SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996 Commission File Number 0-23308
ARDEN INDUSTRIAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0980556
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
560 Oak Grove Parkway, Vadnais Heights, Minnesota 55127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 490-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
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
The aggregate market value of the voting stock held by non-affiliates of the
registrant (3,055,938 shares) at September 11, 1996 was $13,751,721 based on the
closing price of the stock as of that date on the NASDAQ National Market System.
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 the 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]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At September 11, 1996 there were 6,989,456 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's Definitive Proxy Statement of Arden Industrial Products, Inc.
dated September 26, 1996 ("1996 Proxy Statement"), related to Annual Meeting of
Shareholders to be held on October 28, 1996 and pages 8 through 20 of the 1996
Annual Report to Shareholders of Arden Industrial Products, Inc. ("1996 Annual
Report") are incorporated into Part II and III, respectively.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Arden Industrial Products, Inc. ("Arden" or the "Company") is a national
distributor of specialty and standard fasteners to the industrial market,
offering one of the broadest fastener lines in the industry and providing its
customers with a wide range of value-added services. These services include
innovative inventory management programs, engineering and design support and
continuous quality assurance programs, which enable the Company's customers to
lower their overall costs of purchasing, handling and designing fasteners, and
assembling their products. Arden distributes fasteners to approximately 7,500
original equipment manufacturers and other industrial manufacturers, assemblers
and subassemblies (collectively referred to as "OEMs") that operate in a broad
range of industries, as well as to other distributors. The Company currently
operates eight distribution centers in the Midwest and Southeast. The Company
continues to pursue its objective of increasing its market share in the
industrial fastener industry through growth in existing markets and expansion
into new geographic areas.
COMPANY DEVELOPMENT
The Company was founded in 1972 under the laws of the State of Minnesota and had
its initial public offering ("IPO") in March 1994. The proceeds from the IPO
were used to enhance the Company's information system and corporate
infrastructure to support anticipated sales growth, and expand geographically by
opening three distribution centers in Raleigh, North Carolina, Columbus, Ohio,
and Davenport, Iowa. In the fourth quarter of fiscal 1996, the Company decided
to close its Raleigh distribution center in early fiscal 1997, as a means to
reduce costs and effectively use excess capacity in its Atlanta facility.
THE INDUSTRIAL FASTENER INDUSTRY
The United States industrial fastener market is estimated to be over $6 billion
in annual sales at the wholesale level, with fasteners used extensively by OEMs
in the consumer, commercial, automotive, aerospace and defense industries. The
market for industrial fasteners generally is related to the state of the economy
and the overall level of manufacturing activity.
The industrial fastener industry is highly fragmented, with approximately 800
full-line industrial fastener distributors and approximately 3,500 other
distributors that offer fasteners in addition to other products. The market is
served by large distributors, such as Arden, and a number of smaller competitors
that offer value-added services and compete on the basis of the best value for
the price for the end user. Additionally, there are many small, regional
distributors which compete primarily on the basis of price rather than product
selection and value-added services. In addition, fastener manufacturers may sell
their products directly to OEMs.
In recent years, OEMs have increasingly emphasized lowering their total cost of
purchasing and handling fasteners. Because fasteners generally have low unit
prices and OEMs may use hundreds of different fasteners to manufacture or
assemble a single product, administrative and overhead costs comprise a
substantial portion of an OEM's fastener related operating costs. As a result,
the Company believes the number of industrial fastener distributors is
consolidating as OEMs rely on fewer suppliers to provide a wider array of
services. These services enable OEMs to lower their costs associated with
purchasing, receiving, inspecting, storing and managing their fastener supplies
and their investment in fastener inventories, and improve the quality and
reliability of their fastener supplies. In addition, OEMs increasingly are
relying on their distributors for fastener design and application support,
allowing the OEMs to use their internal engineering resources more efficiently.
PRODUCTS
Arden maintains an extensive inventory of over 40,000 different specialty and
standard fasteners. Because of its relationships with most leading fastener
manufacturers, the Company has access to substantially all fasteners its
customers may require. This comprehensive product line enables the Company to
provide a complete and reliable supply of fasteners to its customers.
Specialty fasteners are designed for a specific function and include plastic and
metal clips, clamps, cable ties, inserts, caps, plugs, passive electrical
connectors and specialized lock, speed and threaded nuts. In general, specialty
fasteners replace standard fasteners to improve manufacturing productivity by
speeding the assembly process, or enhancing the appearance, performance or
durability of the end product.
The Company's standard fastener products are used for general purposes in a wide
range of applications and include nuts, bolts, screws, washers and rivets.
SERVICES
The Company provides a variety of services designed to add value for its
customers and to enhance the marketing of the Company's products. The Company
does not receive a specific fee for any of the value-added services.
Inventory Management Programs
The Company provides a range of value-added services for OEM customers,
including inventory sourcing and purchasing, quality inspection, electronic data
interchange, custom packaging, bin stocking and just-in-time delivery of
fasteners to the assembly line. These services allow customers to focus on their
assembly operations and reallocate plant and administrative resources, while the
Company manages the customers' fastener needs. Fastener sales under inventory
management programs have grown from approximately 21% of sales for fiscal 1994,
to approximately 37% of sales for fiscal 1995 and approximately 44% of sales for
fiscal 1996.
Engineering and Design Support
The Company provides a range of engineering and design services to its
customers. The Company's product application specialists and direct sales force
work closely with the engineering staff of OEM customers to recommend the
appropriate fastener for a new product or to suggest alternative fasteners that
reduce overall production costs, streamline assembly, or enhance the appearance
or performance of the end product. In addition, the Company maintains an
extensive inventory of sample fasteners to aid customers in their design
decisions.
QUALITY ASSURANCE
The Company has an established continuous quality assurance program. The
Company's St. Paul distribution center was originally awarded an ISO 9002 -
Certificate of Compliance in April 1995 and was re-certified in May 1996. The
ISO 9002 standard, recognized world wide, is a quality assurance program which
ensures process consistency. The standard independently verifies that the
Company has developed detailed, written procedures for achieving and maintaining
quality systems throughout the organization, and that the Company consistently
follows these procedures. Management believes that, in the future, OEM customers
will increasingly require that their suppliers be ISO 9002 certified.
MARKETING AND SALES
The Company markets its products and services using a team approach of personnel
responsible for marketing the Company's inventory management programs to OEM
customers, and maintaining and building relationships with the Company's large
OEM accounts. The sales force also coordinates engineering and design support
for OEMs from the Company's product application specialists and the design
engineers of fastener manufacturers. Customer service representatives receive
orders, assist in sourcing of products, answer customer questions and arrange
for fastener samples. Furthermore, the Company advertises in trade journals,
attends major trade shows and publishes product catalogs.
CUSTOMERS
The Company has approximately 7,500 OEM and distribution customers. The
Company's principal customers include Carrier Corporation, Deere & Company,
Frigidaire Company, Motor Coach Industries, Navistar International
Transportation Corp., PACCAR, Inc., Polaris Industries Incorporated, Raytheon
Appliances, Simplicity Manufacturing, Inc., Thermo King Corporation and
Whirlpool Corporation. Sales to Polaris Industries represented 18%, 13% and 9%
of the Company's sales for the years ended June 30, 1996, 1995 and 1994,
respectively. Loss of business with Polaris Industries would have a material
adverse effect on the Company's operating results.
Although the Company focuses on sales to OEM customers, it also sells to other
fastener distributors. Sales to other distributors enable the Company to
indirectly serve geographic areas, niche markets and OEM customers not currently
targeted or served by the Company.
SOURCES OF SUPPLY
The Company strives to develop close working relationships with leading fastener
manufacturers. Arden works closely with many fastener manufacturers to carry an
extensive selection of specialty and standard fasteners, to be responsive to
customer requests, and to design customized fasteners. Arden purchases fasteners
from over 900 different suppliers.
