UNITED STATES
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 28, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
.
Commission File 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
Page 1 of 83 Pages
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 October 7, 1997: $3,999,850.
Number of shares of Common Stock, $.10 Par Value, outstanding as of October 7,
1997: 2,873,083.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.
Page 2 of 83 Pages
PART I
ITEM 1. BUSINESS.
GENERAL
Arrow Automotive Industries, Inc. (the "Company" or "Arrow") 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 trading symbol AI.
The Company is primarily engaged in the remanufacture and distribution of
replacement automotive parts used in the repair of domestic and imported
passenger cars, light and heavy duty trucks, farm vehicles and heavy duty
industrial and construction equipment. The Company's products are distributed
throughout the United States and in Canada to the automotive aftermarket.
The Company sells to the distribution sector of the automotive aftermarket
including warehouse distributors ("WD's"), such as General Parts, Inc., Parts
Warehouse, Inc., Mar-Lac Distributing Co., Acklands, Ltd., Joint & Clutch
Service, Inc.; retail automotive chain stores ("retailers") such as Chief Auto
Parts, Inc., TRAK Auto Corporation and The Pep Boys-Manny, Moe & Jack; and
original equipment manufacturers ("OEM's") such as Brake Parts, Inc., New
Holland North America, Inc. and Nacco Materials Handling Group, Inc. The
Company's sales to customers in the retail channel of distribution have been
increasing, but the majority of the Company's sales continue to be to customers
in the WD channel of distribution.
Products are manufactured at and distributed from the Company's two
manufacturing facilities located in Spartanburg, South Carolina and Morrilton,
Arkansas. The Company also maintains distribution facilities in Toronto,
Vancouver and Edmonton, 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. The
Company does not consider its overall business to be seasonal, however, demand
for certain products may be affected by extreme weather.
RECENT DEVELOPMENTS
The distribution sector within the automotive aftermarket is undergoing
rapid consolidation, resulting in fewer and larger distributors. WD's are
expanding vertically through the acquisition of jobber stores and becoming more
like their retail counterparts in the industry. This consolidation is expected
to continue. Program buying groups, which represent most of the WD channel of
distribution, are becoming a more powerful voice for their member warehouses by
encouraging members to maximize their collective buying power through the use
of preferred vendors. In addition, over the last ten years, retail chains have
emerged as major distributors of automotive aftermarket products and have made
successful inroads into product distribution previously dominated by the
traditional WD. As a result of the competitive pressures created by these
changes in the automotive aftermarket, all distributors have become extremely
price sensitive, exerting considerable pressure on vendors for competitive
pricing.
Over the last two fiscal years, the Company has restructured and
streamlined its organization to better compete in the changing automotive
aftermarket. The Company's restructuring plan included the closing of its
Santa Maria, California production facility in December, 1996. The
manufacturing operations formerly conducted at that facility were transferred
to the Company's two remaining manufacturing facilities. As a result of this
consolidation, the Company incurred a $1.1 million restructuring charge in
fiscal 1997. The Company also incurred $1.8 million in non-recurring period
costs related to the consolidation of the production operations from three to
two manufacturing facilities. The streamlining of the Company's operations
during the last two years also included the consolidation of production of four
product lines from multiple facilities to a single manufacturing facility, as
well as the centralization of certain administrative functions.
PRODUCT INFORMATION
The Company remanufactures and distributes a wide range of electrical and
mechanical automotive parts. The Company's product offering encompasses a
broad range of vehicle applications including domestic and import passenger
automobiles, light and heavy trucks, heavy duty industrial and construction
equipment, and farm vehicles. The Company is a leading remanufacturer of
electrical products, which represented 55% of the Company's unit sales in
fiscal 1997. The balance of the Company's sales were of mechanical products.
The table below summarizes the product lines offered by the Company, the total
number of parts offered for sale and the vehicle coverage.
VEHICLE COVERAGE
PRODUCT PART NUMBERS
ELECTRICAL
Alternators 990 1961 - 1997
Starters 1033 1939 - 1997
Generators 123 1939 - 1997
MECHANICAL
Water Pumps 751 1932 - 1997
Clutches 1,141 1939 - 1997
Master Brake Cylinders 620 1960 - 1996
Power Steering Pumps 559 1955 - 1995
Power Brakes 664 1946 - 1994
Smog Pumps 161 1966 - 1994
Brake Calipers 1,096 1965 - 1996
Distributors 560 1950 - 1995
Wiper Motors 341 1962 - 1997
Crankshafts 342 1946 - 1996
Rack and Pinion Steering 222 1973 - 1995
Carburetors 1,827 1937 - 1989
Page 3 of 83 Pages
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.
When first received, cores are sorted and held until needed for production.
When needed, cores are 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. Production of remanufactured
parts is carried on in an assembly-line operation with inspection and testing
conducted at various stages of assembly. The finished product is further
inspected and tested by simulating the product's performance under operating
conditions.
Each of the product lines is supported by an engineer. Their function is
to improve the quality of existing products and formulate the specifications
and procedures for adapting particular remanufactured products for use on makes
and models of vehicles in addition to those for which the products were
originally designed. The Company maintains a Quality Assurance department that
is responsible for monitoring the manufacturing process through a variety of
methods, including Statistical Process Control (SPC), to maintain compliance
with the Company's quality standards as well as to ensure that Arrow's quality
standards are maintained by our suppliers for any purchased component.
WORKING CAPITAL ITEMS
Inventories are kept at a sufficient level to service customer orders.
Sales reported on the Company's financial statements are net of credits given
to customers for prompt payment and volume discounts, as well as credits given
for customer product returns.
The primary customer returns are of "cores". When invoiced, the price of
the finished product sold includes a separately invoiced amount for the core
("core value") which is part of the product. When a customer returns a core to
the Company, the customer receives credit for the then current core value of
the part returned which is applied to future purchases by that customer. The
customer's ability to return product cores is limited to the number of like-
type products purchased by the customer. The core must be in rebuildable
condition to receive credit.
The Company also allows for warranty returns and stock adjustment returns.
The Company's warranty program provides for the right to return defective
product for up to 24 months for the Company's premium line of alternators,
starters and water pumps and up to 12 months for all other products. Stock
adjustment returns are generally returns allowed for the customer's slow-moving
product. Credits for stock adjustment returns are limited to 4% of the
previous calendar year's purchases.
It is industry practice that remanufacturers only accept product returns
from current customers. When a customer ceases to do business with the
Company, the Company no longer accepts product returns for any reason. As
returns generate credits which can only be used against future purchases, the
Company does not record a reserve for customer's warranty, stock adjustments or
core returns.
Page 4 of 83 Pages
DISTRIBUTION
The Company sells its products nationwide, primarily through its own direct
sales force. The Company currently maintains a direct sales force of 33 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
1997) are to warehouse distributors. The balance of the Company's sales are to
retailers (approximately 18 percent in fiscal 1997), original equipment
manufacturers (approximately 9 percent in fiscal 1997) and other customers.
During fiscal 1997, sales to the Company's two largest customers, General
Parts, Inc., and Chief Auto Parts, Inc. accounted for 24% and 13% of net sales,
respectively. No other customer accounted for more than 10% of the Company's
net sales.
Substantially all of the Company's WD 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 among remanufacturers in the automotive
aftermarket. The associations do not purchase directly from vendors and
members of these associations generally 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. 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. At the request of
customers, Arrow also distributes product under a variety of private labels
such as Carquest, Proven Valu, Bravo, Rockhill, Parts Plus, Pronto, Parts
Master and many others. In fiscal 1997, approximately 54 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 customer
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.
Page 5 of 83 Pages
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 price, product quality, a complete product offering, current product
catalogs, direct factory sales service and high order fill rate.
EMPLOYEES
On June 28, 1997, the Company employed 1,259 full-time employees and 23
part-time employees.
