1996
Annual Report
ARMATRON INTERNATIONAL INC.
ARMATRON INTERNATIONAL, INC. AND SUBIDIARY
- ------------------------------------------
FINANCIAL HIGHLIGHTS
Years Ended September 30,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Net Sales $ 13,750,000 $ 12,017,000 $ 13,286,000
- ---------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $ 9,000 $ (1,159,000) $ (934,000)
- ---------------------------------------------------------------------------------------------------------
Net Loss $ (495,000) $ (1,557,000) $ (1,212,000)
- ---------------------------------------------------------------------------------------------------------
Stockholders' Equity $ 229,000 $ 724,000 $ 2,281,000
- ---------------------------------------------------------------------------------------------------------
Stockholders' Equity Per Common Share $ .09 $ .29 $ .93
- ---------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares Outstanding 2,459,749 2,459,749 2,459,754
- ---------------------------------------------------------------------------------------------------------
Loss Per Share of Common Stock:
Net Loss $ (.20) $ (.63) $ (.49)
=========================================================================================================
TO OUR STOCKHOLDERS
New product introduction and increased sales of ECHOVISION grew the fiscal
year's sales by 14.3% from $12,017,000 to $13,750,000 and decreased the
comparative loss from $1,557,000 to $495,000.
We're disappointed despite the improved performance. Production problems
experienced in the introduction of the garden shed negatively affected the
opportunity for additional market penetration and the recent relocation of our
molding facility has caused further production delays. Additional equipment and
a larger storage area has resolved this problem and we anticipate continued
growth with this new product.
ECHOVISION, like many new technology/new market products, has undergone
changes in response to user feedback. The original ECHOVISION products required
the driver, in a tractor/trailer application, to separately connect and
disconnect the system. These products also required too much driver
interpretation of the warning signals. Second generation ECHOVISION products
have incorporated driver friendly information algorithms and have eliminated the
necessity for the driver to make extra connections significantly increasing
driver acceptance.
FEDERAL EXPRESS ordered ECHOVISION systems installed on all new pick-up
and delivery vans manufactured from January 1, 1996 through the end of November.
Driver feedback has been overwhelmingly positive and early accident data
indicates safety effectiveness exceeding program objectives. The program is
currently undergoing a comprehensive evaluation at FEDERAL EXPRESS.
Mr. William Welsh, a member of the Board of Directors since 1982, has
decided to retire. We thank Bill for his dedicated service to Armatron and wish
him well.
With the support of our Board and management team, we have every
confidence in Armatron and the challenges ahead. We are buoyed by the continued
and loyal efforts of our associates and the support of our customers and
stockholders. We will continue to work hard to justify your trust.
/s/ CHARLES J. HOUSMAN
Charles J. Housman
President & Chairman of the Board
ARMATRON INTERNATIONAL, INC. AND SUBIDIARY
- ------------------------------------------
ASSETS (Note 6)
September 30,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents (Note 1).............................................. $ 1,849,000 $ 1,322,000
Trade accounts receivable (less allowance for doubtful accounts of $176,000 in
1996 and $179,000 in 1995)..................................................... 2,121,000 2,189,000
Current portion of other receivable............................................. 39,000 32,000
Inventories (Note 2)............................................................ 2,349,000 2,225,000
Deferred tax asset (Note 8)..................................................... 130,000 165,000
Prepaid and other current assets................................................ 148,000 122,000
--------------------------
Total Current Assets .................................................... 6,636,000 6,055,000
PROPERTY AND EQUIPMENT, net (Note 3).............................................. 637,000 952,000
OTHER ASSETS (Note 4)............................................................. 202,000 249,000
$ 7,475,000 $ 7,256,000
==========================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
1996 1995
CURRENT LIABILITIES:
Accounts payable........................................................... $ 1,171,000 $ 1,112,000
Accrued liabilities (Note 5)............................................... 1,285,000 705,000
--------------------------
Total Current Liabilities ............................................. 2,456,000 1,817,000
--------------------------
LONG-TERM DEBT related parties (Note 6)...................................... 4,715,000 4,715,000
--------------------------
DEFERRED RENT (Note 1) ...................................................... 75,000 --
--------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Note 7):
Common stock, par value $1 per share; authorized 6,000,000 shares; issued
2,606,481 shares in 1996 and 1995......................................... 2,606,000 2,606,000
Additional paid-in capital................................................. 6,770,000 6,770,000
Accumulated deficit........................................................ (8,761,000) (8,266,000)
--------------------------
615,000 1,110,000
Less:
Treasury stock at cost--146,732 shares in 1996 and 1995.................... 386,000 386,000
--------------------------
Total Stockholders' Equity ............................................ 229,000 724,000
--------------------------
$ 7,475,000 $ 7,256,000
==========================
The accompanying notes are an integral part of the consolidated financial
statements.