Although some specialty fasteners are available from several different
suppliers, many of these fasteners are available only from a single source. To
maintain its source of specialty products, the Company has established master or
authorized distributor relationships with many leading specialty fastener
suppliers. Over 36% of the Company sales were from these suppliers during fiscal
1996. Management believes these supplier relationships are a competitive
advantage for the Company. The Company has not experienced any material
shortages in product availability and believes that it enjoys good working
relationships with its suppliers of specialty fasteners.
Standard fastener products are available from a variety of manufacturers. The
Company purchases such products from several different suppliers of quality
fasteners from time to time depending on price and availability.
COMPETITION
The industrial fastener industry is highly competitive and fragmented, with
approximately 800 full-line, industrial fastener distributors and approximately
3,500 other distributors that offer fasteners, value-added services and other
products. The Company believes that no distributor supplies more than 5% of the
market. Because the industrial fastener market is generally mature, sales gains
will be achieved through increased market share rather than through industry
expansion.
The Company considers C-Tech, a division of ITW Fastex, General Fasteners Co.,
Purchased Parts Group, and RB&W Corporation to be its principal competitors
nationally for inventory management programs with OEM customers. The Company
also competes against local and regional distributors and fastener manufacturers
who sell directly to OEM customers. Some of the Company's competitors are large
and have significantly greater financial resources than Arden.
The Company competes primarily based on its extensive product selection,
value-added services such as inventory management programs, electronic data
interchange, engineering and design support, warehouse locations and price. The
Company believes that OEM customers will continue the trend to reduce the number
of suppliers as a means to decrease their costs.
GOVERNMENT REGULATION
The Fastener Quality Act (the "Fastener Act") regulates the manufacture and
distribution of certain high grade industrial fasteners in the United States.
The Fastener Act imposes testing, certification and recordkeeping requirements
on manufacturers and distributors of these fasteners, including requirements
that manufacturers certify that the fasteners conform with the relevant
specifications, and that this conformity has been certified by an accredited
laboratory. Under the Fastener Act, these fasteners must also be traceable by
lot to the manufacturer, and distributors are required to maintain lot
traceability. As a result of the Fastener Act, the Company and other
distributors of these types of fasteners will be required to enhance their
recordkeeping and product tracking systems. Final regulations under the Fastener
Act are expected to be implemented in fiscal 1997. As part of the Company's ISO
9002 certification, the Company continues to enhance its tracking and
traceability systems. The Company does not anticipate that compliance with the
Fastener Act will materially increase its costs.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth biographical information of the executive officers of
the Company who are not directors. Biographical information of the executive
officers of the Company who are also directors of the Company can be found in
the Company's 1996 Proxy Statement, incorporated herein by reference.
Kim B. Erickson, age 40, is the Vice President, Finance and has been the Chief
Financial Officer of the Company since he joined the Company in 1990. From 1986
to 1990, Mr. Erickson served in various capacities with Knutson Mortgage
Corporation, most recently as First Vice President of Finance. Mr. Erickson is a
certified public accountant.
The Company's Vice President, Sales and Marketing resigned effective January
1996 and its Vice President, Operations resigned effective August 1996. The
Company is conducting an executive search to fill the vacancies.
EMPLOYEES
As of August 31, 1996, the Company had 399 full and part time employees. None of
the Company's employees are covered by collective bargaining agreements. The
Company believes it has a good working relationship with its employees.
ITEM 2. PROPERTIES
The Company leases nine distribution centers listed below.
LOCATION SQUARE FEET YEAR OPENED
St. Paul, Minnesota 77,750 1971
Nashville, Tennessee 34,300 1981
Atlanta, Georgia 40,000 1987
Chicago, Illinois 33,000 1989
Milwaukee, Wisconsin 14,500 1993
Raleigh, North Carolina 19,500 1994
Memphis, Tennessee 11,900 1994
Columbus, Ohio 11,600 1994
Davenport, Iowa 10,400 1994
The St. Paul and Nashville facilities are owned by and leased from two
partnerships controlled by Larry A. Carlson and Brian P. Carlson. Larry A.
Carlson is the Chairman of the Board and Chief Executive Officer of the Company.
Brian P. Carlson is a director of the Company and the brother of Larry A.
Carlson. The Company also leases its corporate offices located in Vadnais
Heights, Minnesota (13,300 square feet, opened 1995) and has a storage facility
in Roseau, Minnesota (3,200 square feet, opened 1996) to facilitate service to
the Company's major customer. In the fourth quarter of fiscal 1996, the Company
decided to close its Raleigh distribution center in early fiscal 1997, as a
means to reduce costs and effectively use excess capacity in its Atlanta
facility.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, the Company was not involved in any material legal
proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the Company's 1996 fiscal
year to a vote of security holders, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information contained under the caption "Arden Common Stock" in the 1996
Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the caption "Selected Financial Data" in the
1996 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained under the caption "Financial and Operations Review" in
the 1996 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the captions "Statements of Income," "Balance
Sheets," "Statements of Shareholders' Equity," "Statements of Cash Flows,"
"Notes to Financial Statements," and "Independent Auditor's Report" in the 1996
Annual Report is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
1996 Proxy Statement is incorporated herein by reference.
Information concerning executive officers of the Company who are not directors
can be found under the caption "Executive Officers of the Company" in Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the captions "Executive Compensation,"
"Compensation Committee Report on Executive Compensation," "Performance of the
Company's Stock," and "Election of Directors -- Board of Directors and
Committees -- Remuneration of Directors" in the 1996 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information contained under the caption "Principal Shareholders" in the 1996
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Transactions" in the 1996 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
1. FINANCIAL STATEMENTS. Audited financial statements as of June
30, 1996 and 1995 and for each of the three years in the
period ended June 30, 1996, are filed as part of this Form
10-K and are incorporated by reference from the 1996 Annual
Report.
2. FINANCIAL STATEMENT SCHEDULES.
Page
Independent Auditor's Report on
Financial Statement Schedule II-1
Schedule II -- Valuation and
Qualifying Accounts II-2
3. EXHIBITS. The following exhibits are being filed as part of
this Form 10-K:
<TABLE>
<CAPTION>
Exhibit Method of
Number Title Filing
------- ----- ---------
<S> <C> <C>
3.1 Amended and Restated Articles *
of Incorporation of the Company
3.2 Restated Bylaws of the Company *
4.1 Form of Common Stock Certificate *
4.4 1986 Restated Employee Stock Ownership
Plan and Trust **
10.1 1993 Stock Option Plan *
10.2 Employee Stock Award Plan *
10.3 Revolving Credit and Term Loan Agreement *
10.4 Amended and Restated Revolving
Credit Agreement Filed herewith
13 Arden Fasteners 1996 Annual Report Filed herewith
23.1 Consent of McGladrey & Pullen, LLP Filed herewith
</TABLE>
- -------------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, Reg. No. 33-73722
** Incorporated by reference to the Company's Registration Statement on Form
S-8, Reg. No. 33-88026
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the last quarter of the period covered by this report.
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 there unto duly authorized.
ARDEN INDUSTRIAL PRODUCTS, INC.
Date: September 26, 1996
By: /s/ Larry A. Carlson
-----------------------------------
Larry A. Carlson, President and
Chief Executive Officer
By: /s/ Kim B. Erickson
-----------------------------------
Kim B. Erickson, Vice President-
Finance and Chief Financial 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 dated indicated.
/s/ Larry A. Carlson 9/26/96
--------------------------------------- -------
Larry A. Carlson, Chairman of the Board, Date
President and Chief Executive Officer
/s/ Brian P. Carlson 9/26/96
--------------------------------------- -------
Brian P. Carlson, Director Date
/s/ Joseph C. Levesque 9/26/96
--------------------------------------- -------
Joseph C. Levesque, Director Date
/s/ David D. Koentopf 9/26/96
--------------------------------------- -------
David D. Koentopf, Director Date
/s/ Ann Rockler Jackson 9/26/96
--------------------------------------- -------
Ann Rockler Jackson, Director Date
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
Arden Industrial Products, Inc.