ENVIRONMENTAL
The Company is subject to various federal, state and local environmental
laws and regulations governing, among other things, emissions to air, discharge
to waters and the generation, handling, storage, transportation, treatment and
disposal of a variety of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fines and criminal sanctions
for violations. The Company believes, although there can be no assurance, that
the overall impact of compliance with regulations and legislation protecting
the environment will not have a material adverse effect on its future financial
position or results of operation. However, the operation of automotive parts
remanufacturing plants involves environmental risks, and there can be no
assurance that the Company will not incur material costs or liabilities in
these areas. In addition, significant expenditures could be required to comply
with evolving environmental, health and safety laws, regulations or
requirements that may be adopted or imposed in the future. The Company is in
various stages of investigation or remediation at five separate sites where
contamination has been alleged, as discussed in the footnotes to the financial
statements, and has recorded a liability of $509,000 at June 28, 1997 for
future costs pertaining to environmental cleanup.
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, and Toronto, Canada. The Company utilizes fee warehouses
in Edmonton 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 2001.
The Company operates manufacturing facilities in Spartanburg, South
Carolina (occupying approximately 315,000 square feet of floor space) and
Morrilton, Arkansas (occupying approximately 209,000 square feet of floor
space). The Company formerly occupied industrial space in Santa Maria,
California (occupying approximately 98,000 square feet of floor space) which
was closed during fiscal 1997. The South Carolina, Arkansas and California
facilities are all owned by the Company, subject to mortgages which, together
with other collateral, secure the Company's obligations to its lenders. The
Company is actively marketing the California property.
Page 6 of 83 Pages
In addition, the Company leases warehouse space of approximately 67,000
square feet in Morrilton, Arkansas, 58,000 square feet in Spartanburg, South
Carolina, and 10,500 square feet in Toronto, Canada.
All facilities are well maintained and are 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 1997.
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 October 7, 1997 was 289. The following table
sets forth the high and low sale price on the American Stock Exchange of the
Company's common stock during each fiscal quarter during the last two fiscal
years:
FISCAL FISCAL
1997 1996
HIGH LOW HIGH LOW
First $ 5 5/8 $ 4 1/2 $ 7 3/8 $ 5 1/2
Quarter.....................
Second Quarter............... 4 15/16 3 3/4 6 7/8 4 3/4
Third 4 5/8 4 7 1/2 5 3/4
Quarter...................
Fourth 4 1/4 2 15/16 6 1/8 5 1/16
Quarter.................
The Company did not pay any dividends during the 1997 or 1996 fiscal years.
Operating covenants in the Company's loan agreement with its lenders prohibit
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 7 of 83 Pages
ITEM 6. SELECTED FINANCIAL DATA.
FOR THE FISCAL YEARS ENDED IN JUNE
(Amounts in Thousands Except Per Share Amounts and Financial Ratio Data)
1997 1996 1995 1994 1993
(52 WKS) (53 WKS) (52 WKS) (52 WKS) (52 WKS)
Net $87,501 $103,603 $106,574 $ 108,055 $100,654
sales...................................................
Gross 13,180 21,441 25,092 27,861 26,622
margin.............................................
Selling, administrative & general
21,310 21,597 23,505 23,334 23,147
expense...................................................
Interest 2,364 2,113 1,935 1,614 1,830
expense........................................
(Loss) income before income taxes and
extraordinary (11,594) (2,269) (348) 2,914 1,645
items..................................
(Benefit) provision for income (597) (825) (103) 1,113 628
taxes...........
(Loss) income before extraordinary
(10,997) (1,444) (245) 1,801 1,017
items........................................................
Loss on refinancing of debt, net of
income tax -- -- -- (276) --
benefit...................................
Net (loss) (10,997) (1,444) (245) 1,525 1,017
income.......................................
(Loss) income per share before
extraordinary (3.83) (.50) (.09) .64 .36
items...................................
Loss per share on refinancing of debt,
net of income tax -- -- -- (.10) --
benefit..........................
Net (loss) income per (3.83) (.50) (.09) .54 .36
share.......................
Cash dividends declared per share............ -- -- -- -- --
Capital 644 828 2,574 670 648
expenditures..................................
Depreciation and $ 1,170 $ 1,373 $ 1,412 $ 1,546 $ 1,692
amortization....................
Average shares 2,873 2,873 2,872 2,821 2,814
outstanding.......................
AT YEAR END
Working $ 26,250 $ 36,378 $38,518 $32,071 $29,994
capital...........................................
Total 59,333 71,728 67,144 69,490 60,345
assets................................................
Long-term 16,819 17,969 19,265 11,732 12,487
debt...........................................
Stockholders' 20,043 31,296 32,739 32,974 31,175
equity...................................
Equity per common $ 6.98 $ 10.89 $ 11.40 $ 11.69 $ 11.08
share..........................
FINANCIAL RATIOS (%)
Gross 15.06 20.70 23.54 25.78 26.45
margin.............................................
Net profit (12.57) (1.39) (.23) 1.41 1.01
margin........................................
Return on (42.84) (4.51) (.74) 4.75 3.32
equity.........................................
Current ratio (to 2.37 2.82 3.82 2.39 2.93
1)......................................
Page 8 of 83 Pages
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
RESULTS OF OPERATIONS
The Company incurred net losses of $10,997,000, $1,444,000 and $245,000 for
the respective fiscal years ended June 28, 1997, June 29, 1996 and June 24,
1995. The fiscal 1997 operating loss is attributable to several one-time
charges and a 15.5% decline in net sales compared to the prior fiscal year.
The one-time costs include the following, each of which is discussed in more
detail below:
<diamond> a restructuring charge and non-recurring period costs relating
to the Company's California plant closing of $1,100,000 and
$1,842,000, respectively;
<diamond>
<diamond> a $4,000,000 charge to write down certain inventories to net
realizable value; and
<diamond>
<diamond> a $437,000 increase in the Company's reserve for environmental
remediation costs as a result of the Company's adoption of Statement
of Position 96-1, ENVIRONMENTAL REMEDIATION LIABILITIES.
RESTRUCTURING CHARGE AND RELATED NON-RECURRING PERIOD COSTS
In December, 1996, the Company closed its Santa Maria, California
production facility and transferred the manufacturing operations formerly
conducted at that plant to its remaining manufacturing facilities. This action
was taken to streamline the Company's productive capacity to better match its
production requirements. As a result of this consolidation, the Company
incurred a $1.1 million restructuring charge in fiscal 1997. Of the total
charge, $413,000 represented severance benefits for terminated employees and
$687,000 related to the closing of the facility. The Company is actively
marketing the California property.
In addition to the restructuring charge, the Company incurred non-recurring
period costs totaling $1.8 million attributable to the relocation of production
operations from the California facility to the Company's two remaining
facilities and included such costs as the shipment of inventory and equipment,
employee relocation and initial labor and production inefficiencies.
The consolidation of manufacturing operations is consistent with the
Company's long-term strategy to streamline its operations. Starting in fiscal
1996, the Company consolidated to one location production of certain product
lines which were previously manufactured at all of the Company's
remanufacturing facilities. Centralization of administrative functions began
late in fiscal 1996 and continued throughout fiscal 1997, and included customer
service, customer billing and vendor payment functions. These actions were
taken to enhance operating efficiencies and improve the financial performance
of the Company. The Company is continuing to review its operations and will
take the necessary measures to control costs and promote efficient
manufacturing operations.
INVENTORY PROVISION
The Company continually reviews the net realizable value of its inventory.
The Company's analyses in the third quarter of fiscal 1997 identified certain
inventory items for which quantities on hand exceeded forecasted needs. Lower
unit sales in fiscal 1997 and the consolidation of manufacturing facilities and
product line production resulted in excess inventory levels. As a result, the
Company recorded a charge in the third quarter of $4,000,000 to write down
certain inventories to net realizable value.
ENVIRONMENTAL
In fiscal 1997, the Company adopted Statement of Position No. 96-1
ENVIRONMENTAL REMEDIATION LIABILITIES (SOP 96-1) which provided new guidance
for the accrual of environmental remediation costs. The SOP provides
benchmarks to aid in the determination of when environmental remediation
liabilities should be recognized and specific guidance as to how they should be
measured. The adoption of SOP 96-1 resulted in a pretax charge to operations
of $437,000 in fiscal 1997.
