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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 1, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 1-7807
CHAMPION PARTS, INC.
(Exact name of Registrant as specified in its charter)
Illinois 36-2088911
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2525 22nd Street, Oak Brook, Illinois 60521
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 708/573-6600
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares, $.10 Par Value
(Title of Class)
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 ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 10, 1995, 3,655,266 Common Shares were outstanding
and the aggregate market value of the Common Shares held by
non-affiliates of the Registrant (based on the closing price as
reported on NASDAQ) was approximately $6,002,000. For
information as to persons considered to be affiliates for
purposes of this calculation, see "Item 5. Market for the
Company's Common Shares and Related Shareholder Matters".
PART I
Item 1. BUSINESS
Unless the context indicates otherwise, the term "Company" as
used herein means Champion Parts, Inc. and its subsidiaries.
PRODUCTS
The Company remanufactures a broad line of functional
replacement parts for automobiles, trucks and farm and
industrial equipment.
The Company's general product line includes carburetors, water
pumps, clutches, starters, alternators, generators, starter
drives and solenoids, and constant velocity drive shaft
assemblies for substantially all makes and models of domestic
and foreign automobiles and trucks, and many makes and models of
farm and industrial equipment. In selected markets, the Company
sells disc brake calipers, master cylinders, power steering
pumps, windshield wiper motors, and distributors. The Company's
product line also includes diesel fuel injection systems
primarily for light duty vehicles and for some domestic
automobiles and heavy duty trucks.
During the fiscal years ended January 1, 1995, January 2, 1994
and January 3, 1993, the Company's sales of parts for
automobiles (including light duty trucks) accounted for
approximately 92%, 89% and 87%, respectively, of the Company's
net sales, and sales of parts for heavy duty trucks and farm
equipment accounted for approximately 8%, 11% and 13%,
respectively, of such net sales.
MARKETING AND DISTRIBUTION
The Company's products are marketed throughout the continental
United States and in Canada. The Company sells to automotive
warehouse distributors, which in turn sell to jobber stores and
through them to service stations, automobile repair shops and
individual motorists. In addition, the Company sells to
aftermarket retail chains who distribute products through their
stores. Other customers of the Company include manufacturers of
automobiles, trucks and farm equipment, which purchase the
Company's products for resale through their dealers, independent
fleet specialists who distribute replacement parts for these
vehicles and large volume automotive retailers. Of the
Company's net sales in the year ended January 1, 1995,
approximately 54% were to automotive warehouse distributors;
approximately 13% were to manufacturers of automobiles, trucks
and farm equipment and heavy duty fleet specialists; and
approximately 33% were to retailers and other customers.
The Company exhibits its products at trade shows and advertises
in nationally and regionally distributed automotive trade
magazines. The Company also prepares and publishes catalogs of
its products, including a guide with information as to the
various vehicle models for which the Company's products may be
used and a pictorial product identification guide to assist
customers in the return of used units. The Company's
salespersons and sales agents call on selected customers of
warehouse distributors which carry the Company's products to
familiarize these customers with the Company's products and the
applications of its products to varied automotive equipment.
During the fiscal year ended January 1, 1995, the three largest
customers of the Company accounted for approximately 20%
(Northern Automotive Corporation), 15% (APS, Inc.) and 13%
(Genuine Parts Company), respectively, of net sales, and no
other customer accounted for more than 6% of net sales.
Most of the Company's products are distributed from each of the
Company's plants. Heavy duty products are stocked at and
delivered from the same facilities as automotive products.
The Company makes available to its customers the MEMA
Transnet(TM) computerized order entry system which is administered
by the Motor Equipment Manufacturers Association. The MEMA
Transnet(TM) system enables a customer in any area of the United
States to place orders into the Company's central computer,
which transmits the orders to the Company's plant servicing that
customer's geographic area.
As of February 1, 1995, sales were made by a total of 27 sales
personnel. Of these, 23 were salaried salespersons, and 4 were
employed by the Company as support staff. The Company also
utilizes 11 sales agencies to supplement the direct sales force.
Approximately 45% of the Company's net sales during the fiscal
year ended January 1, 1995 were under trade names of the
Company, and the balance was sold under private labels of
certain customers such as vehicle manufacturers, warehouse
distributor groups and retailers.
The Company does not consider its business to be highly
seasonal. Typically, fourth quarter sales are lower than those
in prior quarters due to customer ordering patterns.
MATERIALS
In its remanufacturing operations, the Company obtains used
units, commonly known as "cores". A majority of the units
remanufactured by the Company are purchased back from customers
as trade-ins, which are encouraged by the Company in the sale of
remanufactured units.