St. Paul, Minnesota
Our audit of the financial statements of Arden Industrial Products, Inc., d/b/a/
Arden Fasteners, included Schedule II, contained herein, for each the three
years in the period ended June 30, 1996.
In our opinion, such schedule presents fairly the information required to be set
forth therein in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 29, 1996
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
(Reductions)
Balance at Charged to Balance
Beginning Costs and Recoveries at end
Description of Year Expenses (Deductions) of Year
- -------------------------------------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C>
For the year ended June 30, 1994:
Allowance for doubtful accounts $ 135 $ 0 $ 6 (a) $ 141
Obsolescence reserve 1,075 650 (904) (b) 821
For the year ended June 30, 1995:
Allowance for doubtful accounts 141 (98) 156 (a) 199
Obsolescence reserve 821 1,100 (593) (b) 1,328
Warranty reserve 0 370 0 370
For the year ended June 30, 1996:
Allowance for doubtful accounts 199 126 1 (a) 326
Obsolescence reserve 1,328 1,877 (1,203) (b) 2,002
Warranty reserve 370 240 0 610
</TABLE>
(a) Uncollected receivables written off, net of recoveries
(b) Obsolete inventory scrapped, net of recoveries
EXHIBIT 10.4
FIRST AMENDMENT TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
This Amendment is made as of the 31 day of October, 1995, by and
between Arden Industrial Products, Inc., a Minnesota corporation ("Borrower")
and TCF Bank Minnesota fsb, a federally chartered stock savings bank.
RECITALS
The Borrower and the Lender have entered into an Amended and Restated
Revolving Credit Agreement dated as of November 30, 1994 (the "Credit
Agreement").
Pursuant to the Credit Agreement, the Borrower has issued to the Lender
its Note, dated November 30, 1994, in the face amount of $5,000,000 (the
"Note").
The Borrower has requested, among other things, that the Lender (i)
extend the Commitment Termination Date from November 30, 1995 to November 30,
1997, (ii) increase the Lender's Commitment from $5,000,000 to $10,000,000 and
(iii) lower the interest rate from two percent (2.00%) over the LIBOR Rate to
one and eight-tenths of one percent (1.80%) over the LIBOR Rate.
The Lender is willing to grant the Borrower's requests pursuant to the
terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the Borrower and the Lender agree as
follows:
Terms used in this Amendment which are defined in the Credit Agreement
shall have the same meanings as defined therein, unless otherwise defined
herein.
To induce the Lender to enter into this Amendment, the Borrower hereby
agrees that the Recitals are true and correct and that the Loan Documents
constitute the legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their respective terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally; except as
limited by applicable statutes of limitation; and except as limited by the
enforceability of obligations subject to the general principles of equity.
Section 1.01 of the Credit Agreement is hereby amended by deleting the
existing definitions of Commitment and Commitment Termination Date and by
substituting therefor the following new definitions of Commitment and Commitment
Termination Date:
"'Commitment' means $10,000,000, unless said amount is reduced
pursuant to Section 2.06, in which event it means the amount to which
said amount is reduced."
"'Commitment Termination Date' means November 30, 1997 or the
earlier termination of the Commitment pursuant to Section 2.06 or
Section 7.02."
The Note. Section 2.02 of the Credit Agreement is hereby amended by
deleting the existing Section 2.02 in its entirety and by substituting therefor
the following new Section 2.02:
"Section 2.02 The Note. The Advances made by the Lender shall
be evidenced by and repayable with interest in accordance with a single
promissory note of the Borrower (the "Note"), payable to the order of
the Lender, substantially in the form of Exhibit A to the First
Amendment to Amended and Restated Revolving Credit Agreement (the
"First Amendment"), dated the date of the First Amendment. This Note is
issued in replacement of and in substitution for, but not in payment
of, that certain Revolving Note of the Borrower dated November 30, 1994
(the "Original Note"), payable to the order of the Lender in the
principal amount of $5,000,000. The Note shall bear interest on the
unpaid principal amount thereof from the date thereof until paid at the
rate provided in Section 2.04."
Interest. Section 2.04(a) of the Credit Agreement is hereby amended by
deleting the existing Section 2.04(a) in its entirety and by substituting
therefor the following new Section 2.04(a):
"(a) LIBOR Rate. The outstanding principal balance of the
Advances shall bear interest from the date of this Agreement until the
Advances are fully paid at an annual rate equal to one and eight-tenths
of one percent (1.80%) over the LIBOR Rate. The LIBOR Rate (plus the
applicable spread of one and eight-tenths of one percent (1.80%)
determined by the Lender on or about the twenty-fifth (25th) day of
each month) shall be applicable for the next succeeding month."
This Amendment shall become effective as of the date the Lender shall
have received the following, each in form and content satisfactory to the
Lender:
The Note, duly executed by the Borrower;
(b) This Amendment, duly executed by the Borrower;
and
(c) A certified copy of the resolutions of the Board
of Directors of the Borrower evidencing approval of this
Amendment and the Note, certified by the Secretary or the
Assistant Secretary of the Borrower as being a true, correct
and complete copy thereof which has been duly adopted and is
in full force and effect.
Except as expressly amended by this Amendment, the terms and conditions
of the Credit Agreement shall remain in all other respects in full force and
effect.
On the date this Amendment becomes effective, each reference in the
Credit Agreement to "this Agreement" and each reference in any of the Loan
Documents to "the Credit Agreement" shall be deemed a reference to the Credit
Agreement as amended by this Amendment.
On the date this Amendment becomes effective, each reference in the
Credit Agreement and in any other Loan Document to the "Note" shall be deemed a
reference to the Note as defined in this Amendment.
The Borrower hereby agrees to pay all fees and disbursements of counsel
to the Lender for the services performed by such counsel in connection with the
preparation of this Amendment and all documents incidental hereto.
The Borrower acknowledges and agrees that the Loan Documents set forth
the entire agreement between the Borrower and the Lender with respect to the
matters covered therein. The Borrower further acknowledges that the Lender has
satisfied all of its obligations under the Lender's offer to lend dated October
__, 1995 and that the Lender has no further obligations or commitments to the
Borrower except as expressly set forth in the Loan Documents. No agreement,
statement or promise made to the Borrower by any employee, officer or agent of
the Lender with respect to the loan evidenced by the Loan Documents shall be
binding on the Lender unless it is set forth in writing and signed by an officer
of the Lender and no amendment or modification of any of the Loan Documents
shall be effective unless set forth in writing and signed by an officer of the
Lender.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
ARDEN INDUSTRIAL PRODUCTS, INC.
By Kim B. Erickson
-----------------------------
Its C.F.O.
TCF BANK MINNESOTA FSB
By Richard D. Larsen
------------------------------
Its Vice President
AND
By Milli A. Navara
------------------------------
Its Commercial Banking Officer
ARDEN FASTENERS 1996 ANNUAL REPORT
(Photo: Screw and Nut)
ARDEN FASTENERS*
Arden is one of the largest distributors of specialty and standard fasteners to
original equipment manufactures (OEMs) in the United States. Within the
fragmented $6 billion market for industrial fasteners, Arden is one of several
major distributors that have differentiated themselves from the more than 800
full-line fastener distributors in the market by offering OEMs a wide range of
value-added services. These services include innovative inventory management
programs, electronic data interchange with customers' manufacturing and
purchasing departments, custom packaging, bar coding, just-in-time delivery to
customers' assembly lines, and electronic billing services.