The Company is subject to various federal, state and local environmental
laws and regulations governing, among other things, emissions to air, discharge
to waters and the generation, handling, storage, transportation, treatment and
disposal of a variety of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fines and criminal sanctions
for violations. The Company believes, although there can be no assurance, that
the overall impact of compliance with regulations and legislation protecting
the environment will not have a material adverse effect on its future financial
position or results of operation. However, the operation of automotive parts
remanufacturing plants involves environmental risks, and there can be no
assurance that the Company will not incur material costs or liabilities in
these areas. In addition, significant expenditures could be required to comply
with evolving environmental, health and safety laws, regulations or
requirements that may be adopted or imposed in the future. The Company is in
various stages of investigation or remediation at five sites where
contamination has been alleged, as discussed in the footnotes to the financial
statements, and has recorded a liability of $509,000 at June 28, 1997 ($437,000
due to the adoption of SOP 96-1) for future costs pertaining to environmental
cleanup.
SALES
Net sales of $87,501,000 declined $16,102,000 or 15.5% in fiscal 1997
compared to fiscal 1996 net sales of $103,603,000. $1,992,000 of the net sales
decline was due to the number of weeks differential in the two periods (52
weeks in fiscal 1997, 53 weeks in fiscal 1996). The other factors contributing
to the decline in net sales in fiscal 1997 were:
<diamond> reduced unit sales,
<diamond>
<diamond> the change in the mix of products sold between electrical
products and mechanical products, and
<diamond>
<diamond> a higher level of customer returns in the current fiscal year
compared to the previous fiscal year.
While unit sales to the Company's two largest customers increased this
year, overall unit sales declined 14.8% in fiscal 1997 compared to unit sales
in the previous fiscal year. The majority of the unit sales decline was due to
a general decline in customer orders throughout the Company's customer base,
while approximately 6% of the decline was due to the loss of two customers. The
Company attributes the lower sales in its customer base in part to the current
merger and consolidation actively occurring among distributors. These mergers
have resulted in closings of distribution centers as newly consolidated
entities rationalize necessary facilities and inventory requirements. Vertical
integration is also occurring in the automotive aftermarket with warehouse
distributors (WD's) purchasing jobber stores. Many jobber stores have closed
due to the extreme competition in the aftermarket distribution channels,
shrinking the customer base of traditional WD's. Program buying groups, which
began as WD membership organizations, focused purely on purchasing power, are
now enlarging their mission statements to include marketing and other services.
The program groups want to send a consistent message regarding all aspects of
vendor services and, therefore, they are promoting broader use of a preferred
vendor concept within their group membership. The growth in the preferred
vendor concept will lead to larger shifts in sales when a group changes
preferred vendor.
In fiscal 1997, the Company experienced a change in the mix of products
sold, in that sales of electrical products declined as a percentage of total
units sold compared to the prior year. The average selling price of electrical
products is higher than the average selling price of mechanical products.
Therefore, the reduction in unit sales of electrical products has a larger
adverse impact on net sales than a reduction in unit sales of mechanical
products. This product sales mix contributed to a larger dollar decline in net
sales than the decline in unit sales. There were no significant changes in the
Company's pricing structure during the current fiscal year.
Customer returns as a percentage of gross sales in fiscal 1997 increased
2.6% relative to fiscal 1996. Customer returns are deducted from gross sales
in calculating net sales. The Company's gross sales were $191,312,000,
$219,889,000, and $212,820,000 for the fiscal years 1997, 1996 and 1995,
respectively. Credits are issued to customers for core returns, warranty
returns and stock adjustments. The higher level of customer returns is due to
the following factors:
<diamond> Customer returns for core, warranty and stock adjustments, as a
percentage of net sales, naturally increases during periods of
declining sales volume, as the returned product relates to the higher
sales volume of previous periods.
<diamond>
<diamond> The Company believes that increased consolidation and merger
activity of distributors resulted in excess customer inventory levels.
The Company believes that in order to rectify surplus inventory
issues, many distributors returned as much of their excess inventory
as permissible within Arrow's policies.
Fiscal 1996 net sales declined 2.8% from fiscal 1995 net sales of
$106,574,000. The decline in net sales in fiscal 1996 (53 weeks) compared to
fiscal 1995 (52 weeks) was due to lower unit sales and a higher level of
customer returns. Unit sales for fiscal 1996 declined 5.8% from unit sales in
fiscal 1995. The Company believes that the impact of consolidations and
mergers within the distribution sector of the industry negatively impacted the
Company's unit sales and resulted in increased customer returns, similar to
that seen in fiscal 1997 and discussed above. The adverse impact on 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.
GROSS MARGIN
The gross margin in fiscal 1997 was 15.1%, down from the prior year's gross
margin of 20.7%. Fiscal 1997's cost of goods sold includes the $4,000,000
inventory provision and non-recurring period costs of $1,054,000 related to the
closure of the California facility.
Gross margin before the above adjustments would have been 20.8%,
approximately the same as the gross margin of fiscal 1996.
The Company's strategy to improve its gross margin has been to streamline
operations and to reduce the break even point. However, lower sales volume and
product mix combined to reduce gross margins below management's goals. The
higher percentage of mechanical products in the current year's sales mix
adversely impacted margins because generally mechanical products have a lower
gross margin than electrical products.
The decline in the gross margin in fiscal 1996 relative to fiscal 1995 was
due to several factors, including temporary labor inefficiencies during the
effort to consolidate production of four product lines from multiple facilities
to a single manufacturing facility. Also, additional costs were incurred due
to down time and inefficient output from certain new manufacturing related
equipment. During fiscal 1996, customer gains and losses caused significant
swings in production requirements resulting in labor inefficiencies and
additional overhead expenses. 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.
IMPACT OF INFLATION
The Company follows the LIFO method of determining inventory costs to
better match current costs with current revenues. In fiscal 1997, the impact
of price changes and operating factors, primarily in reduced spending and
improved material sourcing and usage, decreased cost of goods sold by
$1,200,000 compared to fiscal 1996. In fiscal 1996, the impact of price
changes and operating factors, primarily improved material sourcing and usage,
decreased cost of goods sold from the prior year by $345,000.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1997 were
$21,310,000, or 24.4% of net sales, compared to $21,597,000, or 20.8% of net
sales, in fiscal 1996. The current year's selling, general and administrative
expenses include $788,000 of non-recurring costs related to the closure of the
California plant, consisting primarily of shipping costs to relocate inventory
and equipment to the Company's two remaining manufacturing facilities,
personnel relocation costs, public relations and legal costs. Also during the
current year, the Company accrued $437,000 of additional environmental
remediation liabilities as a result of its adoption of Statement of Position
No. 96-1, ENVIRONMENTAL REMEDIATION LIABILITIES. Selling, general and
administrative expenses, exclusive of these adjustments, would have been
$20,085,000 (22.9% of net sales), reflecting a decrease in spending of
$1,512,000 compared to fiscal 1996. The increase in selling, general and
administrative expenses as a percentage of net sales for fiscal 1997 (exclusive
of the aforementioned adjustments) was primarily attributable to the higher
proportionate fixed expenses not absorbed during the current period of
declining sales volume.
Selling, general and administrative expenses in fiscal 1996 declined $1.9
million compared to the prior fiscal year. The declines in spending related to
lower customer acquisition costs in fiscal 1996 and the effect of cost
reduction measures implemented in that year.
INTEREST EXPENSE
Interest expense in fiscal 1997 of $2,364,000 increased $251,000 or 11.9%
over fiscal 1996. Interest expense in fiscal 1996 of $2,113,000 increased
$178,000 or 9.2% over fiscal 1995. In fiscal 1997, the increase in interest
expense compared to fiscal 1996 is due to higher interest rates on the
Company's bank debt. In fiscal 1996, higher borrowing levels and higher
interest rates resulted in the additional interest expense compared to interest
expense in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $2,467,000 increased in 1997 compared to
fiscal 1996 which had cash flow from operations of $67,000. Declines in
inventories and accounts receivable and an increase in accounts payable and
accrued expenses were the primary working capital components contributing to
the increase in cash flow. Inventory decreased approximately $6.4 million due
to the $4 million inventory provision, as well as a reduction in the level of
on-hand inventories required as a result of the consolidation of the California
facility's inventory with the Company's remaining manufacturing facilities.
Cash flow was also generated from a reduction in accounts receivable of
approximately $4 million, which is consistent with the lower sales volume
during the current fiscal year. Additional cash was provided by a net increase
in accounts payable, cash overdrafts and accrued liabilities of approximately
$350,000. The cash requirements created by the closing of the California
facility resulted in the Company's lengthening of payment terms with vendors
during the current year.