The price of a finished product is comprised of a separately
invoiced amount for the core included in the product ("core
value") and an amount for remanufacturing. Upon receipt of a
core as a trade-in, credit is given to the customer for the then
current core value of the part returned. The Company limits
trade-ins to cores for units included in its sales catalogs and
in rebuildable condition, and credit for cores is allowed only
against purchases by a customer of similar remanufactured
products within a specified time period. A customer's total
allowable credit for core trade-ins is further limited by the
dollar volume of the customer's purchases of similar products
within such time period. In addition to allowing core returns,
the Company permits warranty and stock adjustment returns
(generally referred to as "product returns") pursuant to
established policies. The Company's core return policies are
consistent with industry practice, whereby remanufacturers
accept product returns from current customers regardless of
whether the remanufacturer actually sold the product. The
Company has no obligation to accept product returns from
customers that no longer purchase from the Company.
Other materials and component parts used in remanufacturing,
and some cores, are purchased in the open market. When cores
are not available in sufficient supply for late models of
automobiles, trucks and farm equipment or for foreign model
automobiles, new units sometimes are purchased and sold as
remanufactured units. To market a full line of products, the
Company also purchases certain remanufactured and new automotive
parts which it does not produce.
PATENTS, TRADEMARKS, ETC.
The Company has no material patents, trademarks, licenses,
franchises or concessions.
BACKLOG
The Company did not have a significant order backlog at any
time during the fiscal years 1993 or 1994.
COMPETITION
The Company believes it is one of the largest remanufacturers
of functional automotive replacement parts in the United States,
although reliable information indicating its comparative
position in the industry is not available. Certain of the
Company's competitors are divisions or subsidiaries of
organizations also engaged in other businesses which have
substantially greater financial resources than the Company. The
remanufactured automotive parts industry is highly competitive
as the Company competes with a number of other companies
(including certain original equipment manufacturers) which sell
remanufactured automotive parts. The Company competes with
several large regional remanufacturers and with remanufacturers
which are franchised by certain original equipment manufacturers
to remanufacture their products for regional distribution. The
Company also competes with numerous remanufacturers which serve
comparatively local areas. In addition, sales of remanufactured
parts compete with sales of similar new replacement parts.
Manufacturers of kits used by mechanics to rebuild carburetors
may also be deemed to be competitors of the Company.
The Company competes in a number of ways, including price,
quality, product performance, prompt order fill, service and
warranties. The Company believes its ability to offer and
distribute a full line of products on a national level has been
an important factor in enabling the Company to compete
effectively.
ENGINEERING
The Engineering Department participates in product planning,
product line structuring, cataloging and engineering of the
Company's products and in developing manufacturing processes.
The primary activities of the Department are improving the
quality of existing products, formulating specifications and
procedures for adapting particular remanufactured products for
use on makes and models of vehicles in addition to those for
which originally designed, converting cores from earlier makes
and models for use on later makes and models and developing
specifications, supplies and procedures for remanufacturing
additional products. The Department also conducts periodic
quality audits of the Company's plants under its quality
improvement program to test product quality and compliance with
specifications.
The Company believes such activities improve the Company's
ability to serve the needs of its customers. The Department
also designs and builds new tools, machines and testing
equipment for use in all the Company's plants, and develops
specifications for certain components manufactured by the
Company for use in its remanufacturing operations. The
Department designs and tests new methods of reassembling
components and cleaning parts and cores. During the fiscal
years 1994, 1993 and 1992, the Company expended approximately
$944,000, $940,000 and $1,224,000, respectively, in these
engineering activities.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local
environmental laws and regulations incidental to its business.
The Company continues to modify, on an ongoing basis, processes
that may have an environmental impact. Management believes that
the effects of compliance with environmental laws that have been
enacted or adopted will not have a material effect on capital
expenditures, earnings or competitive position.
EMPLOYEES
As of January 31, 1995, the Company employed approximately
1,470 persons, including 205 salaried employees at corporate
headquarters and plant locations; and approximately 1,265
production, warehouse and maintenance employees and truck
drivers, 720 of whom were subject to union collective bargaining
agreements. In addition, the Company utilizes temporary workers
provided by employment agencies.
The Collective Bargaining Agreement between the Company and the
United Auto Workers at the Company's Hope, Arkansas facility
expired on April 26, 1991. At the expiration of the contract,
the Company implemented its final offer with respect to workers
at the facility. The union went on strike effective September
4, 1991. Since the commencement of the strike, the plant has
been operating with employees who opted to continue working, as
well as with permanent replacements. There have been no
significant interruptions in production as a result of the
strike, and management anticipates no significant interruptions
in the future as a result of the strike.
The Collective Bargaining Agreement between the Company and the
International Brotherhood of Electrical Workers at the Company's
Pennsylvania facilities was renewed for a three year term
beginning September 1, 1993.
RECENT DEVELOPMENTS
On March 23, 1995, the Company entered into a Preferred Stock
Purchase Agreement (the "Agreement") with RGP Holding, Inc.