Arden is an authorized distributor for 69 specialty fastener manufactures and in
many of these relationships is either a master or key distributor. As such, many
smaller distributors are also Arden customers. The Company currently distributes
approximately 40,000 different fasteners to more than 7,500 OEM and distribution
customers. Principal customers include: Carrier Corporation, Deere & Company,
Frigidaire Company, Motor Coach Industries, Navistar International
Transportation Corp., PACCAR, Inc., Polaris Industries Incorporated, Raytheon
Appliances, Simplicity Manufacturing, Inc., Thermo King Corporation and
Whirlpool Corporation.
Arden has 411 full and part-time employees and 8 distribution centers located
in: St. Paul, Minn., Nashville, Tenn., Atlanta, Ga., Chicago, Ill., Milwaukee,
Wis., Memphis, Tenn., Columbus, Ohio, and Davenport, Iowa (Quad Cities). Arden
is ISO 9002 certified.
Arden's common stock trades on the Nasdaq Stock Market under the symbol AFAS.
*Arden Fasteners is Arden Industrial Products, Inc.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE
AND EMPLOYEE DATA)
JUNE 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 87,510 $ 86,330 $ 69,526
Operating income $ 562 $ 5,433 $ 6,319
Income before income taxes $ 662 $ 5,838 $ 6,099
Net income $ 404 $ 3,578 $ 3,689
Shareholders' equity $ 31,165 $ 30,761 $ 27,149
Per Share of Common Stock:
Net income $ .06 $ .51 $ .62
Shareholders' Equity $ 4.45 $ 4.40 $ 4.53
Weighted average number of common and 7,007 6,987 5,992
common equivalent shares outstanding
Employees 411 402 341
</TABLE>
(Bar Graphs)
Sales (in millions): 92--$48.3; 93--$56.8; 94--$69.5; 95--$86.3; 96--$87.5
Net Income (in thousands): 92--$541; 93--$2,557; 94--$3,689; 95--$3,578;
96--$404
Shareholders' Equity (in millions): 92--$4.8; 93--$7.3; 94--$27.1; 95--$30.8;
96--$31.2
1
TO OUR SHAREHOLDERS
Our business did not grow as fast we expected in 1996. Sales for the year ended
June 30, 1996, were $87,510,000, an increase of 1.4 percent over sales of
$86,330,000 in fiscal 1995. Net income for fiscal 1996 was $404,000, or 6 cents
per share, compared with net income of $3,578,000, or 51 cents per share, in
fiscal 1995. We experienced soft fastener demand in a number of key industry
segments and did not add new business as quickly as we had planned during the
year. Plus we had maturing sales from several of our large customers and, during
the fourth quarter particularly, experienced deferred or lost sales as a result
of service and operating issues related to the implementation of our new
information system. Lower earnings were a result of the costs associated with
increasing customer service expectations at the same or lower prices and a cost
structure that was too high for the sales level we achieved.
Pricing pressure is a normal wholesale distribution industry phenomenon, as end
users seek "the best value for the price" (see facing page). In the fastener
distribution segment of the industry, this is being felt most noticeably as more
small competitors being offering value-added services. Just a few years ago,
there were only a few fastener distributors, including Arden, offering OEM
inventory management. Today, that number has increased dramatically. As a leader
in the fastener inventory management process, we are quite certain that this
competition, which is primarily price driven, will be won by those who deliver
the best product and service value. We plan to maintain that position.
Our expenses were higher in 1996. This was partially the result of the high cost
of implementing our new information system. We knew from the beginning of this
very complex project that it would be challenging and expensive ... and it was!
However, we continue to resolve the issues associated with the system
implementation and believe that the resulting sales deferrals and losses were
confined primarily to the fourth quarter. With the ongoing refinement of the
system, we will be one of the strongest competitors in our industry and far
better equipped to provide the very best of service to both our customers and
our fastener suppliers. In addition, we expect that our new information system
will help us lower costs by improving our productivity.
Arden's strategies remain the same:
- - Provide state-of-the-art fastener inventory management services to large
OEMs, and general fastener distribution to our more than 7,500 OEM and
distributor accounts ... at a price that reflects the quality of both
products and services delivered.
- - Become a truly national fastener distributor. We are looking at several
creative alternatives in defining how to reach this objective.
- - Provide engineering and application solutions that lower costs and improve
reliability and assembly of our customers' products.
Looking ahead, industry studies suggest that there will be a significant
consolidation of distributors as the result of pricing competition and "the best
value for the price" principle discussed above. In that regard, with the
refinement of our new information system, the continued building of our
management team, and the careful implementation of our inventory management and
marketing strategies, we are readying ourselves to be a much larger company in
the 21st century.
We appreciate your patience as we build Arden for the future.
Sincerely,
/s/ Larry A. Carlson
Larry A. Carlson, Chairman, President and CEO, September 1996
2
INDUSTRY DESCRIPTION
(Photo: screw and nut)
Arden is a key participant in the fastener distribution industry which has
annual sales of approximately $6 billion. Fastener distribution is part of the
much larger wholesale distribution industry with estimated sales in excess of $3
trillion. While wholesale distribution literally covers everything from soup to
nuts (i.e. fasteners), there are far more similarities among distribution
companies than differences.
Every few years the Distribution Research and Education Foundation (DREF)
commissions Arthur Anderson & Co. to survey the distribution industry and
prepare a study pinpointing key strategic issues. In 1995, this study was titled
"Facing the Forces of Change." Much of this excellent work is directly
applicable to Arden and our strategies, and we believe the following messages
are well worth including in our annual report:
- - Wholesaler-distributors must ... Formally measure customer satisfaction
.... Design or adjust business processes, based on a balance of price and
value .... Take advantage of inherent strengths to deliver the best value
for the price.
- - Wholesaler-distributors must use ... customer feedback and other external
information to drive a formal strategic planning process .... Use strategic
planning to ensure consistent and reliable customer service .... Make
vision and strategy the CEO's primary job .... Reengineer business
processes to meet customer needs.
- - Wholesaler-distributors must redesign their sales efforts and other
processes to achieve seamless customer service .... Place customer service
at center stage .... Make the pricing structure less complex and more
effective.
- - Wholesaler-distributors must identify their strategic suppliers and treat
them as customers .... Understand that supplier needs and wants are
fragmenting .... Develop formal methods for determining supplier
expectations .... Quantitatively prove to strategic suppliers the value
added by the wholesaler-distributor .... Formally evaluate suppliers to
determine which are positioned to be the most effective and productive
partners.
- - Wholesaler-distributors must make logistics a core competency or outsource
it .... Move from inventory control ("How many do I have") to inventory
management ("How many should I have") .... Use technology and other methods
to improve processes within the warehouse .... Take a position on the
leading edge of warehousing and transportation.
- - Wholesaler-distributors must actively manage the human resources process
rather than merely letting it happen .... Empower and train employees ....
Plan for management succession .... Review and reward employees based on
customer satisfaction.
Arden is proactively dealing with virtually every issue in the DREF study
outlined above.
(Photo: screw and nut)
3
INDUSTRY DISTRIBUTION
TRADITIONAL FASTENER DISTRIBUTION
Arden's traditional fastener customers buy a variety of standard and specialty
fasteners based on product availability and pricing. According, a distributor
must be the low-cost provider to compete effectively in this marketplace.
Many traditional fastener customers also take advantage of the engineering and
application support we offer. However, unlike customers who require a full range
of value-added services, Arden's traditional fastener customers generally do not
have sufficient volumes to warrant the large investment necessary to transition
to an inventory management system.
Even though it is not a fast growing as value-added distribution, traditional
distribution represented more than 55 percent of Arden's fiscal 1996 sales. The
Company intends to maintain a major presence in this important segment of the
industry.
