHEREAS, the Bank is willing to make such amendments to, and grant such waivers of, the Credit Agreement subject to the terms and conditions set forth herein. NOW THEREFORE, the Borrower and the Bank hereby covenant and agree as follows: 1. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is hereby amended by: (a) The definition of Applicable Margin contained in Section 1.1 of the Credit Agreement is amended by deleting such definition in its entirety and restating it as follows: Applicable Margin. For each period commencing on an Adjustment Date through the date immediately preceding the next Adjustment Date (each a "Rate Adjustment Period"), the Applicable Margin shall be the applicable margin set forth below with respect to the Borrower's Debt Service coverage ratio, as determined for the fiscal quarter specified in the certificate of compliance delivered by the Borrower during the fiscal quarter immediately preceding the applicable Rate Adjustment Period. Page Term Revolving Debt Service Revolving Base Credit/ Term (Coverage See Credit/Base Rate Eurodollar Eurodollar LEVEL SECTION 11.2) RATE LOANS LOANS LOANS RATE LOANS I Less than or equal to Not Not 0.50:1.00 3.00% 3.25% Available Available II Greater than or equal to 0.76:1.00 but less than Not Not 1.00:1.00 2.00% 2.25% Available Available III Greater than or equal to 1.01:00 but less than Not Not 1.25:1.00 1.00% 1.25% Available Available IV Greater than or equal to 1.25:1.00 0.50% 0.75% 3.00% 3.25% Notwithstanding the foregoing, (a) for Loans outstanding during the period commencing on September 27, 1996 through the date immediately preceding the first Adjustment Date to occur after the fiscal quarter ending December 31, 1996, the Applicable Margin shall be as set forth in Level II above, and (b) if the Borrower fails to deliver any certificate of compliance when required by Section 9.4(d) hereof then, for the period commencing on the next Adjustment Date to occur subsequent to such failure through the date immediately following the date on which such certificate of compliance is delivered, the Applicable Margin shall be the highest Applicable Margin set forth above. (b) Section 11.1 of the Credit Agreement is amended by inserting immediately after the words "$500,000 during any fiscal year thereafter" which appears in Section 11.1 a comma and the words "but for the Borrower's 1997 fiscal year Capital Expenditures shall not include amounts capitalized in connection with the closing of the Borrower's manufacturing facility located in Santa Maria, California up to an aggregate amount of $250,000". Page (c) Section 11.2 of the Credit Agreement is amended by deleting such Section 11.2 and restating it in its entirety as follows: Section 11.2 Debt Service. The Borrower will not permit, as at the end of each fiscal period described in the table set forth below, the ratio of (a) the sum of (i) Net Income (which, for purposes of this Section 11.2, shall exclude all non-recurring restructuring charges and period costs (as such period costs are described in the Borrower's business plan dated as of September 13, 1996) of the Borrower relating solely to the closing of the Borrower's manufacturing facility located in Santa Maria, California up to a maximum aggregate amount of $2,200,000) plus (ii) Total Interest Expense, plus (iii) depreciation, plus (iv) amortization to (b) Total Debt Service to be less than the ratio set forth opposite such period in such table: FISCAL PERIOD RATIO 3 month period: Q1, 1997 1.0:1.0 6 month period: Q1, 1997 through Q2, 1997 1.0:1.0 9 month period: Q1, 1997 through Q3, 1997 1.0:1.0 12 month period: Q1, 1997 through