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 24, 1995
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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
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ARROW AUTOMOTIVE INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1449115
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
3 Speen Street, Framingham, Massachusetts 01701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 872-3711
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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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 45 of this Report.
Page 1 of 54
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. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 1995: $8,584,182
Number of shares of Common Stock, $.10 Par Value, outstanding as of September
15, 1995: 2,873,083
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1995 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
Page 2
PART 1
ITEM 1. BUSINESS.
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General
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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.
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.
Manufacturing Operations
------------------------
The Company's manufacturing operations consist principally of the
collection, disassembly, cleaning, examination and reconditioning
of used automotive
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
Page 3
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
42 full-time salesmen. The majority of the Company's sales (approximately 74
percent in fiscal 1995) are to warehouse distributors. The balance of the
Company's sales are to retailers (approximately 21 percent in fiscal 1995) and
other customers. During fiscal 1995, sales to the Company's largest customer,
General Parts, Inc., accounted for 15% 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(Reg. Trade Mark) and
Lance(Reg. Trade Mark) labels, as well as under a variety of private labels.
The Arrow(Reg. Trade Mark) line consists of the Company's premium quality parts
often containing a number of new components. The Lance(Reg. Trade Mark) line
consists of higher volume units whereby manufacturing economies of scale
permit reduced pricing to customers. The Lance(Reg. Trade Mark) line is
available in starters and alternators. In fiscal 1995, approximately 45
percent of the Company's sales were
Page 4
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(Reg. Trade Mark), which enables
customers to submit orders to the Company directly by computer. The TRANSNET
(Reg. Trade Mark) 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
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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.
Page 5
Employees
---------
On June 24, 1995, the Company employed 1,533 full-time employees and 65
part-time employees.
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.
In addition, the Company leases warehouse space of approximately 11,000
square feet in Hammond, Indiana, 50,000 square feet in Morrilton, Arkansas,
41,000 square feet in Spartanburg, South Carolina, 10,000 square feet in
Toronto, Canada and 8,000 square feet in Vancouver, Canada.
Page 6
All facilities are well maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
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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.
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The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 1995.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
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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 15, 1995 was 322. The following table
sets forth the high and low sale price on the American Stock Exchange of the
Company's common stock, for each full quarterly period during the last two
fiscal years:
Fiscal Fiscal
1995 1994
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High Low High Low
First Quarter $8 3/8 $7 $8 3/8 $6
Second Quarter 8 1/2 7 8 6 1/8
Third Quarter 8 5 5/8 10 7 3/4
Fourth Quarter 6 9/16 5 1/2 9 7
Page 7
The Company did not pay any dividends during the 1995 or 1994 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.
Page 8
ITEM 6. SELECTED FINANCIAL DATA.
---------------------------------
FOR THE FISCAL YEARS ENDED IN JUNE
(Amounts in Thousands Except Per Share Amounts and Financial
Ratio Data)
1995 1994 1993 1992 1991
(52 wks) (52 wks) (52 wks) (52 wks) (52 wks)
Net sales $106,574 $ 108,055 $ 100,654 $ 95,282 $ 91,238
Gross profit 25,092 27,861 26,622 26,447 25,704
Selling, administrative
& general expenses 23,505 23,334 23,147 21,890 22,810
Interest expense - net 1,935 1,614 1,830 2,014 2,676
(Loss) income before
income taxes and
extraordinary items (348) 2,914 1,645 4,413(1) 218
(Benefit) provision for
income taxes (103) 1,113 628 1,765 115
(Loss) income before
extraordinary items (245) 1,801 1,017 2,648 103
Loss on refinancing of
debt, net of income
tax benefit -- (276) -- -- --
Utilization of income
tax net operating
loss carryforwards -- -- -- 400 115
Net (loss) income (245) 1,525 1,017 3,048(1) 218
(Loss) income per share
before extraordinary
items (.09) .64 .36 .95(1) .04
Loss per share on
refinancing of debt, net
of income tax benefit -- (.10) -- -- --
Utilization of income tax
net operating loss
carryforwards per share -- -- -- .15 .04
Net (loss) income per share (.09) .54 .36 1.10(1) .08
Cash dividends declared
per share -- -- -- -- --
Capital expenditures 2,574 670 648 657 217
Depreciation and
amortization $ 1,412 $ 1,546 $ 1,692 $ 1,918 $ 2,153
Average shares outstanding 2,872 2,821 2,814 2,777 2,757
(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.