Cash used for investing activities for fiscal 1997 of $787,000 was used
primarily to purchase property, plant and equipment. Capital expenditures were
$644,000 in fiscal 1997 compared to $725,000 in fiscal 1996. The Company
continues to invest in capital improvements and other long-term assets to
enhance operations and maintain the highest standards of overall quality.
During fiscal 1997, net cash used in financing activities was $2.3 million.
The reduction under the revolving line of credit was $1.3 million and
repayments of long-term debt and capital lease obligations were $1.4 million.
In December, 1993, the Company entered into financing agreements ("Prior
Credit Agreements") with a commercial bank. The Company's primary lender was
joined by a second commercial lender (the "Prior Lenders") in the second
quarter of fiscal 1997 to the extent of a one-third participation. The Prior
Credit Agreements, at June 28, 1997, consisted of a term loan in the original
principal amount of $9 million and a revolving line of credit with a principal
amount of up to $20 million. During fiscal 1997, the Company failed to meet
certain then existing financial covenants related to earnings and balance sheet
ratios in the Prior Credit Agreements. The Prior Lenders subsequently waived
these defaults by modifying such covenants in a manner which resulted in
compliance by the Company for the periods completed.
On October 7, 1997, the Company restructured the Prior Credit Agreements
via an amendment ("Replacement Credit Agreements") effective as of June 28,
1997. The Replacement Credit Agreements consist of a replacement $7,500,000
term loan and continuation of a $20 million revolving line of credit. The
Company's primary lender issued a one-third participation to a financial credit
institution (the "Replacement Lenders") to replace the prior participant.
Under the Replacement Credit Agreements, as in the Prior Credit Agreements,
amounts available to the Company under the revolving line of credit are subject
to a borrowing base formula based upon certain percentages of the Company's
accounts receivable and inventories. The interest rate on amounts outstanding
under the line will change depending upon the achieved debt service coverage
ratio and can range from the lender's base rate to 1.50% over the lender's base
rate, as compared to rates at June 28, 1997 under the Prior Credit Agreements
of lender's base rate plus 3%. At June 28, 1997, 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 1998. The revolving credit loan maturity date is July 31, 2000.
Similarly, the interest rate on the replacement term loan on a given date
can range from 0.25% to 1.75% over the lender's base rate depending upon the
achieved debt service coverage ratio. Under the Prior Credit Agreements at
June 28, 1997, the Company was paying interest on the term loan equal to the
lender's base rate plus 3.25%. The term loan has a maturity date of July 31,
2000. Principal is payable in twelve consecutive quarterly installments of
$267,857, except the final payment which shall be equal to the unpaid balance
of the term loan of $4,285,716. The outstanding balance of the term loan as of
the refinancing date was $4,179,000. The $3,321,000 million incremental cash
proceeds of the replacement term loan over the outstanding balance of the prior
term loan will be used for working capital purposes, primarily to reduce
accounts payable to vendors.
The balance sheet as of June 28, 1997, reflects the current and long term
portion payable under the Replacement Credit Agreements. The Company's
obligations under these agreements continue to be secured by substantially all
of its assets. The interest rate borne on the revolving line of credit and the
term loan at June 28, 1997 was 11.5% and 11.75%, respectively.
Both the Prior Credit Agreements and the Replacement 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 levels of minimum
profitability, tangible net worth, debt service coverage and liabilities to
worth ratios. Certain of these covenants were modified in the Replacement
Credit Agreements.
The Company believes that based upon its current operating forecast for
fiscal 1998, its existing cash balance and cash generated from operations
combined with its borrowing ability under its financing agreements, the Company
will have sufficient funds to meet its cash requirements for operations and
other obligations over the next twelve months.
OUTLOOK
Arrow's strategy has been to focus on streamlining its operations and
reducing operating costs in order to reduce its break-even point. As indicated
throughout this management discussion, Arrow has taken great strides to remove
excess overhead costs from its operations. Strategic efforts included the
following:
<diamond> Closure of the California manufacturing facility and
transferring these operations to the Company's remaining two
manufacturing facilities.
<diamond>
<diamond> Consolidation of the production of four product lines to one
manufacturing facility, changing the previous practice of
manufacturing most product lines at all manufacturing facilities.
<diamond>
<diamond> Investment in the expansion of the "warranty recovery"
department to enhance the efficiency with which the Company transforms
warranty returns to finished good products.
<diamond> Centralization of certain administrative functions in order to
reduce fixed cost per unit produced.
<diamond>
<diamond> Investment in winding equipment with which the Company began
winding major components for alternators and starters, providing
material cost savings by eliminating the need to purchase these parts
from outside vendors.
<diamond>
<diamond> Development of automated bore reaming process for master brake
cylinders which will improve the quality of the product and lower
costs through automation and better material utilization.
<diamond>
<diamond> Establishment of quality task forces focusing on quality
enhancements which have resulted in several significant improvements
over OEM designs and will ultimately favorably impact warranty rates.
<diamond>
<diamond>Through these efforts, the Company has been able to reduce its
operating costs and thereby reduce its break-even point.
<diamond>
<diamond>The marketplace is changing in ways that result in reduced gross
margins. The distribution sector within the marketplace is consolidating.
The traditional warehouse distributors ("WD's") are buying jobber stores and
becoming more like their retail counterparts in the industry; and the
program buying groups, which represent most of the WD channel of
distribution, are becoming a more powerful voice for their member warehouses
by encouraging the use of a primary vendor. In addition to these changes,
retail chains are emerging as major distributors of automotive aftermarket
products, making successful inroads into product distribution previously
dominated by the traditional WD. The increased competition between
retailers and WD's has resulted in lower gross margins at all levels of
distribution. Accordingly, all distributors are extremely price sensitive
and exert considerable pressure on vendors for competitive pricing.
In times of change, opportunities exist. Arrow's opportunity lies in its
ability to offer a broad line of quality, remanufactured automotive parts,
distributed nationwide at reasonable prices. Arrow is not the lowest priced
competitor, but is price competitive. Lower-priced competitors generally
sacrifice either quality, breadth of coverage or service in order to maintain
low price structures. Customers that the Company regains tell Arrow that they
came back for those very reasons and that Arrow's product is worth a price
premium. With this sales approach, the Company is aggressively pursuing
relationships at all levels of distribution, including the traditional market
program distribution groups and retail chains.
The Company is continually studying ways to reduce costs inherent in its
structure and better strategically position itself in the marketplace. Arrow
will continue to change as necessary to adapt to the evolution of the
aftermarket it supplies.
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; a change in product sales mix between
electrical or mechanical products; the loss of or a material reduction in
orders from either of the Company's two largest customers or other material
loss of business; month-to-month volatility in sales volumes or customer
returns which can result in additional labor and operating costs; 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.
Page 9 of 83 Pages
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 1997 Annual Meeting of Stockholders.
Page 10 of 83 Pages
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 20
Auditors...............................................................................
Balance Sheets - June 28, 1997 and June 29, 21
1996................................................
Statements of Operations - Years ended June 28, 1997, June 29, 1996, and
June 24, 22
1995......................................................................................................
Statements of Changes in Stockholders' Equity - Years ended June 28, 1997
June 29, 1996, and June 24, 23
1995.......................................................................
Statements of Cash Flows - Years ended June 28, 1997, June 29, 1996
and June 24, 24
1995...............................................................................................
Notes to Financial 25 - 38
Statements................................................................................
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules of the Company are included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts PAGE 39
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 40 hereof.
(b) The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1997.
(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 11 of 83 Pages
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: October 9, 1997 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.
/S/ JIM L. OSMENT President, Chief Executive Officer, October 9, 1997
Jim L. Osment (Principal Executive Officer) and Director
/S/ JAMES F. FAGAN Executive Vice President, Chief Financial October 9, 1997
James F. Fagan Officer (Principal Financial Officer),
Treasurer and Director
/S/ HARRY A. HOLZWASSER Chairman of the Board and Director October 9, 1997
Harry A. Holzwasser
Mary S. Holzwasser Director
/S/ ROBERT A. HOLZWASSER Director October 9, 1997
Robert A. Holzwasser
/S/ JOEL D. HOLZWASSER Director October 9, 1997
Joel D. Holzwasser
/S/ LAWRENCE M. LEVINSON Director October 9, 1997
Lawrence M. Levinson
Director
Winthrop P. Rockefeller
Director
Alan Steinert, Jr.