Q4, 1997 1.0:1.0 Each period of four consecutive fiscal quarters thereafter, commencing with the four consecutive fiscal quarters ending on the last day of Q1, 1998 1.0:1.0 (d) Section 11.3 of the Credit Agreement is amended by deleting such Section 11.3 and restating it in its entirety as follows: Section 11.2 Liabilities to Worth Ratio. The Borrower will not permit the ratio of Total Liabilities to Tangible Net Worth to exceed (a) 1.50:1.00 as at the end of each fiscal quarter for the fiscal quarters ending Q1, 1997, Q2, 1997 and Q3, 1997 and (b) 1.30 as at the end of each fiscal quarter ending thereafter. (e) Inserting immediately after the text of Section 11.4 of the Credit Agreement the following: Section 11.5 Minimum Profitability. The Borrower will not permit, as at the end of each fiscal period described in the table set forth below, its Net Income (which, for Page purposes of this Section 11.5, shall include all non-recurring restructuring charges and period costs of the Borrower relating soley to the closing of the Borrower's manufacturing facility located in Santa Maria, California) to be less than the amount set forth opposite such period in such table: FISCAL PERIOD AMOUNT 3 month period: Q1, 1997 -$1,250,000 6 month period: Q1, 1997 through Q2, 1997 -$1,350,000 9 month period: Q1, 1997 through Q3, 1997 -$1,250,000 12 month period: Q1, 1997 through Q4, 1997 -$1,000,000 2. WAIVER. The Bank hereby waives the provisions of Section 11.1 - 11.3 of the Credit Agreement solely to the extent necessary to permit non- compliance with such Section 11.1 - 11.3, and only for the fiscal quarter ended June 29, 1996. 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall be effective as of June 29, 1996, upon satisfaction of the following conditions: (a) This Amendment shall have been duly and properly executed and delivered to the Bank by the Borrower; (b) All corporate action necessary for the valid execution, delivery and performance by the Borrower of this Amendment and the Credit Agreement as amended hereby shall have been duly and effectively taken, and evidence thereof satisfactory to the Bank shall have been provided to the Bank; and (c) The Borrower shall have paid to the Bank an amendment fee of $10,000. 4. REPRESENTATIONS AND WARRANTIES. The Borrower, hereby represents and warrants to the Bank as follows: (a) REPRESENTATIONS AND WARRANTIES IN CREDIT AGREEMENT. The representations and warranties of the Borrower contained in the Credit Agreement (i) were true and correct in all material respects when made, and (ii) except to the extent such representations and warranties by their terms are made solely as of a prior date, continue to be true and correct in all material respects on the date hereof. Page (b) RATIFICATION, ETC. Except as expressly provided by this Amendment, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Security Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. (c) AUTHORITY, ETC. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of all of its agreements and obligations under the Credit Agreement as amended hereby are within the corporate authority of the Borrower and have been duly authorized by all necessary corporate action on the part of the Borrower. (d) ENFORCEABILITY OF OBLIGATIONS. This Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their terms. (e) NO DEFAULT. After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. 5. NO OTHER AMENDMENTS OR WAIVERS. Except as expressly provided in this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents remain in full force and effect. 