Page 9
FOR THE FISCAL YEARS ENDED IN JUNE
(Amounts in Thousands Except Per Share Amounts and
Financial Ratio Data)
1995 1994 1993 1992 1991
(52 wks) (52 wks) (52 wks) (52 wks) (52 wks)
AT YEAR END
Working capital $ 40,152 $ 33,702 $ 31,675 $ 30,175 $ 26,973
Total assets 69,006 71,121 62,026 62,990 64,429
Long-term debt 19,265 11,732 12,487 12,418 14,440
Stockholders' equity 32,739 32,974 31,175 30,155 26,729
Equity per common share $ 11.40 $ 11.69 $ 11.08 $ 10.86 $ 9.69
FINANCIAL RATIOS (%)
Gross profit margin 23.54 25.78 26.45 27.76 28.17
Net profit margin (.23) 1.41 1.01 3.20 0.24
Return on equity (.74) 4.75 3.32 10.72 0.82
Current ratio (to 1) 3.94 2.46 3.04 2.76 2.37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATION.
-------------------------
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto.
Results of Operations
---------------------
The Company incurred a net loss of $245,000 for the fiscal year ended
June 24, 1995. During fiscal 1994 and 1993, the Company had net income of
$1,525,000 and $1,017,000, respectively. 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.
Operating results in the current fiscal year were adversely affected by
lower sales volumes during the last six months of the fiscal year, which the
Company attributes primarily to the unusually mild winter experienced
throughout the country combined with changes in the Company's customer base.
Also, the cost of manufacturing has continued to rise due to continued
significant price increases in certain raw materials. Further, the Company
experienced manufacturing inefficiencies during the year related to the
installation of a new raw material cleaning system. Finally, increases in
selling, administrative and general expenses occurred in fiscal 1995 related
to the acquisition
Page 10
of new business during the first nine months of the current year and certain
marketing programs completed during the current fiscal year.
Sales
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Net sales for fiscal 1995 of $106,574,000 were down 1.4% from fiscal
1994's net sales of $108,055,000. In comparison to fiscal 1993, the current
fiscal year's net sales have increased 5.9%. Unit sales for fiscal 1995 were
down 4.9% from fiscal 1994 and down 3.7% from fiscal 1993. The net sales
volume of the first and second quarters in the current fiscal year were
$32,818,000 and $29,163,000, respectively, the highest quarterly sales volumes
ever achieved by the Company. The third and fourth quarters' net sales of
$19,820,000 and $24,773,000 respectively, represented a significant decline
from the net sales achieved in the first two quarters of the fiscal year.
The decline in net sales in the latter half of the current fiscal year is
attributable to several factors. The most significant factor was the mild
winter weather pattern experienced throughout most of the country 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 and the first quarter of fiscal 1996. However, during the
first quarter of fiscal 1996 the Company acquired new customers, which, while
not replacing the lost business entirely, will mitigate the negative impact of
the customer turnover.
Gross Margin
------------
Gross margin as a percentage of sales was 23.5%, 25.8% and 26.4% for the
fiscal years ended 1995, 1994, and 1993, respectively.
A change in the mix of products sold has contributed to the margin
decline. Throughout the last three fiscal years, sales have migrated to the
Company's Lance(Reg. Trade Mark) product lines, which generate lower margins
than the Company's traditional premium lines. This migration of sales to
lower priced lines reflects several issues impacting the remanufactured parts
market. 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. This emergence of "power
buyers" has dramatically increased pricing pressures at a time when
manufacturing overcapacity remains prevalent. Also during the last three
fiscal years, 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 the current
Page 11
fiscal year, the product mix was also 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.
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 new raw
material cleaning systems. The new raw material cleaning systems
were necessary in
order to comply with regulations promulgated pursuant to the Clean Air Act
Amendments of 1990 which mandated that the production of a certain degreasing
agent used by the Company in its manufacturing operations cease completely by
January 1, 1996. The move toward an environmentally friendly degreasing agent
required the replacement of equipment that was key to the flow of the
manufacturing process. Certain delivery and installation delays created less
efficient product processing during the third and fourth quarters of fiscal
1995.
The Company strives to source its raw materials at favorable prices. The
Company continues to review its operations to reduce overall costs to
manufacture its products.
Selling, Administrative and General Expenses
--------------------------------------------
Selling, administrative and general expenses as a percentage of sales
were 22.1%, 21.6% and 23.0% for the fiscal years 1995, 1994, and 1993,
respectively. Spending in these areas increased $170,000 in fiscal 1995 over
fiscal 1994 and $358,000 over fiscal 1993. Beginning late in fiscal 1994 and
continuing into the first three quarters of the current fiscal year, the
Company incurred increased business acquisition costs. Such costs incurred in
fiscal 1995 exceeded similar costs in the prior year by $357,000. Also,
during the current fiscal year the Company invested in the development of new
marketing programs which resulted in additional expense of approximately
$340,000.