Director
Marvin Almy
/S/ KATHALEEN M. CARROLL-COELHO Vice President and Controller October 9, 1997
Kathaleen M. Carroll-Coelho
Page 12 of 83 Pages
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 28, 1997 and June 29, 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 28, 1997. 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 28, 1997 and June 29, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended June 28, 1997,
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.
ERNST & YOUNG LLP
/S/ ERNST & YOUNG LLP
Boston, Massachusetts
September 3, 1997, except
for Notes 1 and 7, as to which the date
is October 8, 1997.
Page 13 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
BALANCE SHEETS
JUNE 28, JUNE 29,
1997 1996
ASSETS
Current assets:
Cash and $ 240,291 $ 850,537
equivalents...........................................................
Accounts receivable, less allowance ($542,017 in
1997 and $524,401 in 1996) for doubtful 12,538,853 16,468,224
accounts............
30,920,184 37,312,671
Inventories...........................................................................
Deferred income 543,000
taxes.........................................................
Refundable income 1,140,000 675,000
taxes.....................................................
Other current 565,746 563,346
assets.............................................................
Total current 45,405,074 56,412,778
assets......................................................
Property, plant and equipment:
952,087 952,087
Land....................................................................................
Buildings and building 15,185,937 15,780,776
improvements..................................
Leasehold 246,441 247,670
improvements....................................................
Machinery and 17,604,681 18,746,723
equipment...................................................
33,989,146 35,727,256
Less allowances for depreciation and 22,362,518 22,912,356
amortization.............
Net property, plant and 11,626,628 12,814,900
equipment...................................
Other 2,300,956 2,500,718
assets................................................................................
$ 59,332,658 $ 71,728,396
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash $ 764,113 $ 1,260,165
overdraft....................................................................
Current portion of advances under
revolving line of 3,836,680 5,104,715
credit.....................................................
Trade accounts 8,523,743 6,647,237
payable.....................................................
Accrued 4,864,374 5,637,422
expenses..............................................................
Current portion of long-term 1,166,111 1,385,672
debt........................................
Total current liabilities 19,155,021 20,035,211
Long-term debt, net of current 16,819,166 17,969,339
portion.........................................
Other noncurrent 3,315,105 2,428,226
liabilities...........................................................
Stockholders' equity
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 1997 and 296,887 296,887
1996.................................
Capital in excess of par 7,428,586 7,428,586
value............................................
Retained 13,022,570 24,019,471
earnings..............................................................
20,748,043 31,744,944
Less cost of common stock in treasury
(95,787 shares in 1997 and 449,324 449,324
1996)..................................
Less minimum pension 255,353
liability..........................................
Total stockholders' 20,043,366 31,295,620
equity.............................................
$ 59,332,658 $ 71,728,396
The accompanying notes are an integral part of the financial statements.
Page 14 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
JUNE 28, JUNE 29, JUNE 24,
1997 1996 1995
(52 WEEKS) (53 WEEKS) (52 WEEKS)
Net $ 87,501,307 $ 103,602,534 $ 106,574,023
sales........................................
Cost and expenses:
Cost of products 74,320,940 82,161,642 81,482,460
sold....................
Selling, administrative
and 21,309,855 21,597,047 23,504,545
general................................
2,364,413 2,112,887 1,934,722
Interest.........................................
Restructuring 1,100,000
charge.....................
99,095,208 105,871,576 106,921,727
Loss before income taxes............ (11,593,901) (2,269,042) (347,704)
Benefit for income (597,000) (825,000) (103,000)
taxes.................
Net $ (10,996,901) $ (1,444,042) $ (244,704)
loss.........................................
Net loss per $ (3.83) $ $ (.50) $ $ (.09)
share..........................
The accompanying notes are an integral part of the financial statements.
Page 15 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CAPITAL IN MINIMUM
COMMON EXCESS OF RETAINED TREASURY PENSION
Stock Par Value Earnings Stock Liability
Balance at June 25, $ 296,767 $ 7,418,004 $ 25,708,217 $ 449,248
1994............
Income tax benefit
resulting from disqualifying
disposition of shares under
stock option 3,920
plans.............
Purchase of treasury stock.. 76
Exercise of stock options ... 120 6,330
Net loss for the (244,704)
year.............
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 332
plans.............
Net loss for the (1,444,042)
year............
Balance at June 29,1996... 296,887 7,428,586 24,019,471 449,324
Minimum pension
liability $ 255,353
adjustment.............
Net loss for the (10,996,901)
year............
Balance at June 28,1997.... $ 296,887 $ 7,428,586 $ 13,022,570 $ 449,324 $ 255,353
The accompanying notes are an integral part of the financial statements.
Page 16 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
JUNE 28, JUNE 29, JUNE 24,
1997 1996 1995
(52 WEEKS) (53 WEEKS) (52 WEEKS)
Operating activities
Net $ (10,996,901) $ (1,444,042) $ (244,704)
loss..........................................................
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and 1,170,068 1,373,132 1,411,722
amortization......................
Provision for environmental
remediation 436,700
costs......................................
Deferred income taxes 543,000 (399,000) 144,000
(credits).....................
Restructuring 1,100,000
charge.....................................
Cash payments relating to the restructuring
(475,000)
charge.......................................................
Provision for bad 22,754 109,840 41,376
debts..................................
(Increase) decrease in assets:
Accounts 3,906,617 (4,042,418) 3,084,405
receivable......................................
6,392,487 (1,004,810) 1,125,159
Inventories....................................................
Refundable income (465,000) (57,477) (567,523)
taxes..............................
Other current 29,897 595,634 31,402
assets......................................
Increase (decrease) in liabilities:
Accounts payable, accrued
expenses and other current 352,052 4,229,577 (1,261,460)
liabilities...........
Income taxes (961,842)
payable.....................................
Accrued retirement 450,179 706,359 68,580
benefits............................
Cash provided by
operating 2,466,853 66,795 2,871,115
activities..........................................
Investing activities
Purchase of (644,119) (724,744) (2,551,563)
equipment..................................
Increase in net cash
surrender value of life insurance (278,709) (268,296) (139,599)
policies......
135,737 34,735 84,898
Other..............................................................
Cash used for investing (787,091) (958,305) (2,606,264)
activities......................
Financing activities
(Decrease) increase in
advances under revolving line of (1,268,035) 2,374,740 1,410,529
credit.........
Repayments of long-
term debt and capital lease (1,369,735) (1,386,035) (1,377,984)
obligations.........
Proceeds from life insurance 347,762
loans.................
Proceeds from exercise of
stock options and related tax 332 10,370
benefits...........
Purchase of treasury (76)
stock.............................
Cash (used in) provided by financing activities. (2,290,008) 989,037 42,839
(Decrease) increase in cash and equivalent..... (610,246) 97,527 307,690
Cash and equivalents at beginning of year..... 850,537 753,010 445,320
Cash and equivalents at end of $ 240,291 $ 850,537 $ 753,010
year...............
The accompanying notes are an integral part of the financial statements.
Page 17 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. MANAGEMENT'S PLAN AND SUBSEQUENT EVENT
Over the last two fiscal years, in response to continuing losses from
operations, Arrow Automotive Industries, Inc. (the
"Company" or "Arrow") has restructured and streamlined its organization to
better compete in a changing automotive aftermarket. The Company's
restructuring plan included the closing of its Santa Maria, California
production facility in December, 1996. The manufacturing operations formerly
conducted at that facility were transferred to the Company's two remaining
manufacturing facilities. As a result of this consolidation, the Company
incurred a $1.1 million restructuring charge in fiscal 1997, consisting of
$413,000 of employee termination benefits and $687,000 relating to the facility
closing. The Company also
incurred $1.8 million in non-recurring period costs related to the
consolidation of the production operations from three to two manufacturing
facilities. The streamlining of the Company's operations during the last two
years also included the consolidation of production of four product lines from
multiple facilities to a single manufacturing facility, as well as the
centralization of certain administrative functions.