(Photo: screw and nut)
4
WAREHOUSE PROCESS
(Diagram of typical warehouse layout)
INBOUND SHIPPING
1. Receiving docks-unload inbound shipments.
2. Staging racks-product awaiting putaway.
3. Small percentage of inbound product crossdocked to shipping.
4. Product is put away.
(Diagram of typical warehouse layout)
OUTBOUND SHIPPING
1. Dispatch orders via radio.
2. Pickers tour bins and pallets for selection of product to fill
orders.
3. Upon completion of route, pickers deliver to shipping
locations.
4. Orders complete, staged for shipment.
5. Outbound-loading trucks.
5
INDUSTRY DISTRIBUTION
VALUE-ADDED FASTENER DISTRIBUTION
Many OEM customers see the need to reduce the total cost of fastener usage and
look to their distributor to literally "take them out" of the fastener business.
This requires the kind of value-added services that make the entire fastener
procurement process virtually transparent to an OEM.
Arden's value-added services include: Studies of customers' products which help
customers get the most out of their fastener applications by finding or
engineering exactly the right fastener for the job .... Quality control which
makes inspection virtually unnecessary .... Inventory management which gets the
right quantity of each fastener to the assembly line at the right time, thereby
reducing the need for warehousing .... And electronic ordering and invoicing
which take away the expensive and time-consuming paperwork associated with
maintaining ready supplies of hundreds of individual fastener types in a
manufacturing operation.
Providing this kind of value-added service to customers is the real challenge in
providing the "best value for the price," as pointed out in the Arthur Anderson
DREF study discussed earlier. The cost reduction model on the facing page
details the steps in Arden's value-added customer services.
6
VALUE-ADDED CUSTOMER SERVICES
1. ENGINEERING
- Parts reliability and consolidation
- Reduction in assembly time
- Fit and finish
2. PURCHASING
- Streamline quoting and order placement process
- Vendor consolidation
3. RECEIVING
- Reduction in costs of receiving fasteners and moving
to storage
4. INSPECTION
- Elimination of inspection process
5. STORAGE
- Reduction in storage and handling
- Reduction in obsolescence
- Reduction in inventory investment
6. ASSEMBLY LINE
- Enhanced product availability at point of assembly
7. ADMINISTRATION
- Electronic ordering/invoicing/payment
- Elimination of paper work
- Improve timeliness and accuracy of information
7
Financial and Operations Overview
Selected Financial Data
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Sales $87,510 $86,330 $69,526 $56,841 $48,316
Cost of goods sold 62,325 59,350 46,609 37,317 33,838
------- ------- ------- ------- -------
Gross profit 25,185 26,980 22,917 19,524 14,478
Operating expenses 24,623 21,547 16,598 14,668 12,973
------- ------- ------- ------- -------
Operating income 562 5,433 6,319 4,856 1,505
Interest income (expense) 100 405 (220) (473) (650)
------- ------- ------- ------- -------
Income before
income taxes 662 5,838 6,099 4,383 855
Income taxes 258 2,260 2,410 1,826 314
------- ------- ------- ------- -------
Net income $ 404 $ 3,578 $ 3,689 $ 2,557 $ 541
======= ======= ======= ======= =======
Net income per
common share $ .06 $ .51 $ .62 $ .46 $ .10
======= ======= ======= ======= =======
Weighted average number
of common and common
equivalent shares
outstanding 7,007 6,987 5,992 5,500 5,500
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $25,387 $24,972 $24,069 $ 5,667 $ 3,461
Total assets 43,300 40,407 34,957 22,412 17,757
Total debt 811 -- -- 8,099 8,041
Shareholders'
equity 31,165 30,761 27,149 7,341 4,784
</TABLE>
The following discussion contains forward looking statements. Future operating
results are subject to fluctuations not within the control of the Company. This
discussion should be read in conjunction with the Company's financial statements
and notes thereto and with the other information contained in this and other
reports filed by the Company with the Securities and Exchange Commission.
Results of Operations
FISCAL 1996 IN COMPARISON WITH FISCAL 1995
Sales for the fiscal year ended June 30, 1996, were $87.5 million with operating
income of $562,000 and net income of $404,000, or $.06 per share. Sales for the
fiscal year ended June 30, 1995 were $86.3 million with operating income of $5.4
million and net income of $3.6 million, or $.51 per share.
Fiscal 1996 sales growth was hampered by soft fastener demand from industry
segments in which the Company has a large concentration of customers, including
lawn and garden equipment and trucking; a flattening of sales from the Company's
larger, more mature customers; a slow down in procuring new inventory management
account business; and deferred or lost sales to the Company's traditional
customer base as a result of service and operating issues associated with the
fourth quarter implementation of the new information system. The decline in
operating income is related to the costs associated with increased customer
service expectations at the same or lower prices, and a cost structure that was
too high for the sales levels achieved. Included in these costs were inventory
8
obsolescence and shrinkage charges which were in excess of historical levels,
implementation costs for the new information system, and a one-time charge for
the planned closure of the Company's Raleigh facility.
The Company's major customer represented 17.8% of sales in fiscal 1996 up from
13.4% in fiscal 1995. Revenues from inventory management accounts, exclusive of
the Company's major customer, increased 12.5% to $23.3 million and represented
26.7% of sales in fiscal 1996, compared with 24.0% of sales in fiscal 1995.
Increased inventory management account sales were primarily a result of $1.4
million of sales to a new account and a net increase in business to existing
customers. The increase in inventory management revenues were offset by
decreased revenues from the Company's traditional customer base due to soft
fastener demand from key industry segments, flattening of sales from certain
large customers, and deferred or lost sales to the Company's traditional
customer base as a result of service and operating issues associated with the
fourth quarter implementation of the new information system. Management believes
that the deferred or lost sales, as a result of the system issues, were confined
principally to the fourth quarter of fiscal 1996. The Company continues to
resolve the issues associated with the system implementation. Revenues from the
Company's traditional customer base decreased 10.0% to $48.6 million and
represented 55.6% of sales in fiscal 1996 compared with 62.6% of sales in fiscal
1995.
Inventory management accounts differ from the Company's traditional customer
base in that they generate greater sales volumes and include value-added
services in the cost of the product. Value-added services reduce the customers'
overall fastener-related procurement, handling, assembly and administrative
costs. The traditional customer generally purchases fasteners based on product
availability and price.
Gross margin in fiscal 1996 was 28.8% compared with 31.3% in fiscal 1995. The
decrease in gross margin was primarily due to inventory obsolescence-related
issues: obsolescence charges totaled $1.9 million, or 2.1% of sales in fiscal
1996 compared with $1.1 million, or 1.3% of sales in fiscal 1995, and
significantly discounted sales of slow moving product decreased gross margin by
an additional 0.3% of sales. The increased obsolescence-related charges were a
result of production cuts by several large customers and a large number of
engineering and design changes implemented by certain inventory management
customers. The Company is attempting to match its future purchases more closely
with its large customers' needs and to require such customers to purchase
fasteners acquired for them.
The Company also experienced a 0.7% reduction in gross margin as a result of
lower prices to certain inventory management accounts and a 0.5% reduction in
gross margin due to year-end inventory adjustments for shrinkage. Subsequent to
June 30, 1996, procedures and processes have been implemented to reduce the
Company's exposure to future inventory shrinkage.
Operating expenses were $24.6 million, or 28.1% of sales in fiscal 1996 and
$21.5 million, or 25.0% of sales in fiscal 1995. The implementation of the
Company's new information system resulted in an approximate $1.2 million charge
to operating expenses in fiscal 1996. The total cost incurred during the last
two fiscal years for the new information system was approximately $2.9 million
which included $1.5 million in software and hardware capital expenditures and
$1.4 million in system development costs. System development costs are
anticipated to continue into fiscal 1997, at lower levels.
Employee-related expenses, which are the Company's largest operating expense
component, amounted to $15.5 million, or 17.7% of sales, and $14.0 million, or
16.2% of sales for the fiscal years ended June 30, 1996 and 1995, respectively.