ARMATRON INTERNATIONAL, INC. AND SUBIDIARY
- ------------------------------------------
STATEMENTS OF CONSOLIDATED OPERATIONS
For the Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
Net Sales ............................................... $ 13,750,000 $ 12,017,000 $ 13,286,000
Cost of products sold.................................... 11,054,000 10,570,000 11,253,000
--------------------------------------------
Gross margin............................................. 2,696,000 1,447,000 2,033,000
Selling, general and administrative expenses............. 2,625,000 2,541,000 3,113,000
Provision for (recovery of) bad debts.................... 62,000 65,000 (146,000)
--------------------------------------------
Operating Profit (Loss) ................................. 9,000 (1,159,000) (934,000)
--------------------------------------------
Other Income (Expense):
Interest expense--third parties.......................... (49,000) (41,000) (6,000)
Interest expense--related party.......................... (480,000) (488,000) (494,000)
Other income--net........................................ 60,000 131,000 57,000
--------------------------------------------
Other income (expense)--net.............................. (469,000) (398,000) (443,000)
--------------------------------------------
Loss before income taxes ................................ (460,000) (1,557,000) (1,377,000)
Income tax (benefit) expense (Note 8).................... 35,000 -- (165,000)
--------------------------------------------
Net Loss ................................................ $ (495,000) $ (1,557,000) $ (1,212,000)
============================================
Net Loss per Share of Common Stock ...................... $ (.20) $ (.63) $ (.49)
============================================
Weighted Average Number of Common Shares Outstanding..... 2,459,749 2,459,749 2,459,754
============================================
The accompanying notes are an integral part of the consolidated financial
statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (495,000) $ (1,557,000) $ (1,212,000)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization............................. 395,000 453,000 616,000
Deferred tax (benefit) expense............................ 35,000 -- (165,000)
Provision (recovery) for bad debts........................ 62,000 65,000 (146,000)
Loss on disposal of equipment............................. 1,000 -- 35,000
(Increase) decrease in:
Accounts receivable..................................... 6,000 160,000 (42,000)
Inventories............................................. (124,000) 712,000 315,000
Prepaid and other current assets........................ (26,000) 144,000 (124,000)
Other assets............................................ 9,000 (32,000) (105,000)
Increase (decrease) in:
Accounts payable........................................ 59,000 (275,000) 576,000
Other current liabilities............................... 580,000 (85,000) (37,000)
Deferred rent........................................... 75,000 -- --
-------------------------------------------
Net Cash Flow from (used for) Operating Activities.... 577,000 (415,000) (289,000)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of equipment and patents.............. (50,000) (780,000) (146,000)
-------------------------------------------
Net Cash Flow used for Investing Activities........... (50,000) (780,000) (146,000)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt--third parties................... -- (1,000) (16,000)
Payments on long-term debt--related party................... -- (425,000) (110,000)
Loan origination costs...................................... -- (63,000) --
-------------------------------------------
Net Cash Flow used for Financing Activities........... -- (489,000) (126,000)
-------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... 527,000 (1,684,000) (561,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 1,322,000 3,006,000 3,567,000
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 1,849,000 $ 1,322,000 $ 3,006,000
===========================================
SUPPLEMENTAL INFORMATION:
Interest paid--third parties................................ $ 49,000 $ 41,000 $ 6,000
Interest paid--related party................................ $ 41,000 $ 528,000 $ 454,000
Income taxes paid........................................... $ -- $ -- $ --
The accompanying notes are an integral part of the consolidated financial
statements.
ARMATRON INTERNATIONAL, INC. AND SUBIDIARY
- ------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1996, 1995 and 1994
Common Stock Treasury Stock Total
---------------------- Paid-In Accumulated --------------------- Stockholders'
Shares Amount Capital Deficit Shares Amount Equity
--------- ---------- ---------- ------------ --------- ---------- -------------
Balance,
September 30, 1993........ 2,606,481 $2,606,000 $6,770,000 $(5,497,000) (146,727) $(386,000) $ 3,493,000
Net loss.................... -- -- -- (1,212,000) -- -- (1,212,000)
- ----------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1994........ 2,606,481 2,606,000 6,770,000 (6,079,000) (146,727) (386,000) 2,281,000
Increase in treasury stock.. -- -- -- -- (5) -- --
Net loss.................... -- -- -- (1,557,000) -- -- (1,557,000)
- ----------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1995........ 2,606,481 2,606,000 6,770,000 (8,266,000) (146,732) (386,000) 724,000
Net loss.................... -- -- -- (495,000) -- -- (495,000)
- ----------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1996........ 2,606,481 $2,606,000 $6,770,000 $(8,761,000) (146,732) $(386,000) $ 229,000
======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Armatron
International, Inc. and its wholly owned subsidiary. All intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue from product sales is recognized at the time the products are
shipped. Following industry trade practice, the Company offers extended
payment terms for delivery of seasonal items.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of less than three months to be cash equivalents. The
Company invests excess funds in short-term, interest-bearing obligations,
including reverse repurchase agreements and commercial paper.