The Company's strategy to improve its operating results has been to
streamline operations and to reduce the break even point. The Company is
continually studying ways to reduce costs inherent in its structure and better
strategically position itself in the marketplace. In addition, the Company's
sales and marketing personnel have developed several programs intended to
increase the
sales of the Company's products. These include installer incentives to pull
the product through the distribution channel to end users. The Company has
also implemented aggressive and focused efforts throughout its sales
organization to pursue prospective customers.
On October 7, 1997, the Company restructured the Company's existing credit
agreements via an amendment effective as of June 28, 1997. The new credit
agreements consist of a replacement $7,500,000 term loan and continuation of a
$20 million revolving line of credit. The incremental cash proceeds of
$3,321,000 from the new term loan over the outstanding balance of the previous
term loan will be used for working capital purposes. The new credit agreements
will provide lower interest rates than the existing credit agreements.
The Company's fiscal 1998 operating plan contemplates an improvement over the
fiscal 1997 operating results. Managament believes, that based on the 1998
operating plan and the availability under its new credit line, the Company will
have sufficient cash to support operations and remain in compliance with the
financial covenants of its new credit agreements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of the Company are as follows:
FISCAL YEAR: The Company's fiscal year ends on the last Saturday of June.
Fiscal years 1997 and 1995 contained 52 weeks and fiscal year 1996 contained 53
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.
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.
Page 18 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
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 10), 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 2-5 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 1997 and 1996 and 2,872,309 for 1995.
STOCK BASED COMPENSATION: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
(SFAS 123), ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 123 encourages, but
does not require, companies to record the compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to
continue accounting for stock-based compensation under the Accounting
Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations, as permitted by SFAS 123. This allows
the Company to continue to account for stock-based compensation plans using the
intrinsic value method, and to disclose the pro forma effects on net income and
earnings per share had the fair value of options been expensed. Under the
provisions of APB 25, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's common stock at the
date of grant over the amount an employee must pay to acquire the stock.
Accordingly, no compensation expense has been recognized for options issued
under the Company's Incentive Stock Option Plan. No grants were issued under
the Incentive Stock Option Plan for the years ended June 28, 1997 and June 29,
1996. The effect of applying SFAS 123 to the Company's stock-based awards on a
pro forma basis was not material.
IMPAIRMENT OF LONG-LIVED ASSETS: In fiscal 1997, the Company adopted
Statement of Financial Account Standards No. 121 (SFAS 121), ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the estimated fair value of those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. As a
result of the operating loss sustained in 1997, the Company evaluated the
recoverability of its long-lived assets, principally plant and equipment. The
Company's analysis, consisting principally of independent appraisals, indicates
that there was no impairment in the carrying amount of these assets.
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.
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
RECLASSIFICATION: Certain amounts reported in prior years have been
reclassified to conform to the 1997 presentation.
CONCENTRATION OF CREDIT RISK: The Company sells its products nationwide,
primarily to warehouse distributors and to a lesser extent, to retailers and
original equipment manufacturers. 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. In fiscal 1997, sales to the Company's two largest
customers represented 24% and 13%, respectively, of net sales and no other
customer accounted for more than 10% of net sales.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: In October 1996, the
American Institute of Certified Public Accountants issued Statement of Position
96-1, ENVIRONMENTAL REMEDIATION LIABILITIES, (SOP 96-1) which provides new
guidance with respect to the accrual of environmental remediation costs. The
SOP provides benchmarks to aid in the determination of when environmental
remediation liabilities should be recognized and specific guidance as to how
they should be measured. The Company adopted SOP 96-1 as of June 28, 1997,
which resulted in a pretax charge of $437,000 ($.15 per share) which is included
in the results from operations.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE (SFAS 128). This new standard requires dual
presentation of basic and diluted earnings per share (EPS) in the face of the
statement of income and requires reconciliation of the numerators and the
denominators of the basic and diluted EPS calculations. This statement will be
effective for the second quarter of the Company's fiscal year ended June, 1998.
The Company has not yet quantified the effect of the adoption of SFAS 128 on
its earnings per share of common stock.
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, (SFAS 130), and Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS 131). SFAS 130 established standards
for reporting and displaying comprehensive income and its components. SFAS 131
establishes standards for the manner by which public companies report
information about operating segments in financial statements. The requirements
to report information about major customers remains consistent with SFAS 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS 130 and 131
are effective for the Company in fiscal 1998. The Company does not believe the
adoption of these Statements will have a material effect on the Company's
financial statements.
NOTE 3. INVENTORIES
Inventories consist of the following:
1997 1996
Stated at cost on first-in, first out (FIFO) method
(which approximates replacement cost):
Finished goods........................................$ 10,507,186 $ 11,522,643
Work in process and materials......................... 25,649,998 32,260,028
36,157,184 43,782,671
Less reserve required to state inventory on the
last-in, first-out (LIFO) method...................... (5,237,000) (6,470,000)
$ 30,920,184 $ 37,312,671
Page 19 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
The Company continually reviews the net realizable value of its inventory.
The Company's review in the third quarter of fiscal 1997 identified certain
inventory items for which quantities on hand exceeded forecasted needs. The
combined effect on the Company's inventory requirements due to the reduced unit
sales in fiscal 1997 and the consolidation of manufacturing facilities and
product lines resulted in excess inventory levels. As a result, the Company
recorded a charge in the third quarter of $4,000,000 to write down certain
inventories to net realizable value.
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 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:
1997 1996
Bank $ 13,398 $ 30,591
balance.......................................................................
Less outstanding (777,511) (1,290,756)
checks......................................................
$ (764,113) $ (1,260,165)
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of the
following:
1997 1996
Compensation and taxes withheld
$ 2,489,180 $ 3,358,507
therefrom............................................................................
Promotional 833,319 629,246
allowances........................................................
Other.................................................................................... 1,541,875 1,649,669
$ 4,864,374 $ 5,637,422
NOTE 6. ENVIRONMENTAL
In fiscal 1997, the Company adopted Statement of Position No. 96-1
ENVIRONMENTAL REMEDIATION LIABILITIES (SOP 96-1) which provided new guidance
for the accrual of environmental remediation costs. The SOP provides benchmarks
to aid in the determination of when environmental remediation liabilities
should be recognized and specific guidance as to how they should be measured.
The adoption of SOP 96-1 resulted in a pretax charge to operations of $437,000
in fiscal 1997.
The Company is in various stages of investigation or remediation at five
separate sites where contamination has been alleged. The total accrual for
environmental remediation liability as of June 28, 1997 is $509,000, which
includes the $437,000 impact of SOP 96-1. Of this total liability, $392,000
relates to a manufacturing facility formerly occupied by the Company in Hudson,
Massachusetts. Testing at the site has indicated the presence of relatively
high levels of volatile organic compounds in both the soil and ground water. A
ground-water treatment system has been installed at this site pursuant to the
direction of the
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
Massachusetts Department of Environmental Protection ("DEP"). In addition to
the ground water treatment, treatment or removal of contaminated soil may also
be required.
The balance of the accrual for environmental remediation liability relates
to two sites identified by the Environmental Protection Agency and state
regulatory agencies for cleanup under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and similar state statutes with
respect to which the Company has been named as a potentially responsible party.
The environmental investigations at these sites are on-going, but based on
information available to date the Company does not believe its liability with
respect to either site will be material.
NOTE 7. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
1997 1996
Term $ 4,821,429 $ 6,107,143
loans.......................................................................
Noncurrent portion of advances under
revolving line of credit 13,000,000 13,000,000
Other................................................................................ 163,848 247,868
17,985,277 19,355,011
Less current (1,166,111) (1,385,672)
portion..........................................................
$ 16,819,166 $ 17,969,339
Maturities of amounts classified as long-term debt are as follows: 1999--
$1,115,255; 2000--$1,090,603; 2001--$14,611,882; 2002--$1,426.
Interest paid amounted to $2,367,367 during 1997, $2,034,098 during 1996
and $1,960,718 during 1995.