The Company constantly reviews its selling, administrative and general
expenses for areas where reductions can be made, and continues to exercise
strict control over discretionary spending.
Net Interest Expense
--------------------
Net interest expense in fiscal 1995 of $1,935,000 increased 20.0% or
$322,000, from fiscal 1994's net interest expense which was down $217,000, or
12%, from net interest expense in fiscal 1993. Higher borrowing levels and
higher interest rates resulted in the additional net interest expense incurred
in the current fiscal year. 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
Page 12
financing obtained in the third quarter of fiscal 1994.
Income Taxes
------------
The Company's tax benefit was 29.6% in fiscal 1995, which was less
than the statutory rate of 34%, primarily due to certain nondeductible
expenses. The effective tax rate for both fiscal years 1994 and 1993 was
38.2%.
Impact of Inflation and Changing Prices
---------------------------------------
Although the Company cannot accurately determine the precise overall
effect of inflation on its business, the Company is conscious of the impact of
inflation and, when possible, will compensate by increasing selling prices.
The Company has refrained from passing on all of the increased costs through
pricing because of the current competitive climate. The Company will continue
its efforts to reduce costs through improvements in product distribution,
purchasing practices, manufacturing techniques and more intense reclamation
efforts. However, due to the cost increases in raw materials mentioned
earlier, the Company has found it necessary to implement certain price
increases scheduled to take effect late in the first quarter of fiscal 1996.
The Company follows the LIFO method of determining inventory costs to
better match current costs with current revenues. In fiscal 1995, 1994 and
1993, the impact of inflation and operating factors increased cost of goods
sold over the respective prior years by $795,000, $121,000 and $273,000.
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.
Liquidity and Financial Condition
---------------------------------
In fiscal 1995, cash provided by operating activities of $2,871,000 was
substantially used to purchase new raw material cleaning
Page 13
systems, while cash provided by net financing activities remained relatively
unchanged from the beginning of the fiscal year. The decline in the Company's
sales volume and related reductions in spending and purchasing levels in the
second half of the current fiscal year resulted in decreases in accounts
receivable, inventories and outstanding accounts payable as of June 24, 1995
when compared to those balances on June 25, 1994.
As previously mentioned, the Company replaced raw material cleaning
systems at all three manufacturing plants during fiscal 1995. The
investment in those capital expenditures approximated $2,214,000.
Cash used in operating activities in fiscal 1994 was $4,131,000 and cash
used in investing activities was $804,000. Cash was provided from financing
activities of $4,940,000. At June 25, 1994, increases in inventory and
accounts receivable levels over the prior year's levels absorbed cash of
$6,190,000 and $3,003,000, respectively. The positive cash flow from net
income combined with cash provided by an increase in accounts payable and
advances under the Company's revolving line of credit supported the growth in
inventory and accounts receivable.
Cash of $1,846,000 was provided by operations in fiscal 1993 relative to
the prior
year. The positive cash flow was substantially generated from net income and
a reduction in inventory and accounts receivable, offset to some extent by
increases in accrued liabilities and other current assets. Cash of $1,173,000
was used for financing activities, primarily to reduce outstanding long-term
debt.
Capital Resources
-----------------
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 consisted of a $20 million revolving
line of credit and a $9 million term loan. The balance of the term loan at
June 24, 1995 was $7,392,857. The difference between amounts paid to retire
the former indebtedness and the related carrying amounts, principally the
unamortized balance of debt issue costs and early payment penalties, of
$276,000, net of an income tax benefit of $169,000, has been reflected as an
extraordinary charge in the fiscal 1994 statement of income.
The Company's obligations under this financing agreement are secured by
substantially all of its assets. The agreement contains certain provisions
and covenants which, among other things, restrict the amount of future
indebtedness, the amount of cash dividends and capital expenditures and
require the Company to maintain specified levels of tangible net worth, debt
service and net worth ratios. The debt service covenant of this financing
agreement was amended during the third and fourth quarters of fiscal 1995 such
that the loss sustained by the
Page 14
Company during the respective quarters did not result in a breach of the
covenant.
The Company anticipates that operating revenues and existing credit lines
will be adequate to provide for the Company's cash requirements for fiscal
1996.
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 16 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
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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
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
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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 in the Company's Annual Proxy
Statement for its 1995 Annual Meeting of Stockholders.