6. EXPENSES. Pursuant to Section 16 of the Credit Agreement, all costs and expenses incurred or sustained by the Bank in connection with this Amendment, including the fees and disbursements of legal counsel for the Bank in producing, reproducing and negotiating the Amendment, will be for the account of the Borrower whether or not the transactions contemplated by this Amendment are consummated. 7. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but which together shall constitute one instrument. 8. MISCELLEANOUS. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof. Page IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment under seal as of the date first set forth above. ARROW AUTOMOTIVE INDUSTRIES, INC. By: /S/ JAMES F. FAGAN Name: James F. Fagan Title: Executive Vice President THE FIRST NATIONAL BANK OF BOSTON By: /S/ MATTHEW A. ROSS Names: Matthew A. Ross Title: Vice President Page EX-3 4 EXHIBIT 99. FOR IMMEDIATE RELEASE: CONTACT: HANK SHAFRAN CONE COMMUNICATIONS 617-951-8193 CONTACT: JAMES F. FAGAN ARROW AUTOMOTIVE INDUSTRIES, INC. 508-872-3711 ARROW AUTOMOTIVE INDUSTRIES TO STREAMLINE PRODUCTION WITH CLOSING OF SANTA MARIA, CA PLANT EXPANDED MANUFACTURING IN ARKANSAS FACILITY DESIGNED TO IMPROVE OPERATING EFFICIENCIES AND CUSTOMER SERVICE AGGRESSIVE RELOCATION PLAN TARGETS CALIFORNIA WORKFORCE MORRILTON, AR (SEPTEMBER 26, 1996)- ARROW AUTOMOTIVE INDUSTRIES (ASE: AI), A LEADER IN THE AUTOMOTIVE AFTERMARKET SINCE 1929, TODAY ANNOUNCED THAT IT WILL BE CLOSING ITS SANTA MARIA, CA PRODUCTION FACILITY. PRODUCT LINES SERVICED AT THE CALIFORNIA FACILITY WILL NOW BE MANUFACTURED AT ARROW'S PRODUCTION FACILITY IN MORRILTON, ARKANSAS. ARROW WILL CONTINUE TO OPERATE A FULLY STAFFED, FULL-INVENTORY DISTRIBUTION CENTER IN SANTA MARIA, CALIFORNIA FOR CUSTOMERS IN SEVEN WEST COAST STATES, ALASKA AND HAWAII. THE COMPANY IS OFFERING A RELOCATION PACKAGE TO MANY SANTA MARIA EMPLOYEES AND HOPES THEY WILL CHOOSE TO RELOCATE TO ARKANSAS. "CONSOLIDATING OPERATIONS AT OUR ARKANSAS FACILITY REPRESENTS A CONTINUATION OF OUR EFFORTS TO IMPROVE OPERATING EFFICIENCIES AND CUSTOMER SERVICE," STATED JIM OSMENT, ARROW PRESIDENT AND CEO. "WE WILL CONTINUE TO PRODUCE THE SAME HIGH QUALITY PRODUCTS OUR CUSTOMERS HAVE COME TO DEPEND ON IN A MORE STREAMLINED AND COST-EFFECTIVE MANNER". EXHIBIT 99. (CONTINUED) SIMILAR CONSOLIDATION EFFORTS HAVE BEEN INSTITUTED THIS YEAR BY ARROW, WITH THE ESTABLISHMENT OF CENTRALIZED CUSTOMER SERVICE, PURCHASING AND BILLING OPERATIONS AT THE ARKANSAS OFFICES. THE COMPANY'S SALES FORCE WILL REMAIN THE SAME FOR CUSTOMERS IN THE WEST COAST REGION. TO RESPOND TO EMPLOYEE NEEDS, ARROW IS WORKING TO CREATE AN ATTRACTIVE RELOCATION PACKAGE WHICH WILL BE OFFERED TO MANY SANTA MARIA EMPLOYEES. AS AN EMPLOYER IN SANTA MARIA, CA SINCE 1981, ARROW WILL ALSO BE WORKING WITH SEVERAL JOB TRAINING AND RE-EMPLOYMENT GROUPS IN SANTA MARIA TO PROVIDE APPROPRIATE SERVICES TO EMPLOYEES WHO DO NOT RELOCATE. ARROW AUTOMOTIVE INDUSTRIES, WITH MANUFACTURING AND DISTRIBUTION CENTERS LOCATED IN THE U.S. AND CANADA, IS ONE OF THE LARGEST INDEPENDENT REMANUFACTURERS OF REPLACEMENT PARTS FOR DOMESTIC AND IMPORTED VEHICLES. NOW IN ITS 67TH YEAR, ARROW AUTOMOTIVE INDUSTRIES REMAINS A LEADER IN THE AUTOMOTIVE AFTERMARKET, WITH CURRENT SALES IN EXCESS OF $100 MILLION ANNUALLY. EX-27 5
5 This schedule contains summary financial information extracted from the balance sheet and statement of operations, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-29-1996 JUN-29-1996 851 0 16,992 524 37,313 57,769 35,727 22,912 73,112 19,670 17,969 0 0 297 30,999 73,112 103,603 103,603 82,162 82,162 0 0 2,113 (2,269) (825) 0 0 0 0 (1,444) (0.50) (0.50)
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