The increase was primarily a result of personnel costs associated with the
implementation of the new information system, and a $550,000 charge for
employment matters and severance packages. The Company adopted FASB No. 123,
Accounting for Stock-Based Compensation, on July 1, 1996, and has elected to
continue to measure compensation cost using the intrinsic value-based method for
employees. The adoption of FASB No. 123 is not expected to have a material
impact on fiscal 1997 operating results.
9
In the fourth quarter, the Company made the decision to close its Raleigh
distribution facility in early fiscal 1997, as a means to reduce costs and
effectively use excess capacity in its Atlanta facility. The Company accrued
$260,000 in fiscal 1996 for the distribution center closing. The Company will
continue to review the cost effectiveness of its existing facilities and explore
expansion opportunities in other regions.
Fiscal 1996 operating expenses included $240,000 for replacement warranty
contingencies incurred in the normal course of business, compared with $370,000
in fiscal 1995. Additionally, operating expenses reflected twelve months of
costs for two distribution centers and a corporate office opened in mid-fiscal
1995, increased depreciation, repairs and maintenance costs of $600,000 for
equipment upgrades, and increased marketing and communication expenses.
Interest income, net was $100,000 in fiscal 1996 compared with $405,000 in
fiscal 1995. During fiscal 1996, the Company intermittently invested excess
funds or borrowed money against its bank line of credit. Throughout fiscal 1995,
the Company invested the funds made available by its March 1994 initial public
offering.
The Company's effective tax rate was 39% in fiscal 1996 which was consistent
with fiscal 1995.
FISCAL 1995 IN COMPARISON WITH FISCAL 1994
Sales for the fiscal year ended June 30, 1995 were $86.3 million with operating
income of $5.4 million and net income of $3.6 million, or $.51 per share. Sales
for the fiscal year ended June 30, 1994 were $69.5 million with operating income
of $6.3 million and net income of $3.7 million, or $.62 cents per share.
Weighted average common and common equivalent shares outstanding increased to
7.0 million in fiscal 1995 from 6.0 million in fiscal 1994 as a result of the
Company's March 1994 initial public offering.
Sales increased $16.8 million, or 24.2% in fiscal 1995. Sales growth resulted
from increased unit volumes with existing customers and the addition of new
customers. The Company's major customer represented 13.4% of sales in fiscal
1995, up from 9.1% of sales in fiscal 1994. Revenues from inventory management
accounts, which includes the Company's major customer, increased 67.4% to $24.7
million and represented 37.4% of sales in fiscal 1995, compared with 21.2% of
sales in fiscal 1994. Revenues from the Company's traditional customer base
increased 12.6% to $61.6 million and represented 62.6% of sales in fiscal 1995,
compared with 78.8% of sales in fiscal 1994. All of the Company's nine
distribution centers' increased sales by at least 10% during the year.
Gross margin was 31.3% in fiscal 1995, compared with 33.0% in fiscal 1994. The
decrease in gross margin was partially due to increased sales to inventory
management accounts which generated greater sales volumes at lower gross
margins, and competitive pricing pressures. In addition, gross margin was
impacted by inventory obsolescence charges of $1.1 million, or 1.3% of sales in
fiscal 1995, compared with $650,000, or 0.9% of sales in fiscal 1994.
Operating expenses were $21.5 million, or 25.0% of sales in fiscal 1995, and
$16.6 million, or 23.9% of sales in fiscal 1994. The fiscal 1995 increase in
operating expenses were largely related to the Company's efforts towards the
development of a new information system, an enhanced corporate infrastructure to
handle future growth, and the opening of two distribution centers and a
corporate office. Employee-related expenses amounted to $14.0 million, or 16.2%
of sales in fiscal 1995 and $11.0 million, or 15.8% of sales in fiscal 1994.
Depreciation expense increased to $1.1 million, or 1.3% of sales in fiscal 1995
and $655,000, or 0.9% of sales in fiscal 1994.
Retirement costs increased in fiscal 1995 as a result of a one-time charge of
$340,000 resulting from the termination of the Company's defined benefit pension
plan in May 1995. Also, a reserve of $370,000 was established in fiscal 1995 for
replacement warranty contingencies incurred in the normal course of business.
10
Interest income, net was $405,000 in fiscal 1995 compared with interest expense,
net of $220,000 in fiscal 1994. Throughout fiscal 1995, the Company invested the
funds made available by its March 1994 initial public offering.
The Company's effective tax rate was 39% in fiscal 1995 compared with 40% in
fiscal 1994. The decrease in effective tax rate was primarily the result of
apportionment adjustments caused by sales increases in states with lower tax
rates.
Liquidity and Capital Resources
For fiscal 1996, the Company funded operations with cash borrowed from the
Company's bank line of credit and cash generated from operations. The Company
generated cash from operations of $683,000 in fiscal 1996 compared with net cash
used in operations of $1.9 million in fiscal 1995. In the prior fiscal year,
operations were funded with the proceeds received from the Company's March 1994
initial public offering.
The increase in receivables was a result of the Company's customers taking
longer to pay, due principally to invoice accuracy issues resulting from the
implementation of the new information system. Subsequent to June 30, 1996, the
Company corrected the major invoicing issues and anticipates a reduction in the
average days outstanding back to its historical levels. Inventories increased a
net $762,000 in fiscal 1996 primarily due to 1) a $2.2 million increase in
inventory levels for the Company's inventory management accounts to accommodate
the volatility in customer demand requirements; 2) a one-time inventory buyout
in June 1996 of $450,000 from the previous supplier of a new inventory
management account; and 3) a partial offset of non-cash charges of $1.9 million
for obsolescence.
Accrued liabilities increased $1.9 million from June 30, 1995 primarily as a
result of a $240,000 reserve for replacement warranty contingencies incurred in
fiscal 1996; a $260,000 charge to close the Raleigh distribution center; a
$550,000 charge primarily as a result of employment matters and severance
packages; and a $360,000 obligation for inventory purchased in connection with
the implementation of a new inventory management program.
Purchases of property and equipment amounted to $1.6 million in fiscal 1996
compared with $3.8 million in fiscal 1995. Fiscal 1996 capital spending
consisted of $906,000 in computer hardware and software, $80,000 in office
furniture, fixtures and equipment, and $566,000 in warehouse equipment and
vehicles.
The Company has a $10.0 million unsecured revolving credit line for working
capital needs, maturing November 30, 1997. Advances are due on demand. Amounts
outstanding under this agreement bear interest at the LIBOR plus one and
eight-tenths percent. The credit line agreement contains financial covenants
including defined financial ratios and limitations as to indebtedness. The
amount outstanding as of June 30, 1996 was $811,000. During fiscal 1996, average
borrowings under the line of credit were approximately $910,000, and the
weighted average interest rate was 7.7%. The maximum amount outstanding under
the credit line was $2.6 million.
Management considers its cash needs to fund operations and capital requirements
for fiscal 1997 to be adequately covered by its operations and available
borrowing under the revolving credit line.
11
STATEMENTS OF INCOME ARDEN INDUSTRIAL PRODUCTS, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Sales (Note 7) $87,510 $86,330 $69,526
Cost of goods sold 62,325 59,350 46,609
------- ------- -------
Gross profit 25,185 26,980 22,917
Operating expenses 24,623 21,547 16,598
------- ------- -------
Operating income 562 5,433 6,319
Interest income (expense) 100 405 (220)
------- ------- -------
Income before income taxes 662 5,838 6,099
Federal and state income taxes (Note
5) 258 2,260 2,410
------- ------- -------
Net income $ 404 $ 3,578 $ 3,689
======= ======= =======
Net income per common share $ 0.06 $ 0.51 $ 0.62
======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 7,007 6,987 5,992
======= ======= =======
See Notes to Financial Statements.