Page 15
PART IV
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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 24, 1995 and
June 25, 1994 21
Statements of Operations - Years
ended June 24, 1995, June 25, 1994, and
June 26, 1993 23
Statements of Changes in Stockholders'
Equity - Years ended June 24, 1995,
June 25, 1994, and June 26, 1993 25
Statements of Cash Flows - Years
ended June 24, 1995, June 25, 1994,
and June 26, 1993 27
Notes to Financial Statements 29
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 44
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 45 hereof.
(b) The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1995.
Page 16
(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.
Page 17
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 21, 1995 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 21, 1995
------------------------- Executive Officer) and
Jim L. Osment Director
Executive Vice President, September 21, 1995
/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 21, 1995
------------------------- Director
Harry A. Holzwasser
------------------------- Director September 21, 1995
Mary S. Holzwasser
/s/ Robert A. Holzwasser Director September 21, 1995
-------------------------
Robert A. Holzwasser
/s/ Joel D. Holzwasser Director September 21, 1995
-------------------------
Joel D. Holzwasser
/s/ Lawrence M. Levinson Director September 21, 1995
-------------------------
Lawrence M. Levinson
Page 18
------------------------- Director September 21, 1995
Winthrop P. Rockefeller
------------------------- Director September 21, 1995
Alan Steinert, Jr.
/s/ Kathaleen M. Vice President and September 21, 1995
Carroll-Coelho Controller
-------------------------
Kathaleen M. Carroll-Coelho
Page 19
Report of 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 24, 1995 and June 25, 1994, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 24, 1995. 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 24, 1995 and June 25, 1994, and the results of its operations
and its cash flows for each of the three years in the period ended June 24,
1995, 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 9 and 10 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
200 Clarendon Street
Boston, Massachusetts
August 30, 1995
Page 20
ARROW AUTOMOTIVE INDUSTRIES, INC.
BALANCE SHEETS
June 24, June 25,
1995 1994
------------- -------------
Assets (Note 5)
Current assets:
Cash and equivalents $ 753,010 $ 445,320
Accounts receivable, less allowance
($477,285 in 1995 and $552,622
in 1994) for doubtful accounts 12,535,646 15,661,427
Inventories (Note 2) 36,307,861 37,433,020
Deferred income taxes (Note 10) 1,778,000 1,919,000
Other current assets 2,422,578 1,373,477
------------ ------------
Total current assets 53,797,095 56,832,244
Property, plant and equipment (Note 8):
Land 952,087 952,087
Buildings and building improvements 15,656,256 15,621,268
Leasehold improvements 258,221 258,221
Machinery and equipment 18,567,735 16,307,227
Construction in progress 25,052 47,678
------------ ------------
35,459,351 33,186,481
Less allowances for depreciation and
amortization 22,174,393 21,134,125
------------ ------------
Net property, plant and equipment 13,284,958 12,052,356
Other assets 1,923,519 2,236,194
------------ ------------
$ 69,005,572 $ 71,120,794
============ ============
The accompanying notes are an integral part of the financial statements.
Page 21
ARROW AUTOMOTIVE INDUSTRIES, INC.
BALANCE SHEETS (continued)
June 24, June 25,
1995 1994
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of advances under
revolving line of credit (Note 5) $ 2,729,975 $ 10,219,446
Cash overdraft (Note 3) 1,216,348 907,095
Trade accounts payable 3,089,034 3,951,308
Accrued expenses (Note 4) 5,009,865 5,718,304
Income taxes payable 227,477 961,842
Current portion of long-term debt 1,372,486 1,372,538
------------ ------------
Total current liabilities 13,645,185 23,130,533
Long-term debt, net of current portion
(Note 5) 19,265,190 11,732,234
Deferred income taxes (Note 10) 1,634,000 1,631,000
Accrued retirement benefits (Note 9) 1,721,867 1,653,287
Stockholders' equity (Notes 6 and 7):
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 1995 and
2,967,670 in 1994 296,887 296,767
Capital in excess of par value 7,428,254 7,418,004
Retained earnings 25,463,513 25,708,217
------------ ------------
33,188,654 33,422,988
Less cost of common stock in treasury
(95,787 shares in 1995 and 95,775
in 1994) 449,324 449,248
------------ ------------
Total stockholders' equity 32,739,330 32,973,740
Commitments and Contingency (Note 8)
------------ ------------
$ 69,005,572 $ 71,120,794
============ ============
The accompanying notes are an integral part of the financial statements.
Page 22
Arrow Automotive Industries, Inc.