The Company has no requirements for compensating balances. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits and in deposit accounts at its commercial finance
company. The Company has not experienced any losses in such accounts. The
Company believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Inventories
Inventories are stated on a first-in, first-out (FIFO) basis at the lower
of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed based
upon the estimated useful lives of the various assets using the
straight-line method with annual rates of depreciation of 10 to 33-1/3%.
Capitalized tooling costs are amortized over three years. Depreciation
expense was $363,000, $426,000 and $616,000 for fiscal 1996, 1995 and
1994, respectively. Tooling and molding costs are charged to a deferred
cost account as incurred, prepaid tooling, until the tool or mold is
completed. Upon completion the costs are transferred to a
property/equipment account.
Maintenance and repairs are charged to operations as incurred. Renewals
and betterments which materially extend the life of assets are capitalized
and depreciated. Upon disposal, the asset cost and related accumulated
depreciation are removed from their respective accounts. Any resulting
gain or loss is reflected in earnings.
Deferred Rent
Deferred rent results from amortizing the lease for its operating facility
over the term of the lease on a straight-line basis.
Advertising
The Company expenses advertising as incurred. Advertising expense was
$322,000, $295,000 and $248,000 for fiscal 1996, 1995 and 1994,
respectively.
Income Taxes
Effective October 1, 1993 the Company adopted Financial Accounting
Standard No. 109 (SFAS No. 109) "Accounting for Income Tax". SFAS No. 109
changes the Company's method of accounting for income taxes from the
income statement approach, recognized by Accounting Principles Board No.
11 to an asset and liability approach. As permitted by SFAS No. 109 the
Company opted not to restate the financial statements for prior periods.
Deferred income taxes are provided for temporary differences between
financial statement and income tax reporting principally from the
carryforward of unused net operating losses, tax credits, and alternative
minimum taxes.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents and long-term debt
approximate their fair value based on instruments with similar terms and
maturities.
Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Earnings (Loss) Per Share
Earnings (loss) per share of common stock is computed on the basis of
weighted average number of common shares outstanding in each year.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has adopted SFAS No. 121
'Accounting for the impairment of long-lived assets and for long-lived
assets to be disposed of' and SFAS No. 123 'Accounting for Stock-Based
Compensation'. The effective date for both these statements is fiscal
years beginning after December 15, 1995.
The Company has not elected early adoption of these two statements. Upon
adoption of SFAS No. 121, the Company will review for events or changes in
circumstances indicating the carrying amount of long-lived assets held
which may not be recoverable. The Company does not anticipate a material
impact upon adoption on its financial position or its results of
operations.
2. INVENTORIES
Inventories consist of the following at September 30:
1996 1995
Raw Materials....................... $ 1,632,000 $ 1,606,000
Work in Process..................... 65,000 84,000
Finished Goods...................... 652,000 535,000
--------------------------
$ 2,349,000 $ 2,225,000
==========================
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30:
1996 1995
Land and buildings.................................... $ 80,000 $ 80,000
Furniture and fixtures................................ 396,000 391,000
Machinery and equipment............................... 1,830,000 1,902,000
Capitalized tooling costs............................. 3,808,000 3,773,000
-------------------------
6,114,000 6,146,000
Less accumulated depreciation and amortization........ 5,477,000 5,194,000
-------------------------
$ 637,000 $ 952,000
=========================
4. OTHER ASSETS
Other assets consists of the following at September 30:
1996 1995
Other receivable, net of current portion................. $ 89,000 $ 104,000
Note receivable--employee, due under terms of an annual
renewable note, interest payable monthly at an annual
rate of 6%, secured by a second mortgage................ 100,000 100,000
Other.................................................... 13,000 45,000
---------------------
$ 202,000 $ 249,000
=====================
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of September 30:
1996 1995
Salaries, commissions and benefits............... $ 365,000 $ 321,000
Warranty costs................................... 40,000 64,000
Advertising costs................................ 145,000 135,000
Interest......................................... 439,000 --
Other............................................ 296,000 185,000
--------------------------
$ 1,285,000 $ 705,000
==========================
6. DEBT
Long-term debt consists of the following as of September 30:
1996 1995
$ 4,715,000 $ 4,715,000
=========================
The Company has a $7,000,000 line of credit with a realty trust operated
for the benefit of the Company's principal shareholders. This line of
credit, with interest payable at 10%, requires monthly payments of
interest only, is payable in full in October 1997 and is collateralized by
all assets of the Company. The terms and conditions for this line of
credit are no less favorable than the Company could have received from an
independent third party. The Company had $4,715,000 outstanding under
this line of credit at September 30, 1996 and 1995. The maximum borrowings
against this line during fiscal 1996 were $4,715,000. Repayment of this
line of credit is subordinate to the repayment of any and all balances
outstanding on the revolving line of credit described below. Related
interest expense incurred in the years ended September 30, 1996, 1995 and
1994 were $480,000, $488,000 and $494,000, respectively. At September 30,
1996 interest payments totaling $439,000 for the period November 1, 1995
to September 30, 1996 were in arrears. On December 11, 1996 the Company
received a waiver for the covenant violation. The period of this waiver
extends through October 1, 1997.