In December, 1993, the Company entered into financing agreements ("Prior
Credit Agreements") with a commercial bank. The Company's primary lender was
joined by a second commercial lender (the "Prior Lenders") in the second
quarter of fiscal 1997 to the extent of a one-third participation. The Prior
Credit Agreements, at June 28, 1997, consisted of a term loan in the original
principal amount of $9 million and a revolving line of credit with a principal
amount of up to $20 million. During fiscal 1997, the Company failed to meet
certain then existing financial covenants related to earnings and balance sheet
ratios in the Prior Credit Agreements. The Prior Lenders subsequently waived
these defaults by modifying such covenants in a manner which resulted in
compliance by the Company for the periods completed.
On October 7, 1997, the Company restructured the Prior Credit Agreements
via an amendment ("Replacement Credit Agreements") effective as of June 28,
1997. The Replacement Credit Agreements consist of a replacement $7,500,000
term loan and continuation of a $20 million revolving line of credit. The
Company's primary lender issued a one-third participation to a financial credit
institution (the "Replacement Lenders") to replace the prior participant.
Under the Replacement Credit Agreements, as in the Prior Credit Agreements,
amounts available to the Company under the revolving line of credit are subject
to a borrowing base formula based upon certain percentages of the Company's
accounts receivable and inventories. The interest rate on amounts outstanding
under the line will change depending upon the achieved debt service coverage
ratio and can
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
range from the lender's base rate to 1.50% over the lender's base rate, as
compared to rates at June 28, 1997 under the Prior Credit Agreements of
lender's base rate plus 3%. At June 28, 1997, 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 1998. The revolving credit loan maturity date is July 31, 2000.
Similarly, the interest rate on the replacement term loan on a given date
can range from 0.25% to 1.75% over the lender's base rate depending upon the
achieved debt service coverage ratio. Under the Prior Credit Agreements at
June 28, 1997, the Company was paying interest on the term loan equal to the
lender's base rate plus 3.25%. The term loan has a maturity date of July 31,
2000. Principal is payable in twelve consecutive quarterly installments of
$267,857, except the final payment which shall be equal to the unpaid balance
of the term loan. The outstanding balance of the term loan as of the
refinancing date was $4,179,000. The $3,321,000 incremental cash proceeds of
the replacement term loan over the outstanding balance of the prior term loan
will be used for working capital purposes, primarily to reduce accounts payable
to vendors.
The balance sheet as of June 28, 1997, reflects the current and long term
portion payable under the Replacement Credit Agreements. The Company's
obligations under these agreements continue to be secured by substantially all
of its assets. The interest rate borne on the revolving line of credit and the
term loan at June 28, 1997 was 11.5% and 11.75%, respectively.
Both the Prior Credit Agreements and the Replacement 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 levels of minimum
profitability, tangible net worth, debt service coverage and liabilities to
worth ratios. Certain of these covenants were modified in the Replacement
Credit Agreements.
At June 28, 1997, the Company had $505,622 of outstanding letters of
credit.
NOTE 8. 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 9. 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 and expire on the sixth anniversary of the 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 20 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
Information with respect to incentive stock options outstanding is as
follows:
OPTIONS OUTSTANDING
NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 6/28/97 CONTRACTUAL LIFE EXERCISE PRICE
$6.625 89,000 7 months $6.625
$6.125 5,000 7 months $6.125
$6.125 - $6.625 94,000 7 months $6.600
A summary of the status of the Incentive Stock Option Plan as of June 28,
1997, June 29, 1996 and June 24, 1995, and changes during the years ending on
those dates is presented below:
1997 1996 1995
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF PRICE OF PRICE OF PRICE
SHARES SHARES SHARES
Outstanding at
beginning of
121,500 $6.693 121,500 $6.693 128,700 $6.666
year.....................
Options cancelled
or expired............ (27,500) $7.010 (6,000) $6.417
Options exercised (1,200) $5.375
Outstanding
at year end........... 94,000 $6.600 121,500 $6.693 121,500 $6.693
Exercisable
at year end........... 94,000 99,200 76,900
Available for
future grant.......... 110,000 87,500 87,500
At June 28, 1997, 204,000 shares of Common Stock were reserved for issuance
under the Company's stock option plans
NOTE 10. LEASES
Property, plant and equipment includes the following amounts for leases of
manufacturing facilities that have been capitalized:
1997 1996
Building, building improvements
and machinery and $ 443,308 $ 446,308
equipment...............................................
Less accumulated (288,487) (217,949)
amortization................................................
$ 154,821 $ 228,359
Page 21 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
Lease amortization is included in depreciation expense and amounted to
$70,680 in 1997, $69,320 in 1996 and $72,643 in 1995. During 1996 and 1995,
the Company acquired $103,371 and $10,888 respectively, of equipment under
capital lease arrangements. No equipment was acquired under capital lease
arrangements in 1997.
The future minimum rental commitments as of June 28, 1997 for all
noncancelable operating leases are as follows:
TRUCKS AND
TOTAL REAL ESTATE TRAILERS
1998............................................. $835,569 $331,741 $ 503,828
1999............................................. 610,958 107,130 503,828
2000............................................. 567,036 63,208 503,828
2001............................................. 558,353 54,525 503,828
2002............................................. 364,656 23,000 341,656
Thereafter......................................... 654,020 654,020
$ 3,590,592 $ 579,604 $ 3,010,988
Total rental expense for all operating leases was:
1997 1996 1995
Minimum Rental $ 1,262,284 $ 1,322,209 $ 1,309,206
Contingent Rentals 595,715 616,760 592,707
Less: Sublease Rental (130,780) (113,710) (114,629)
$ 1,727,219 $ 1,825,259 $ 1,787,284
The contingent rentals are based on additional truck miles driven over a
specified minimum.
NOTE 11. 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 22 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
The assets of the Hourly Plan are primarily shares of mutual funds holding
stocks, bonds and cash. A financial institution is the investment manager of
these 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 obligations 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. As of June 28, 1997 and
June 29, 1996, the accrued pension cost of the Supplemental Benefit Agreements
totaled $1,581,932 and $1,418,167 respectively.
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 28, 1997 and June 29, 1996 (in thousands):
PLANS IN WHICH ACCUMULATED BENEFITS
EXCEED ASSETS
1997 1996
Actuarial present value of benefit obligations:
Accumulated benefit obligations,
including vested benefits of $6,283
in 1997 and $5,531 in $ (6,926) $ (6,081)
1996..........................................
Recognition of future salary (309) (349)
increases..........................
Projected benefit obligation for
service rendered to (7,235) (6,430)
date..............................................
Plan assets at fair 5,479 4,602
value...............................................
Projected benefit obligation in excess
of plan (1,756) (1,828)
assets..............................................................
Unrecognized transition (585) (650)
asset.......................................
Unrecognized net 554 382
loss..................................................
Unrecognized prior service 479 517
cost....................................
Adjustment to record minimum (734) (531)
liability.........................
Accrued pension cost included in the
balance $ (2,042) $ (2,110)
sheet..............................................................
Page 23 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
Net pension expense includes the following components (in thousands):
1997 1996 1995
Service cost--benefits earned during the $ 312 $ 259 $ 237
period............
Interest cost on projected benefit 562 490 434
obligation..................
Return on plan (571) (441) (412)
assets...................................................
Deferred asset gain 182 95 78
(loss)...............................................
Amortization of transition (65) (65) (65)
asset.....................................
Amortization of unrecognized net 15 (3) (22)
gain..........................
Amortization of unrecognized prior service 38 37 23
costs..........
Total pension expense $ 473 $ 372 $ 273
In accordance with Statement of Financial Accounting Standards No. 87,
EMPLOYERS ACCOUNTING FOR PENSION, (FAS87) the Company has recorded an
additional minimum liability representing the excess of unfunded accumulated
benefit obligations over previously recorded pension cost liabilities. A
corresponding amount is recognized as an intangible asset except to the extent
that these additional liabilities exceed related unrecognized prior service
cost and net transition obligations, in which case the increase in the
liabilities is charged directly to stockholders' equity. At June 28, 1997,
$255,353 of the excess minimum liability resulted in a charge to equity.
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 1997, 1996 and 1995.
Page 24 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
The Company also maintains The Arrow Automotive Industries, Inc. 401(K) Plan
for all employees. The cost of providing matching contributions for the year
ended June 28, 1997 and June 29, 1996 was $61,612 and $45,314, respectively.