Statements of Operations
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
------------- ------------- -------------
Net sales $106,574,023 $108,054,720 $100,654,148
------------- ------------- -------------
Cost and expenses:
Cost of products sold 81,482,460 80,193,327 74,032,182
Selling, administrative and
general 23,504,545 23,334,056 23,146,655
Interest 1,934,722 1,613,508 1,830,401
------------- ------------- -------------
106,921,727 105,140,891 99,009,238
------------- ------------- -------------
(Loss) income before income
taxes and extraordinary item (347,704) 2,913,829 1,644,910
(Benefit) provision for income
taxes (Note 10) (103,000) 1,113,000 628,000
------------- ------------- -------------
(Loss) income before
extraordinary item (244,704) 1,800,829 1,016,910
Extraordinary charge from
refinancing of debt, net
of income tax benefit of
$169,000 (Note 5) (275,985)
------------- ------------- -------------
Net (loss) income $ (244,704) $ 1,524,844 $ 1,016,910
============= ============= =============
(Loss) income per share
before extraordinary item $ (.09) $ .64 $ .36
Page 23
Extraordinary charge per share
from refinancing of debt,
net of income tax benefit of
$.06 per share (.10)
------------- ------------- -------------
Net (loss) income per share $ (.09) $ .54 $ .36
============= ============= =============
The accompanying notes are an integral part of the financial statements.
Page 24
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 27,
1992 $ 290,897 $ 7,146,712 $ 23,166,463 $ 449,128
Income tax benefit
resulting from
disqualifying
disposition of
shares under stock
option plans 463
Exercise of stock
options 60 2,696
Net income for the
year 1,016,910
------------ ------------ ------------ ------------
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
Page 25
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
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
Page 26
Arrow Automotive Industries, Inc.
Statements of Cash Flows
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
------------- ------------- -------------
Operating activities
Net (loss) income $ (244,704) $ 1,524,844 $ 1,016,910
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,411,722 1,546,047 1,691,854
Write off of deferred
financing costs (Note 5) 344,985
Deferred income taxes
(credits) 144,000 (271,000) (112,000)
Provision for bad debts 41,376 105,008 23,905
(Increase) decrease in assets:
Accounts receivable 3,084,405 (3,003,313) 211,099
Inventories 1,125,159 (6,190,209) 607,667
Other current assets (763,598) (366,993) (715,498)
Increase (decrease) in
liabilities:
Accounts payable, accrued
expenses and other current
liabilities (1,261,460) 934,558 (574,966)
Income taxes payable (734,365) 765,106 7,284
Accrued retirement benefits 68,580 480,294 (310,708)
------------- ------------- -------------
Cash provided by (used for)
operating activities 2,871,115 (4,130,673) 1,845,547
Investing activities
Purchase of property, plant
and equipment (2,551,563) (437,563) (510,854)
Increase in net cash
surrender value of life
insurance policies $ (139,599) $ (223,174) $ (233,445)
The accompanying notes are an integral part of the financial statements.
Page 27
Arrow Automotive Industries, Inc.
Statements of Cash Flows (continued)
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
------------- ------------- -------------
Other $ 84,898 $ (143,155) $ 72,320
------------- ------------- -------------
Cash used for investing
activities (2,606,264) (803,892) (671,979)
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 1,410,529 4,763,770 440,452
Deferred financing costs of
replacement financing (281,964)
Repayments of other long-
term debt and capital lease
obligations (1,377,984) (1,137,478) (1,617,167)
Proceeds from exercise of
stock options and related
tax benefits 10,370 273,943 3,219
Purchase of treasury stock (76) (120)
------------- ------------- -------------
Cash provided by (used for)
financing activities 42,839 4,940,419 (1,173,496)
------------- ------------- -------------
Increase in cash and
equivalents 307,690 5,854 72
Cash and equivalents at
beginning of year 445,320 439,466 439,394
------------- ------------- -------------
Cash and equivalents at end
of year $ 753,010 $ 445,320 $ 439,466
============= ============= =============
The accompanying notes are an integral part of the financial statements.
Page 28
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 1. 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 years 1995, 1994, and 1993 each contained 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 1995, sales to the Company's largest
customer represented 15% of net sales and no other customer accounted for more
than 10% of net sales.
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 8), 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: The Company provides deferred taxes to recognize temporary
differences between financial reporting and tax accounting.
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 2,872,309 for 1995, 2,821,063 for 1994 and 2,813,752 for 1993.
Page 29
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies (continued)
Cash Equivalents: The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
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.