The Company has a revolving line of credit with a commercial finance
company which permits combined borrowings of up to $3,500,000 in cash and
letters of credit. This line of credit expires in December 1996 and is
collateralized by all assets of the Company. The terms of this agreement
include a borrowing limit which fluctuates depending on the levels of
account receivable and inventory which collateralize the borrowings.
Interest on amounts outstanding is payable on a monthly basis at an annual
rate of 2-1/4% over the prime rate which was 8-1/4% at September 30, 1996.
As of September 30, 1996 the Company had outstanding letters of credit
amounting to approximately $331,000 under this agreement. This instrument
approximates its fair value as the underlying interest rate is tied to
market rates. The loan agreement contains various covenants pertaining to
the maintenance of working capital, net worth and other conditions. The
Company is required to maintain continuing working capital of $4,800,000
and adjusted net worth, as defined in the loan agreement of $400,000. At
September 30, 1996, working capital was $4,180,000, which is in violation
of the loan agreement. On December 20, 1996 the Company received a waiver
for the covenant violation and renewed this revolving credit line. (See
Note 13.)
A summary of borrowings on commercial finance company and bank revolving
credit agreements and unused lines of credit for the years ended September
30, 1996, 1995 and 1994 is as follows:
1996 1995 1994
Average borrowings during year................... $ 313,638 $ 394,129 $ --
Average interest rate during year................ 10.67% 11.25% 7.5%
Maximum borrowings during year................... $ 1,365,000 $ 1,330,000 $ --
Unused line of credit at September 30............ $ 3,169,000 $ 3,354,000 $ 2,196,000
7. STOCK OPTIONS
The Company's incentive stock option plan terminated December 1, 1990.
Options were granted to officers and key employees to purchase common
shares at prices not less than the fair market value on the date of grant.
Options are exercisable in varying installments and expire in varying
periods which may not exceed ten years from the date of the grant.
Information concerning stock options for the years ended September 30,
1996, 1995 and 1994 is summarized below:
Options Outstanding
Shares Price Range
September 30, 1994........................ 20,000 $1.75--$2.50
Granted................................. -- --
Exercised............................... -- --
Canceled................................ -- --
----------------------
September 30, 1995........................ 20,000 $1.75--$2.50
Granted................................. -- --
Exercised............................... -- --
Canceled................................ -- --
----------------------
September 30, 1996........................ 20,000 $1.75--$2.50
======================
At September 30, 1996 and 1995, options for 20,000 shares were
exercisable. The expiration dates of the options range from 1998 to 1999.
The average exercise price of outstanding options is $2.27.
8. INCOME TAXES
As discussed in the summary of significant accounting policies the Company
adopted Statement of Financial Accounting Standards No. 109 as of October
1, 1993. The adoption of this change did not have a cumulative effect on
the financial position or the net results of operations.
The provision for income taxes for continuing operations consists of the
following:
(000's)
Year Ended September 30,
1996 1995 1994
CURRENT TAX PROVISION
Federal....................................... $ -- $ -- $ --
State......................................... -- -- --
----------------------------
TOTAL CURRENT PROVISION......................... -- -- --
----------------------------
DEFERRED TAX (BENEFIT)/EXPENSE
----------------------------
Federal....................................... (160) (545) (127)
State......................................... (39) (297) (38)
----------------------------
TOTAL DEFERRED (BENEFIT)/EXPENSE................ (199) (842) (165)
----------------------------
CHANGE IN VALUATION ALLOWANCE................... 234 842 --
----------------------------
INCOME TAXES (BENEFIT)/EXPENSE.................. $ 35 $ -- $ (165)
============================
The significant items comprising the deferred tax assets and liabilities
are as follows:
1996 1995
Deferred Tax Assets:
Doubtful Receivables............................ $ 78,000 $ 80,000
Inventory Obsolescence and Shrinkage............ 225,000 177,000
Sales Allowances................................ 32,000 26,000
Warranties...................................... 18,000 28,000
Non-qualified Executive Retirement Plan......... 147,000 130,000
Tax Loss Carryforwards.......................... 6,595,000 6,386,000
Tax Credit Carryforwards........................ 439,000 459,000
Other........................................... 215,000 223,000
--------------------------
Subtotal........................................ 7,749,000 7,509,000
--------------------------
Deffered Tax Liabilities:
Excess of Tax over Book Depreciation............ (114,000) (73,000)
--------------------------
Net Deferred Tax Assets......................... 7,635,000 7,436,000
Less Valuation Allowance........................ (7,505,000) (7,271,000)
--------------------------
NET DEFERRED TAX ASSETS......................... $ 130,000 $ 165,000
==========================
A reconciliation of the federal tax rate to the Company's effective tax
rate for 1996, 1995 and 1994 are as follows:
% of Pretax Income
1996 1995 1994
Federal income tax at statutory rate on loss before taxes..... 35.0% 35.0% 35.0%
Reduction due to valuation allowance.......................... (29.08) (35.0) (44.22)
------------------------------
Income tax credit at effective rate........................... 5.92% 0% (9.22)%
==============================
For income tax purposes the Company has unused Federal operating loss
carryforwards of $16,491,000 expiring through 2011 and State operating
loss carryforwards of $13,399,000 expiring through 2001.