The Company provides for the continuation of health care and life insurance
benefits upon retirement for certain of its active and retired employees. In
accordance with the 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 following represents the unfunded
accumulated postretirement benefit obligation reconciled with amounts
recognized in the Company's balance sheet at June 28, 1997 and June 29, 1996
(in thousands):
1997 1996
Accumulated postretirement benefit obligation:
$ (1,397) $ (1,602)
Retirees..............................................................................................
Fully eligible active plan (140) (220)
participants...................................................
Other active plan (292) (353)
participants.............................................................
Accumulated postretirement benefit (1,829) (2,175)
obligation......................................
Unrecognized transition 1,927 2,048
obligation........................................................
Unrecognized net (610) (316)
gain..........................................................................
Accrued postretirement benefit $ (512) $ (443)
cost......................................................
Net periodic postretirement benefit cost includes the following components
(in thousands):
1997 1996 1995
Service cost--benefits earned during
the $ 22 $ 19 $ 20
period...................................................................................
Interest cost on projected benefit
142 168 156
obligation....................................................................................
Amortization of transition
obligation over 20 121 121 121
years..............................................................
Amortization of unrecognized (30) (7) (18)
gain................................................
Net periodic postretirement
benefit $ 255 $ 301 $ 279
cost.................................................................................
The cost of covered health care benefits was assumed to increase 8.5% for
retirees less than 65 years old and 6.0% for retirees 65 years and older for
fiscal 1997. These rates are assumed to decrease incrementally to 5.5% in 2001
and remain at that level thereafter. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 8%.
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
An increase of 1% in the assumed medical trend rates would result in an
increase to the accumulated postretirement benefit obligation of $501,000 at
June 29, 1996 and a 1997 net periodic postretirement benefit cost of $295,000.
The Company maintains a severance pay plan for its clerical and salaried
employees. The Company's obligation for these postemployment benefits as of
June 28, 1997 is not material.
NOTE 12. INCOME TAXES
The (benefit) provision for income taxes consists of the following:
1997 1996 1995
Current:
$ (1,140,000) $ (426,000) $ (225,000)
Federal.............................................................
State (22,000)
Deferred............................................................. 543,000 (399,000) 144,000
$ (597,000) $ (825,000) $ (103,000)
The Company recorded a current income tax benefit which will be realized
with the carryback of the 1997 net operating loss. Net operating loss
carryforwards can be carried forward to fiscal year 2012.
A reconciliation of the statutory federal income tax rate to the annual
effective income tax rate follows:
1997 1996 1995
Income tax (benefit) at statutory (34.0)% (34.0)% (34.0)%
rate...............................
Valuation allowance on temporary 16.5
differences.................
Tax loss with no current tax 12.0
benefit................................
Nondeductible portion of
travel and entertainment 0.2 0.2 4.4
expenses................................
State income tax
benefit, net of federal tax (2.6)
benefit...................................
Other.............................................................................. (0.2)
(5.5)% (36.4)% (29.6)%
Page 25 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - 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 28, 1997 and
June 29, 1996 are as follows:
1997 1996
Deferred tax assets:
$ 2,880,000 $ 1,543,000
Inventory.........................................................................
Net operating loss 1,744,000
carryforwards.....................................
Accrued retirement 680,000 653,000
benefits............................................
Accrued medical 229,000 376,000
benefits................................................
Accounts 217,000 210,000
receivable.......................................................
493,000 161,000
Other..............................................................................
Total deferred tax asset 6,243,000 2,943,000
Deferred tax liabilities:
Book/tax 2,386,000 2,296,000
depreciation.....................................................
104,000 104,000
Other..............................................................................
Total deferred tax liabilities 2,490,000 2,400,000
Net deferred tax asset before
valuation 3,753,000 543,000
reserve............................................................
Valuation (3,753,000)
reserve..............................................................
Net deferred tax $ 0 $ 543,000
asset......................................................
Income taxes paid (refunded) amounted to $(678,193) during 1997, $(645,554)
during 1996, and $1,365,465 during 1995.
Page 26 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal Quarter 1997
1ST 2ND 3RD 4TH
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net $ 24,481 $ 21,230 $ 22,481 $ 19,309
sales............................
Gross 5,454 4,211 (36) 3,551
margin.....................
Net (584) (1,019) (6,120) (3,274)
loss.............................
Net loss per
$ (.20) $ (.35) $ (2.13) $ (1.15)
share...............................
Weighted average
shares outstanding........... 2,873 2,873 2,873 2,873
FISCAL QUARTER 1996
1ST 2ND 3RD 4TH
(14 wks) (13 wks) (13 wks) (13 wks)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net $ 29,137 $ 23,738 $ 26,226 $ 24,502
sales............................
Gross 6,271 4,504 5,484 5,182
margin......................
Net(loss) income................ 332 (793) (359) (624)
Net (loss) income per
$ .12 $ (.28) $ (.13) $ (.22)
share................................
Weighted average
shares outstanding........... 2,873 2,873 2,873 2,873
In the first quarter of 1997, the Company recorded a $1.2 million
restructuring charge for the closure of its Santa Maria, California
manufacturing facility of which $100,000 was reversed in the third quarter.
The Company incurred one-time period costs relating to the restructuring in the
first, second and third quarters of fiscal 1997 of $10,000, $880,000 and
$952,000 respectively.
In the third quarter of fiscal 1997, the Company recorded a $4 million
charge to write down certain inventories to a net realizable value.
In the fourth quarter of fiscal 1997, the Company recorded $437,000 as a
result of the adoption of Statement of Position 96-1, ENVIRONMENTAL REMEDIATION
LIABILITIES.
Page 27 of 83 Pages
ARROW AUTOMOTIVE INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDING JUNE 1997, 1996 AND 1995
ADDITIONS
CHARGED CHARGED TO
BALANCE AT TO COSTS 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 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
Year Ended
June 28, 1997...... $ 524,401 $ 22,754 $ 0 $ 5,138 $ 542,017
(1) Uncollectible accounts written off, net of recoveries.
Page 28 of 83 Pages
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 Page 43
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
10.4* Supplemental Benefit Plan Form 10-K for year ended June
Agreement 28, 1985, 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
FILED WITH THIS
ITEM Incorporated by FORM 10-K AT
NUMBER DESCRIPTION REFERENCE TO OR PAGE INDICATED
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 Harry Form 10-Q for quarter ended
A. Holzwasser dated as of June December 25, 1993, Exhibit 10.2
28, 1993
10.13* Directors and Officers Liability Form 10-Q for quarter ended
Insurance Policy and Excess March 29, 1997, Exhibit 10.2
Policy
10.14* 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
10.15* 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
10.16 Amendment No. 1 to Employment Form 10-K for year ended June
Agreement with Harry A. 24, 1995, Exhibit 10.21
Holzwasser dated August, 1995
Page 29 of 83 Pages
FILED WITH THIS
ITEM Incorporated by FORM 10-K AT
NUMBER DESCRIPTION REFERENCE TO OR PAGE INDICATED
10.17 Amendment and Restated Revolving Form 10-Q for quarter ended
Credit and Term Loan Agreement December 28, 1996, Exhibit 10.1
dated December 3, 1996 among
Arrow Automotive Industries, Inc.
and the First National Bank of
Boston and BTM Capital
Corporation.
10.18 Waiver and First Amendment to Form 10-Q for quarter ended
Amended and Restated Revolving December 28, 1996, Exhibit 10.2
Credit and Term Loan Agreement
dated December 28, 1996.
10.19 Waiver and Second Amendment to Form 10-Q for quarter ended
Amended and Restated Revolving March 29, 1997, Exhibit 10.1
Credit and Term Loan Agreement
with BankBoston, N.A. and BTM
Capital Corporation dated as of
March 29, 1997.
10.20 Third Amendment to Amended and
Restated Revolving Credit and
Term Loan Agreement with
BankBoston, N.A.,
and Norwest Business Credit, Inc.
dated as of June 28, 1997.
Page 62
11. Statement re Computation of per Note 2 to Notes to Financial
share earnings (loss) Statements filed herewith
23. Consent of Independent Auditors
Page 82
27. Financial Data Schedule Page 83
Page 30 of 83 Pages