Note 2. Inventories
Inventories consist of the following:
1995 1994
------------ ------------
Stated at cost on first-in, first out
(FIFO) method (which approximates
replacement cost):
Finished goods $10,471,077 $11,027,263
Work in process and materials 32,651,784 32,425,757
------------ ------------
43,122,861 43,453,020
Less reserve required to state
inventory on the last-in, first-out
(LIFO) method (6,815,000) (6,020,000)
------------ ------------
$36,307,861 $37,433,020
============ ============
Note 3. 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.
Page 30
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 3. Cash Management System (continued)
The cash (overdraft) balance consists of the following:
1995 1994
------------ ------------
Bank balance $ 39,223 $ 87,679
Less outstanding checks (1,255,571) (994,774)
------------ ------------
$(1,216,348) $ (907,095)
============ ============
Note 4. Accrued Expenses
Accrued expenses consist of the
following:
1995 1994
------------ ------------
Compensation and taxes withheld
therefrom $ 3,390,337 $ 3,466,210
Promotional allowances 497,133 780,156
Other 1,122,395 1,471,938
------------ ------------
$ 5,009,865 $ 5,718,304
============ ============
Note 5. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following:
1995 1994
------------ ------------
Term loans $ 7,392,857 $ 8,678,571
Noncurrent portion of advances under
revolving line of credit 13,000,000 4,100,000
Other 244,819 326,201
------------ ------------
20,637,676 13,104,772
Less current portion (1,372,486) (1,372,538)
------------ ------------
$19,265,190 $11,732,234
============ ============
Page 31
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 5. Long-Term Debt and Credit Arrangements (continued)
Maturities of amounts classified as long-term debt are as follows: 1997--
$14,363,316; 1998--$1,353,345; 1999--$1,298,528; 2000--$1,285,714; 2001--
$964,287.
Interest paid amounted to $1,960,718 during 1995, $1,681,952 during 1994 and
$1,884,380 during 1993.
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 24, 1995, the revolving line of credit enables the Company to borrow
up to $20 million through December 31, 1996, based on a formula applied to the
balances of the Company's inventory and accounts receivable. Amounts
outstanding under the line ($15,729,975 at June 24, 1995) bear interest (at
the Company's option) of 0.5% over the prime lending rate or 2% over 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 24, 1995 on
outstanding borrowings under the revolving line of credit was approximately
8.3%. Optional prepayment is permitted. At June 24, 1995, 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 1996.
The $9 million term loan bears interest (at the Company's option) of 0.75%
over the prime lending rate or 2.25% over the Eurodollar rate payable monthly.
The interest rate at June 24, 1995 on outstanding term loan borrowings of
$7,392,857 was approximately 8.4%. Principal is payable in equal quarterly
installments which are intended to extinguish the debt by December 31, 2000.
Optional prepayment is permitted.
The Company's obligations under these agreements are secured by substantially
all of its assets.
Page 32
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 5. Long-Term Debt and Credit Arrangements (continued)
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, debt
service and net worth ratios.
At June 24, 1995, the Company had $379,000 of outstanding letters of credit.
Note 6. 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 7. 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.
Page 33
Arrow Automotive Industries,
Inc.
Notes to Financial Statements
Note 7. Stock Options (continued)
Information with respect to stock options is as follows:
1995 1994
-----------------------------------------------------
Number Price Per Number Price Per
of Shares Share of Shares Share
-----------------------------------------------------
Outstanding at
beginning of year 128,700 $5.375-$8.750 197,400 $4.125-$8.750
Options cancelled
or expired (6,000) $5.375-$6.625 (10,600) $4.125-$6.625
Options exercised (1,200) $5.375 (58,100) $4.125-$6.625
--------- ---------
Outstanding at
year end 121,500 $6.125-$8.750 128,700 $5.375-$8.750
========= =========
Exercisable at
year end 76,900 58,800
========= =========
Available for
future grant 87,500 82,500
========= =========
At June 24, 1995, 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 24, 1995 was $6.69.
Note 8. Leases
Property, plant and equipment includes the following amounts for leases of
manufacturing facilities that have been capitalized:
1995 1994
------------ ------------
Building, building improvements
and machinery and equipment $ 342,937 $ 454,980
Less accumulated amortization (154,783) (159,289)
------------ ------------
$ 188,154 $ 295,691
============ ============
Page 34
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 8. Leases (continued)
Lease amortization is included in depreciation expense and amounted to $72,643
in 1995, $79,510 in 1994 and $35,430 in 1993. During 1995 and 1994, the
Company acquired $10,888 and $217,426, respectively, of equipment under
capital lease arrangements.