In addition to the loss carryforwards the Company has research and
development and investment tax credit carryovers of $104,000 and $335,000
respectively through 2001 which are available to reduce future tax
liabilities.
The realization of the net deferred tax asset of $130,000 is dependent on
the Company's ability to generate sufficient taxable income in the future.
In recognizing its net deferred tax assets the Company has used certain
assumptions about future levels of pretax income.
9. BENEFIT PLANS
The Company has a 401(k) Savings Plan whereby employees may voluntarily
defer a portion of their compensation and the Company matches a portion of
the employee deferral. All employees with at least one year of continuous
service are eligible for the plan. Company contributions vest 100% after
five years. The Company's contributions amounted to $0 in fiscal years
1996 and 1995 and $22,000 in 1994.
The Company also has a retirement plan for certain senior executives. The
benefits payable under this retirement plan are based upon a formula which
allows for the offset of benefits under other offered retirement plans and
Social Security benefits. At September 30, 1996, the unfunded benefit
obligation of this retirement plan was approximately $331,000. The Company
has made no contributions to this retirement plan in each of the three
years ended September 30, 1996.
10. COMMITMENTS AND CONTINGENCIES
The Company was obligated at September 30, 1996 under certain operating
leases for various types of equipment and the Company's operating
facility. The lease for the operating facility expires in September 2000.
Rental expense for fiscal 1996, 1995 and 1994 was $420,000, $450,000, and
$625,000, respectively. The future minimum lease commitments total
$1,287,000 as follows: $332,000 in fiscal 1997, $325,000 in 1998, $315,000
in 1999, and $315,000 in 2000.
Commitments for the purchase of molds at September 30, 1996 totalled
$60,000.
In January 1991, the California Department of Health Services (DHS) issued
a Corrective Action Order (CAO) against the Company and a former
subsidiary. The CAO requires the Company and a former subsidiary to comply
with a Cleanup and Abatement Order which had been issued in 1990 against
the Company for soil contamination at the site of the former subsidiary.
To date, no determination has been made with regard to the extent of any
environmental damage and who may be liable. The Company does not believe,
based on the information available at this time, that the outcome of this
matter will have a material adverse effect on its financial position or
results of operations.
11. BUSINESS SEGMENT INFORMATION
The Company operates principally in two segments, the Consumer Products
segment and the Industrial Products segment. Operations in the Consumer
Products segment involve the manufacture and distribution of Flowtron
leaf-eaters, bugkillers, yard carts and storage sheds which comprise 94
percent of the Company's sales for 1996. The Company distributes its
consumer products primarily to major retailers throughout the United
States, with some products distributed under customer labels.
Substantially all of this segment's sales and accounts receivable related
to business activities with such retailers. The Industrial Products
segment has developed an electronic obstacle avoidance system for
automotive applications. Production of this unit began in fiscal 1996.
There are no intercompany sales between segments. Operating profit is
total revenue less operating expenses excluding interest expense, general
corporate expenses and income taxes. Identifiable assets by industry
segment are those assets that are identified in the operation of each of
the Company's segments. Corporate assets are principally cash and other
assets. The Company export sales are not significant. Net sales to a
single customer accounted for $2,486,000, or 18%, of net sales in fiscal
1996, $2,441,000, or 20%, of net sales in fiscal 1995, and $4,125,000, or
31% of net sales in fiscal 1994. At September 30, 1996 the accounts
receivable due from this customer was $703,000 or 33% of net trade
accounts receivable.