12
ARDEN INDUSTRIAL PRODUCTS, INC. BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 544 $ 602
Receivables, less allowance for doubtful accounts of $326 and
$199, respectively (Note 7) 11,852 10,498
Inventories 22,655 21,893
Prepaid expenses 321 280
Deferred tax assets (Note 5) 2,150 1,345
------- -------
Total current assets 37,522 34,618
Property and Equipment, net (Note 2) 5,778 5,789
------- -------
$43,300 $40,407
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank line of credit (Note 3) $ 811 $ --
Accounts payable 7,275 7,504
Compensation 1,001 861
Warranty 610 370
Other accrued expenses 2,438 911
------- -------
Total current liabilities 12,135 9,646
------- -------
Commitments and Contingencies (Note 6)
Shareholders' Equity
Common stock, par value $0.01 per share; authorized 25,000
shares; issued 6,989 shares 70 70
Additional paid-in capital 16,138 16,138
Retained earnings 14,957 14,553
------- -------
31,165 30,761
------- -------
$43,300 $40,407
======= =======
</TABLE>
See Notes to Financial Statements.
13
STATEMENTS OF SHAREHOLDERS' EQUITY ARDEN INDUSTRIAL PRODUCTS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
COMMON STOCK ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 5,500 $55 $ -- $ 7,286 $ 7,341
Sale of common stock at $12
per share, net of offering
costs of $1,689 1,481 15 16,068 -- 16,083
Issuance of common stock
under the stock award
plan (Note 4) 3 -- 36 -- 36
Net income -- -- -- 3,689 3,689
----- --- ------ ------ ------
Balance, June 30, 1994 6,984 70 16,104 10,975 27,149
Issuance of common stock
under the stock award
plan (Note 4) 5 -- 34 -- 34
Net income -- -- -- 3,578 3,578
----- --- ------ ------ ------
Balance, June 30, 1995 6,989 70 16,138 14,553 30,761
Net income -- -- -- 404 404
----- --- ------ ------ ------
Balance, June 30, 1996 6,989 $70 $16,138 $14,957 $31,165
===== === ======= ======= =======
</TABLE>
See Notes to Financial Statements.
14
ARDEN INDUSTRIAL PRODUCTS, INC. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 404 $ 3,578 $ 3,689
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,563 1,115 655
Provision for doubtful accounts 126 (98) --
Provision for inventory obsolescence 1,877 1,100 650
Deferred income taxes (805) (385) 60
Changes in assets and liabilities:
Receivables (1,480) (1,695) (1,997)
Inventories (2,639) (7,466) (4,352)
Accounts payable (229) 1,664 975
Accrued liabilities and other 1,866 313 (174)
------- ------- -------
Net cash provided by (used in)
operating activities 683 (1,874) (494)
------- ------- -------
Cash Flows from Investing Activities
Purchases of property and equipment (1,552) (3,824) (1,990)
------- ------- -------
Cash Flows from Financing Activities
Net borrowings (payments) on revolving credit line 811 -- (7,831)
Sale of common stock -- -- 16,083
Principal payments on long-term borrowings -- -- (268)
Repayments from ESOP and officer-shareholders -- -- 599
------- ------- -------
Net cash provided by financing activities 811 -- 8,583
------- ------- -------
Net (decrease) increase in cash and cash
equivalents (58) (5,698) 6,099
Cash and Cash Equivalents
Beginning 602 6,300 201
------- ------- -------
Ending $ 544 $ 602 $ 6,300
======= ======= =======
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 71 $ -- $ 408
Income taxes 920 2,282 2,312
======= ======= =======
</TABLE>
See Notes to Financial Statements.
15
NOTES TO FINANCIAL STATEMENTS ARDEN INDUSTRIAL PRODUCTS, INC.
Note 1.
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Arden Industrial Products, Inc., which does business as
Arden Fasteners, wholesales industrial fasteners to manufacturers and
distributors throughout the United States and abroad. Export sales were
approximately 3, 6 and 5 percent of total sales in 1996, 1995 and 1994,
respectively. The Company grants credit to its customers on terms established on
an individual customer basis.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. The Company at times maintains
balances in excess of federally insured limits. The Company has not experienced
any losses on such accounts.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
based on the average cost method, which approximates the first-in, first-out
method. Inventories include a reserve for obsolescence of approximately
$2,002,000 and $1,328,000 at June 30, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
of property and equipment is computed using the straight-line method over lives
of 3 to 10 years for furniture and equipment, and 5 years for leasehold
improvements.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
WARRANTY: The Company provides its customers a limited replacement warranty for
a short period of time and accrues the estimated cost of the potential warranty
obligations at the time that their existence, and when amounts, are
determinable.
REVENUE RECOGNITION: The Company's revenues consist of the sale of products to
its customers. The Company recognizes sales and the related cost of goods sold
on the accrual basis of accounting at the time products are shipped and
ownership transfers.
NET INCOME PER COMMON SHARE: Net income per common share is computed based upon
the weighted average number of common and common equivalent shares outstanding
during the year. Fully diluted earnings per share are considered to be the same
as primary earnings per share, since the effect of certain potentially dilutive
securities is antidilutive.
STOCK-BASED COMPENSATION: The Company adopted FASB No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, on July 1, 1996. The Company has elected to continue
to measure compensation cost using the intrinsic value-based method for
employees (Note 4).
USE OF ESTIMATES: The preparation 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.
16
Note 2.
PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
Furniture and equipment $10,741 $ 9,233
Leasehold improvements 1,131 1,087
------- -------
11,872 10,320
Less accumulated
depreciation 6,094 4,531
------- -------
$ 5,778 $ 5,789
======= =======
</TABLE>
Note 3.
FINANCING AGREEMENT
BANK LINE OF CREDIT: The Company has an unsecured revolving credit line through
November 30, 1997, for working capital needs to a maximum commitment of
$10,000,000. Advances are due on demand. Amounts outstanding under this
agreement bear interest at LIBOR plus 1.8 percent. The credit line agreement
contains financial covenants, including defined financial ratios and limitations
as to indebtedness.
FAIR VALUE OF FINANCIAL INSTRUMENT: Due to the variable rate of interest, the
bank line-of-credit balance approximates fair market value at June 30, 1996.
Note 4.
EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN: The Company has a 401(k) retirement plan covering substantially
all of its employees. Under the plan's provisions, the employees may elect to
allocate a certain percentage of their compensation to the plan. Also, the
Company has the option to contribute funds to the plan on behalf of the
employees. The Company made contributions of approximately $270,000 and $263,000
in 1996 and 1995, respectively.
STOCK OPTION PLAN: On December 1, 1993, the Company established a stock option
plan pursuant to which options for up to 580,000 shares of common stock may be
granted to employees and directors. These options are granted at the direction
of the Board of Directors and include both incentive stock options and
non-statutory stock options. All incentive options must be granted at no less
than 100 percent of the fair market value of the stock on the date of the grant,
or 110 percent for employees owning more than 10 percent of the Company's common
stock. All non-statutory options must be granted at no less than 85 percent of
fair market value of the stock on the date of grant. The options expire at
varying dates not to exceed ten years from the grant date and are not
transferrable. Information with respect to the stock options is summarized as
follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
------ ------------
<S> <C> <C>
Granted 80,042 $ 12.00
------- -----------
Outstanding at
June 30, 1994 80,042 12.00
Granted 7,917 9.50-11.50
Canceled (4,500) 12.00
------- -----------
Outstanding at
June 30, 1995 83,459 9.50-12.00
Granted 210,000 4.88- 6.25
Canceled (19,500) 12.00
------- -----------
Outstanding at
June 30, 1996 273,959 $4.88-12.00
======= ===========
</TABLE>
Options to purchase 39,959 shares were exercisable at June 30, 1996.