The future minimum rental commitments as of June 24, 1995 for all
noncancelable operating leases are as follows:
Trucks and
Total Real Estate Trailers Other
----------- --------------- ------------- -----------
1996 $ 958,245 $ 306,634 $ 635,399 $ 16,212
1997 498,218 303,201 195,017 0
1998 314,816 270,536 44,280 0
1999 74,654 54,359 20,295 0
2000 10,278 10,278 0 0
----------- --------------- ------------- -----------
Total $ 1,856,211 $ 945,008 $ 894,991 $ 16,212
=========== =============== ============= ===========
Total rental expense for all operating leases was:
1995 1994 1993
------------ ------------ ------------
Minimum rentals $ 1,309,206 $ 1,267,108 $ 1,455,686
Contingent rentals 592,707 690,606 795,448
Less: Sublease rentals (114,629) (60,338)
------------ ------------ ------------
$ 1,787,284 $ 1,897,376 $ 2,251,134
============ ============ ============
The contingent rentals are based on additional truck miles driven over a
specified minimum.
Note 9. 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.
Page 35
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 9. 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.
Page 36
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 9. Employee Benefit Plans (continued)
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 24, 1995 and June 25, 1994 (in thousands):
Plans in Which Accumulated
Benefits Exceed Assets
--------------------------
1995 1994
---------- ----------
Actuarial present value of benefit
obligations:
Accumulated benefit obligations,
including vested benefits of $4,986
in 1995 and $4,565 in 1994 $ (5,515) $ (5,037)
Recognition of future salary increases (276) (327)
-------- --------
Projected benefit obligation for service
rendered to date (5,791) (5,364)
Plan assets at fair value 4,589 4,487
-------- --------
Projected benefit obligation in excess
of plan assets (1,202) (877)
Unrecognized net gain from past
experience different from that assumed
and effects of changes in assumptions (208) (557)
Adjustment to record minimum liability (65) (150)
-------- --------
Accrued pension cost included in the
balance sheet $(1,475) $ (1,584)
======== ========
Page 37
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 9. Employee Benefit Plans (continued)
Net pension expense includes the following components (in thousands):
1995 1994 1993
------ ------ ------
Service cost--benefits earned during the
period $ 237 $ 242 $ 218
Interest cost on projected benefit
obligation 434 402 341
Expected return on plan assets (334) (324) (297)
Amortization of transition assets (65) (65) (65)
Amortization of unrecognized net gain (22) (16) (13)
Amortization of unrecognized prior
service costs 23 22
------ ------ ------
Total pension expense $ 273 $ 261 $ 184
====== ====== ======
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 Profit Sharing Plan in 1995. During 1994 and 1993,
the Company
accrued a contribution of $107,000 and $138,000, respectively, to the
Profit Sharing Plan.
Page 38
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 9. 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 24, 1995 was $36,500.
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 24, 1995 and June 25, 1994 (in thousands):
1995 1994
Accumulated postretirement benefit obligation: -------- --------
Retirees $( 1,388) $( 1,423)
Fully eligible active plan participants (266) (855)
Other active plan participants (378) (219)
-------- --------
Accumulated postretirement benefit obligation ( 2,032) (2,497)
Unrecognized transition obligation 2,169 2,290
Unrecognized net gain (458)
-------- --------
Accrued postretirement benefit cost $ ( 321) $ (207)
======== ========
Page 39
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 9. Employee Benefit Plans (continued)
Net periodic postretirement benefit cost includes the following components:
1995 1994
--------- ---------
Service cost $ 20,000 $ 20,000
Interest cost 156,000 191,000
Amortization of transition obligation over 20 years 121,000 121,000
Amortization of unrecognized gain (18,000)
--------- ---------
Net periodic postretirement benefit cost $ 279,000 $ 332,000
========= =========
The cost of covered health care benefits was assumed to increase 13% for
retirees less than 65 years old and 7% for retirees 65 years and older for
fiscal 1995. These rates are assumed to decrease incrementally to 6% in 2007
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 $2.7 million at June 24, 1995
and a 1995 net periodic postretirement benefit cost of $343,000.
The Company maintains a severance pay plan for its clerical and salaried
employees. The Company's obligation for these postemployment benefits as of
June 24, 1995 is not currently material.
Note 10. Income Taxes
Effective June 27, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109,
the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to be realized or settled. Prior
to the adoption of FAS 109, income tax expense was determined using the
deferred method. Under the deferred method, deferred taxes are measured using
tax rates effective when timing differences originate. The adoption of FAS
109 in fiscal year 1994 did not have a material impact on the Company's
accounting for income taxes.