For the Years Ended September 30,
1996 1995 1994
Net sales to unaffiliated customers:
Consumer Products............................... $ 12,910,000 $ 11,920,000 $ 13,223,000
Industrial Products............................. 840,000 97,000 63,000
------------------------------------------
Total net sales............................. $ 13,750,000 $ 12,017,000 $ 13,286,000
==========================================
Operating profit (loss)
Consumer Products............................... $ 750,000 $ (25,000) $ 542,000
Industrial Products............................. 29,000 (410,000) (341,000)
------------------------------------------
779,000 (435,000) 201,000
General corporate expenses........................ (770,000) (724,000) (1,135,000)
------------------------------------------
Consolidated operating loss....................... 9,000 (1,159,000) (934,000)
Interest expense.................................. (529,000) (529,000) (500,000)
Other income--net................................. 60,000 131,000 57,000
------------------------------------------
Loss before income taxes.......................... $ (460,000) $ (1,557,000) $ (1,377,000)
==========================================
Identifiable assets:
Consumer Products............................... $ 5,244,000 $ 5,766,000 $ 6,412,000
Industrial Products............................. 282,000 61,000 74,000
Corporate....................................... 1,949,000 1,429,000 3,113,000
------------------------------------------
Total assets................................ $ 7,475,000 $ 7,256,000 $ 9,599,000
==========================================
Depreciation:
Consumer Products............................... $ 359,000 $ 422,000 $ 610,000
Industrial Products............................. 4,000 4,000 6,000
Corporate....................................... -- -- --
------------------------------------------
Total depreciation and amortization......... $ 363,000 $ 426,000 $ 616,000
==========================================
Capital expenditures:
Consumer Products............................... $ 40,000 $ 780,000 $ 146,000
Industrial Products............................. 10,000 -- --
------------------------------------------
Total capital expenditures.................. $ 50,000 $ 780,000 $ 146,000
==========================================
12. INTERIM FINANCIAL REPORTING
The aggregate impact on the "Net Loss" resulting from fourth quarter
adjustments relating to the reversal of reserves in the amount of $253,000
which was material and had the effect of decreasing the Net Loss by
$253,000 in the fourth quarter.
13. SUBSEQUENT EVENT
On December 11, 1996 the Company received a waiver from the realty trust
for the violation of certain loan covenants (Note 6).
On December 20, 1996 the Company received a waiver from the commercial
finance company for the violation of certain loan covenants (Note 6). The
Company renewed this line of credit which expires in December 1999.
Interest on amounts outstanding is payable on a monthly basis at an annual
rate of 1-3/4% over the prime rate. As of October 1, 1996 the Company is
required to maintain continuing working capital of not less than
$2,000,000 and adjusted net worth of not less than $2,500,000.
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Directors of ARMATRON INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of Armatron
International, Inc. as of September 30, 1996 and 1995, and the related
consolidated statements of operations, cash flows and stockholders' equity, for
the years ended September 30, 1996, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Armatron
International, Inc. as of September 30, 1996 and 1995 and the results of its
operations and its cash flows for the years ended September 30, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during the year ended
September 30, 1994.
/s/ R. J. GOLD & COMPANY, P.C.
R. J. GOLD & COMPANY, P.C.
Needham, Massachusetts
December 9, 1996
December 20, 1996 as to Note 13.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996, operating activities generated $577,000 in cash, which was
due primarily to an increase of other current liabilities of $580,000. The
increase of other current liabilities was primarily due to an increase in
accrued interest of $439,000. In fiscal 1995, operating activities consumed
$415,000 in cash, which was due primarily to a net loss of $1,557,000 and a
decrease of $360,000 in accounts payable and other current liabilities.
These were partially offset by reductions in accounts receivable of
$160,000, inventories of $712,000 and other and non-current assets of
$112,000.
In fiscal 1996, investing activities consumed $50,000 for equipment
purchases relating primarily to the purchase of tooling and dies, of this
amount $40,000 related to the Consumer Products Segment, and $10,000 related
to the Industrial Products Segment. In fiscal 1995, investing activities
consumed $780,000 relating primarily to the purchase of molds for the yard
cart and storage shed introduced that year.
In fiscal 1996, there were no financing activities. In fiscal 1995,
financing activities consumed $426,000 for the payment of long-term debt and
$63,000 for the payment of loan origination costs. In fiscal 1996 as a result
primarily of the factors noted above, cash and cash equivalents increased
$527,000. In fiscal 1995, as a result primarily of the factors noted above,
cash and cash equivalents decreased $1,684,000.
In fiscal 1996, 1995 and 1994, purchases of equipment and patents amounted
to $50,000, $780,000 and $146,000, respectively. These expenditures were
mainly for tooling and dies used in production of the Company's lawn and
garden products. The Company plans to spend approximately $465,000 for
capital expenditures in fiscal 1997. These expenditures are expected to be
mainly for tooling and dies for the Company's lawn and garden products.
In December 1996, the Company renewed from a commercial finance company a
revolving line of credit which allows aggregate borrowings of $3,500,000 to
be used as working capital and which expires in December 1999. The interest
rate on loans shall be 1 3/4% over the prime rate. The interest rate on the
expiring revolving line of credit was 2 1/4% over the prime rate which was 8
1/4% at September 30, 1996. Borrowings made against this line of credit are
collateralized by all assets of the Company. As of September 30, 1996, the
Company was contingently liable for outstanding letters of credit of
approximately $331,000 under this line of credit agreement.