STOCK AWARD PLAN: On December 1, 1993, the Company established a stock award
plan pursuant to which 20,000 shares of common stock may be awarded to employees
at the direction of the Board of Directors. The Company awarded 5,150 and 3,090
shares of common stock under this plan in 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company had an employee stock ownership plan
(ESOP) which owned 488,400 shares of the Company's common stock at
17
Notes To Financial Statements Arden Industrial Products, Inc.
Note 4. (continued)
June 30, 1995. In 1995, the Company began the process of terminating the ESOP
and distributing the assets to the participants. In May of 1996, the ESOP
distributed all plan assets. No contributions were made to the plan in 1996,
1995, and 1994.
DEFINED BENEFIT PENSION PLAN: The Company had a noncontributory, defined benefit
pension plan that covered substantially all employees. The plan was termianted
in 1995. The Company recognized pension expense of approximately $340,000 and
$385,000 in 1995 and 1994, respectively.
Note 5.
INCOME TAXES
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Currently payable income taxes:
Federal $893 $2,238 $1,998
State 170 407 352
Deferred income
taxes (805) (385) 60
---- ------ ------
$258 $2,260 $2,410
==== ====== ======
</TABLE>
The provision for income taxes differs from the amount obtained by applying the
U.S. federal income tax rate to pretax income due to the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected"
federal tax expense
at 34% $225 $1,985 $2,074
State income taxes,
net of federal
benefit 27 269 232
Other 6 6 104
---- ------ ------
$258 $2,260 $2,410
==== ====== ======
</TABLE>
The tax effects of the principal temporary differences are shown in the
following table (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
(liabilities):
Allowance for doubtful
accounts $ 124 $ 76
Inventory obsolescence
reserves 760 505
Additional inventory costs
for tax purposes 770 635
Warranty 232 140
Accrued expenses 374 119
Accelerated tax depreciation (110) (130)
------ ------
Net deferred tax assets $2,150 $1,345
====== ======
</TABLE>
No valuation allowance is necessary for deferred tax assets.
Note 6.
COMMITMENTS AND CONTINGENCIES
CONTINGENCIES: As a distributor, the Company may be subject to product liability
claims and may be a defendant in lawsuits from time to time arising out of the
normal course of business. The estimated costs resulting from any losses are
charged to operating expenses when it is probable a loss has been incurred and
the amount of the loss is determinable. It is the opinion of management that the
outcomes of any existing claims will not have a material adverse effect on the
financial position or results of operations of the Company.
LEASES: The Company leases office and warehouse facilities and equipment from
unrelated parties under noncancelable operating leases, expiring at various
dates through May 2001. Additionally, the Company leases warehouse and office
space for its St. Paul and Nashville distribution facilities from partnerships
controlled by certain shareholders, including the President of the Company. The
agreements for the St. Paul and
18
Note 6. (continued)
Nashville distribution facilities are under term leases, expiring in June 1999
and August 1999, respectively, with monthly payments of $39,000 plus taxes,
utilities, insurance and other operating costs.
Approximate future minimum payments, exclusive of other costs, required under
noncancelable operating leases at June 30, 1996, are (in thousands):
YEARS ENDING JUNE 30:
- -------------------------------
1997 $1,070
1998 965
1999 820
2000 305
2001 205
Rent expense incurred was (in thousands):
TOTAL
RENT AMOUNTS PAID TO
YEARS ENDED JUNE 30: EXPENSE RELATED PARTIES
- -----------------------------------------------------------------
1996 $1,367 $471
1995 1,219 471
1994 971 471
Note 7.
MAJOR CUSTOMER
Sales to a major customer were as follows (dollars in thousands):
SALES
YEARS ENDED JUNE 30: AMOUNT % TO TOTAL
--------------------------------------------------------
1996 $15,555 17.8%
1995 11,578 13.4
1994 6,297 9.1
Receivables at June 30, 1996 and 1995, include amounts due from this customer
totaling $2,800,000 and $2,120,000, respectively.
Note 8.
RELATED PARTY TRANSACTION
The Company contributed $129,000 in 1995 to The Arden Foundation, of which
certain officers of the Company are directors. The Arden Foundation was
established in February 1994 to provide funds to qualified organizations for
charitable, scientific and educational purposes.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Arden Industrial Products, Inc.
St. Paul, Minnesota
We have audited the accompanying balance sheets of ARDEN INDUSTRIAL PRODUCTS,
INC., D/B/A ARDEN FASTENERS, as of June 30, 1996 and 1995, and the related
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1996. 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 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 Arden Industrial Products, Inc.
as of June 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
July 29, 1996
19
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION ARDEN INDUSTRIAL PRODUCTS, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
FISCAL 1996 FISCAL 1995
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
- ----------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $19,916 $20,951 $25,223 $21,420 $19,967 $20,126 $23,185 $23,052
Gross profit 5,833 5,939 7,378 6,035 6,296 6,216 7,289 7,179
Net income (loss) (36) 20 226 194 891 688 1,084 915
Net income (loss)
per share $ (0.01) $ 0.00 $ 0.03 $ 0.03 $ 0.13 $ 0.10 $ 0.16 $ 0.13
</TABLE>
ARDEN COMMON STOCK
Arden's common stock trades on the Nasdaq National Market under the symbol
"AFAS". The following table sets forth, for the periods indicated, the range of
closing prices per share for the Company's stock.
FISCAL 1996 FISCAL 1995
HIGH LOW HIGH LOW
- ------------------------------------- ---------------
First Quarter $9.50 $7.00 $13.13 $9.38
Second Quarter 8.25 4.88 10.25 6.25
Third Quarter 5.25 4.00 8.25 5.75
Fourth Quarter 5.75 4.50 9.00 6.00
As of August 31, 1996, the Company had 514 shareholders of record.
Arden has never paid cash dividends on its common stock. The Board of Directors
presently intends to retain all earnings for use in the Company's business and
does not anticipate paying cash dividends in the foreseeable future.
20
Corporate Information
Board of Directors
Larry A. Carlson
Chairman, President and CEO,
Arden Industrial Products, Inc.
Brian P. Carlson
Private Investor,
St. Paul, Minnesota
Ann Rockler Jackson
President and CEO,
Rockler Companies, Inc.
Medina, Minnesota
David D. Koentopf
Chairman, Everest Medical Corp.
Minneapolis, Minnesota
Joseph C. Levesque
Chairman, President and CEO,
Aetrium Incorporated,
St. Paul, Minnesota
Officers
Larry A. Carlson
Chairman, President and CEO
Kim B. Erickson
Vice President, Finance and CFO
Investor Information
Corporate Office
Arden Industrial Products, Inc.
560 Oak Grove Parkway
Vadnais Heights, Minn. 55127
(612) 490-6800
Annual Meeting
You are invited to attend our annual meeting
of shareholders which will be held
at 3:30 P.M., on Monday, October 28, 1996,
at Arden's St. Paul distribution center,
200 South Owasso Blvd. East
St. Paul, Minn. 55117
Investor Information
Shareholders and prospective investors are
welcome to write or call Arden with questions
or requests for information.
The Company's Form 10-K annual report to
the Securities and Exchange Commission may
be obtained by writing the Company.
Transfer Agent and Registrar
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
P.O. Box 738
South St. Paul, Minn. 55075
Securities Counsel
Parsinen Bowman Kaplan & Levy P.A.
100 South Fifth St., Suite 1100
Minneapolis, Minn. 55402
Independent Accountants
McGladrey & Pullen, LLP
800 Marquette Avenue, Suite 1300
Minneapolis, Minn. 55402
Investor Relations Counsel
Swenson/Falker Associates, Inc.
1111 TCF Tower
121 South Eighth Street
Minneapolis, Minn. 55402
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent auditors for Arden Industrial Products, Inc. (the Company), we
hereby consent to the incorporation of our report dated July 29, 1996, included
in this Form 10-K in the Company's previously filed Registration Statements on
Form S-8, No. 33-75606 and 33-88026.
/s/ McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
September 26, 1996