Page 40
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 10. Income Taxes (continued)
The (benefit) provision for income taxes consists of the following:
1995 1994 1993
------------ ------------ ------------
Current:
Federal $ (225,000) $ 1,022,000 $ 626,000
State (22,000) 193,000 114,000
Deferred 144,000 (271,000) (112,000)
------------ ------------ ------------
$ (103,000) $ 944,000 $ 628,000
============ ============ ============
The deferred income tax provision in 1995 results primarily from costs related
to the Company's employee benefit plans and changes in inventory reserve
levels. The deferred income tax credit in 1994 and 1993 results principally
from costs related to the Company's Supplemental Benefit Agreements, changes
in inventory reserve levels and depreciation.
A reconciliation of the statutory federal income tax rate to the annual
effective income tax rate follows:
1995 1994 1993
------------ ------------ ------------
Income tax at statutory
rate (34.0)% 34.0% 34.0%
State income tax, net of
federal tax benefit 4.0 3.9
Nondeductible portion of
travel and entertainment
expenses 4.4 0.3 0.6
Officers life insurance
expense 0.3 (0.9)
Other (0.4) 0.6
------------ ------------ ------------
(29.6)% 38.2% 38.2%
============ ============ ============
Page 41
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 10. 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 24, 1995 and
June 25, 1994 are as follows:
1995 1994
------------ ------------
Deferred tax assets:
Inventory $ 1,439,000 $ 1,486,000
Accrued retirement benefits 643,000 657,000
Accounts receivable 191,000 221,000
Other 148,000 212,000
------------ ------------
Total deferred tax asset 2,421,000 2,576,000
------------ ------------
Deferred tax liabilities:
Book/tax depreciation 2,166,000 2,122,000
Other 111,000 166,000
------------ ------------
Total deferred tax liabilities 2,277,000 2,288,000
------------ ------------
Net deferred tax asset $ 144,000 $ 288,000
============ ============
Income taxes paid amounted to $1,365,465 during 1995, $429,115 during 1994,
and $732,716 during 1993.
Page 42
Arrow Automotive Industries, Inc.
Notes to Financial Statements
Note 11. Selected Quarterly Financial Data (Unaudited)
Fiscal Quarters 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
Fiscal Quarters 1994
---------------------------------------
1st 2nd 3rd 4th
(13 wks) (13 wks) (13 wks) (13 wks)
---------------------------------------
(Amounts in thousands, except per share data)
Net sales $ 28,843 $ 25,842 $ 25,199 $ 28,171
Gross margin 6,815 6,569 6,674 7,803
Income before
extraordinary item 502 494 355 450
Net income 502 218 355 450
Income per share
before extraordinary
item .18 .18 .13 .16
Net income per share $ .18 $ .08 $ .13 $ .16
Weighted average
shares outstanding 2,814 2,814 2,818 2,838
The second quarter of fiscal 1994 included an extraordinary charge to income
of $275,985 or $.10 per share (net of income tax benefit of $169,000 or $.06
per share) as a result of bank debt refinancing.
Page 43
Arrow Automotive Industries, Inc.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDING JUNE 1995, 1994 AND 1993
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 26, 1993 $ 461,598 $ 23,905 $ 0 $ 6,191 $ 479,312
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
(1) Uncollectible accounts written off, net of recoveries.
Page 44
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.
Page 45
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 the year
Plan Agreement ended June 28, 1995
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-K for year ended June
Partnership dated July 14, 1987 27, 1987, Exhibit 10.31
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
* Indicates management contract or compensation plan, contract or
arrangement.
Page 46
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-K for year ended June
Insurance Policy and Excess 25, 1994, Exhibit 10.16
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.
Page 47
Filed with This
Item Incorporated by Form 10-K at
Number Description Reference To or Page Indicated
------- --------------------- --------------------- ----------------
10.20 First Amendment to Financing Form 10-Q for quarter ended
Agreement with The First National March 25, 1995, Exhibit 10.1
Bank of Boston dated March 24,
1995
10.21* Amendment No. 1 to Employment Page 49
Agreement with Harry A.
Holzwasser dated August, 1995
10.22 Second Amendment to Revolving Page 51
Credit and Term Loan Agreement
with The First National Bank of
Boston dated as of June 24, 1995
11. Statement re Computation of per Note 1 to Notes to Financial
share earnings (loss) Statements filed herewith
23. Consent of Independent Auditors Page 54
* Indicates management contract or compensation plan, contract or
arrangement.
Page 48