The Company has a $7,000,000 line of credit from a Realty Trust operated as
a partnership for the benefit of the Company's principal shareholders.
These principal shareholders include the Company's President; a Director,
who is also the President of Automatic Radio International; and another
Director, the Company's Clerk, a minority partner of the Realty Trust. The
Company entered into this line of credit in 1990 in order to secure adequate
operating capital financing which was not available from a financial
institution. This line of credit, with interest at 10%, requires monthly
payments of interest only, is payable in full in October 1997 and is
collateralized by all assets of the Company, as noted in Footnote 6.
Interest payments for the period November 1, 1995 through September 30, 1996
are in arrears. The Company had $4,715,000 outstanding under this line of
credit at September 30, 1996. The maximum borrowings against this line of
credit is subordinate to the repayment of any and all balances outstanding
on the revolving line of credit with the commercial finance company. The
Company plans to renew its line of credit with the Realty Trust prior to
October 1997 and does not anticipate any problems or delays. It is
anticipated that terms and conditions of the renewal will be similar to
existing terms and conditions.
Production of the ECHOVISION automotive obstacle detection system commenced
in December 1995. The financial requirements for the program have been
adequately provided for within the credit lines available. The Company's
initial marketing strategy is to focus on identifying potential customers
and marketing directly to them. These efforts are performed by salaried
Company employees. The effectiveness of this marketing program will be
evaluated during fiscal 1997.
At September 30, 1996, the Company had unused operating loss carryforwards
of approximately $16,491,000 for financial reporting purposes which are
available to be applied against taxable income for the years 1997 through
2011. As noted in Footnote 7 Income Taxes, the Company recorded a Net
Deferred Tax Asset of $130,000. The Company expects to realize this asset
through improved operating performance achieved through the anticipated
contribution of its new products. Taxable Income for fiscal 1997 must
increase to approximately $317,000 in order to fully realize the recorded
net deferred tax asset.
In January 1991, the California Department of Health Services (DHS) issued a
Corrective Action Order (CAO) against the Company and a former subsidiary.
The CAO requires the Company and a former subsidiary to comply with a
Cleanup and Abatement Order which had been issued in 1990 against the
Company for soil contamination at the site of the former subsidiary. To
date, no determination has been made with regard to the extent of any
environmental damage and who may be liable. The Company does not believe,
based on the information available at this time, that the outcome of this
matter will have a material adverse effect on its financial position or
results of operation.
Management is of the opinion that, unless there is a significant rise in
interest rates, inflation will not be an important factor in fiscal 1997.
The Company believes that is present working capital and lines of credit
from a commercial finance company and from the Realty Trust will be
sufficient to finance its seasonal borrowing needs, operations and
investments in capital expenditures in fiscal 1997.
RESULTS OF OPERATIONS
Sales of the Consumer Products Segment in 1996 increased 8 percent over the
1995 period resulting from an increase in sales volume of 4.4% and 3.6%
increase in selling prices. The increase in sales volume was specifically
related to the introduction of the Storage Shed. Sales of the Industrial
Products Segment in 1996 increased 766 percent over the 1995 period
resulting specifically from the increase in sales volume.
Sales of the Consumer Product Segment in 1995 decreased 9 percent over the
1994 period as a result of active competition and a maturing product line.
This resulted in a decrease of approximately 2% in the average selling price
and a reduction of 7% in sales volume. Sales of the Industrial Product
Segment were not significant in 1995 or 1994.
Operating profit of the Consumer Products Segment was $775,000 higher in
1996 than in 1995. Operating profit of the Industrial Products Segment was
$439,000 higher in 1996 than in 1995. The increases in operating profits
for both segments resulted from increase in gross margins as a result of
increased sales.
Operating profit of the Consumer Products Segment was $567,000 lower in 1995
than in 1994, primarily as a result of lower margins from the $1,303,000
decrease in sales. Operating profit of the Industrial Products Segment
decreased $69,000 as the result of a one-time charge to write-off obsolete
inventory.
General and Administrative Corporate expenses are not allocated to industry
segments as any allocation would not be meaningful. These expenses were
$46,000 higher in 1996 than in 1995. General and Administrative Corporate
expenses were $411,000 lower in 1995 than in 1994 as a result of the active
expense reduction program undertaken.
Net sales to one customer accounted for approximately $2,486,000, or 18%, of
consolidated net sales in fiscal 1996, as compared to net sales to one
customer of $2,441,000, or 20%, in fiscal 1995, and $4,125,000, or 31%, in
fiscal 1994.
In fiscal 1996, the consolidated operating loss decreased $1,168,000
resulting in operating income of $9,000 when compared to fiscal 1995. The
operating loss in fiscal 1995 was $1,159,000, an increase of $225,000 when
compared to the operating loss of $934,000 in fiscal 1994.
Interest expense during fiscal 1996 remained unchanged when compared to
fiscal 1995, and increased $29,000 to $529,000 between fiscal 1995 and
fiscal 1994.
Other income of $60,000 in fiscal 1996, $131,000 in fiscal 1995 and $57,000
in fiscal 1994 consists primarily of income earned on short-term
investments.
The aggregate effect of all fourth quarter adjustments as described in
Footnote 12. of the financial statements, on current years reported
operations resulting from the reversal of reserves for accrued expenses
amounted to $253,000. These reversals are not expected to have an impact
upon future operations.
The Company believes inflation did not have a material effect on its results
of operations for fiscal 1996, 1995 or 1994.
BUSINESS OUTLOOK
This Annual Report, including "Management's Discussion and Analysis of
Results of Operations and Financial Condition." contains forward-looking
statements within the meaning of the safe harbor provision of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties which could cause
actual results to differ materially from those described in the forward-
looking statements. Such factors and uncertainties include, but are not
limited to: the Company's various debt documents; general economic
conditions and conditions in the retail environment; the Company's
dependence on a few large customers; price fluctuations in the raw materials
used by the Company; competitive conditions to the Company's markets; the
timely introduction of new products; the impact of competitive products and
pricing; certain assumptions related to consumer purchasing patterns; the
seasonal nature of the Company's business; and the impact of federal, state
and local environmental requirements (including the impact of current or
future environmental claims against the Company). As a result, the
Company's operating results may fluctuate especially when measured on a
quarterly basis. These forward-looking statements represent the Company's
best estimate as of the date of this Annual Report. The Company assumes no
obligation to update such estimates except as required by the rules and
regulations of the Securities and Exchange Commission.
FIVE-YEAR FINANCIAL SUMMARY
SELECTED FINANCIAL DATA:
Years Ended September 30,
1996 1995 1994 1993 1992
(in thousands, except per share data)
Net Sales......................................... $ 13,750 $ 12,017 $ 13,286 $ 16,174 $ 18,562
Operating Income (Loss)........................... $ 9 $ (1,159) $ (934) $ (1,106) $ (929)
Net Loss from continuing operations............... $ (495) $ (1,557) $ (1,212) $ (1,548) $ (1,432)
Earnings (Loss) Per Share of Common Stock:
Net Loss........................................ $ (.20) $ (.63) $ (.49) $ (.63) $ (.58)
========================================================
Total Assets...................................... $ 7,475 $ 7,256 $ 9,599 $ 10,398 $ 13,120
Long-Term Obligations............................. $ 4,715 $ 4,715 $ 5,140 $ 5,251 $ 6,016
There were no dividends paid on common shares during any of the above years.
Under the financing agreement, as set forth in footnote 6 to the company's
financial statements the Company is restricted from paying dividends for the
three-year term of that agreement.
- --------------------------------------------------------------------------------
Common Stock Information:
The approximate number of shareholders of record at December 2, 1996 was 1,108.
The following table indicates the quarterly high and low prices for the
Company's common stock on the American Stock Exchange for 1995 and the high and
low bid prices as reported in Over the Counter Bulletin Board for 1996 which
do not include retail markup, markdown or commissions and may not
necessarily represent actual transactions:
1996 1995
Quarter High Low High Low
First.............................. 11/16 7/16 1-1/16 11/16
Second............................. 11/16 1/4 1-1/18 3/4
Third.............................. 2-7/8 1/4 1-1/16 13/16
Fourth............................. 1-1/8 5/8 15/16 9/16
BOARD OF DIRECTORS
Charles J. Housman
President, Treasurer & Chairman of the Board
Edward L. Housman
President, Automatic Radio International
Elliot J. Englander
Member, Englander, Finks, Ross, Cohen & Brander, P.C.
Attorneys at Law
Craig Spangenberg
Partner, Spangenberg, Shibley, Traci & Lancione
Attorneys at Law
OFFICERS
Charles J. Housman, President, Treasurer
Sal DeYoreo, Vice President
Elliot J. Englander, Clerk
AUDITORS
R. J. Gold & Company, P.C.
GENERAL COUNSEL
Englander, Finks, Ross, Cohen & Brander, P.C.
TRANSFER AGENT
American Stock Transfer & Trust Co.
STOCK TRADING
Over the Counter Bulletin Board
FORM 10-K
A copy of the Company's Fiscal 1996 Annual Report on Form 10-K to the Securities
and Exchange Commission is available to Stockholders, without charge, upon
written request to the Company:
Armatron International, Inc.
Two Main Street
Melrose, MA 02176
ARMATRON
INTERNATIONAL INC.