("RGP"), an affiliate of Mr. Raymond G. Perelman, a director,
the Chairman of the Board of Directors and the beneficial owner
of 18.1% of the outstanding Common Shares of the Company,
pursuant to which Agreement RGP agreed, subject to the terms and
conditions of the agreement, to purchase 1,666,667 shares of
the Company's newly authorized Series A Redeemable Cumulative Convertible
Voting 9% Preferred Shares (the "Preferred Shares") at a purchase price of
$3.00 per share, or an aggregate purchase price of $5,000,001, subject to
the terms and conditions of the agreement.
On April 17, 1995 RGP notified the Company that it had
determined, not to consummate the purchase. RGP stated that the Company
failed to satisfy certain conditions for closing.
The Company's Current Report on Form 8-K filed March 23, 1995,
which form describes the proposed purchase, is incorporated
herein by reference.
Item 2. PROPERTIES
The Company's corporate headquarters are located at 2525 22nd
Street, Oak Brook, Illinois, a one-story building which has
approximately 91,500 square feet of space, and is leased under a
sublease which expires in 1996. The facility houses the
Company's corporate office functions, including administration,
accounting, data processing, marketing, and limited engineering
and product development. Approximately one-third of the
facility is used for office space and the remainder is used for
storage and a limited distribution facility.
The following table sets forth certain information with respect
to each of the Company's remanufacturing, warehousing and
service facilities other than the corporate headquarters:
Warehouse Remanufacturing
Area Area
Location (sq. ft.) (sq. ft.)
OWNED:
Fresno, California 50,000 110,000
Lock Haven, Pennsylvania --- 50,000
Beech Creek, Pennsylvania 40,000 160,000
HELD UNDER INDUSTRIAL
REVENUE FINANCING ARRANGEMENTS:
Lock Haven, Pennsylvania --- 55,000
Hope, Arkansas 55,000 221,000
LEASED:
Maple, Ontario,
Canada 30,000 16,000
Hope, Arkansas 35,000 ---
The Company's plants are well maintained and are in good
condition and repair. A substantial portion of the machinery
and equipment has been designed by the Company for its
particular purposes and, in many instances, has been built by
it.
In connection with the Company's plant consolidation plan
announced in March, 1994, the facilities in Lock Haven,
Pennsylvania are currently idle. It is the Company's present
intention to dispose of these properties.
Item 3. LEGAL PROCEEDINGS
Spectron/Galaxy Site
The Company was notified in 1989 by the United States
Environmental Protection Agency ("EPA") that it was a
"potentially responsible party" ("PRP") with respect to the
removal of hazardous substances from the Spectron, Inc. site in
Elkton, Maryland (the "Spectron Site"). The Company has
admitted to sending 93,868 gallons of liquid substances to the
Spectron Site.
A PRP Group known as the Spectron Steering Committee ("SSC")
was formed and in August, 1989, an Administrative Order by
Consent ("Phase I Order"), authorizing the SSC to conduct the
surface removal, and a Consent Agreement under which the PRPs
became obligated to reimburse the EPA for its past costs in
connection with the site, were entered into by the EPA and
approximately ten PRPs, including several major industrial
corporations.
The Company has been informed that the costs incurred to date
with respect to the removal phase of the Spectron Site are
approximately $8.0 to $8.5 million, but that although the
removal project has been completed, there has not yet been a
final accounting for that phase of the activity because the EPA
has not yet demanded payment of its past or oversight costs.
The Company entered into an agreement with the Company's waste
transporter, which selected the Spectron Site, pursuant to which
the transporter paid one-half of the cost attributed to surface
removal for the Company's waste sent to the Spectron Site. The
Company has paid approximately $17,000 for its portion of the
removal.
In 1990, the Company received notices that the EPA has
determined that ground water seepages from the Spectron Site
pose an imminent endangerment to nearby residents and the
environment. A number of additional PRPs who had not been
notified of potential liability for the surface removal were
contacted by the EPA in preparation for the second phase of
activity at the site ("Phase II"). Most of the newly noticed
parties had used the site during its earlier years of operation,
prior to 1979, when it was known as Galaxy Chemicals.
The Company has been informed by the waste transporter that the
Spectron Contributors reached agreement with the Galaxy
Contributors with respect to Phase II to the effect that the
Galaxy Contributors will contribute approximately $3.5 million
to Phase II, and that up to an additional approximate $4
million of clean-up costs will be allocated between the two
groups on a formula basis based on gallons contributed. The
Company is informed that the Galaxy Contributors have spent
approximately $1 million to date and are focusing efforts on a
plan to contain seepage from the site into an adjacent creek.
The Company's waste transporter has informed the Company that
preliminary estimates of the cost of the containment plan range
up to $15 million, of which the Galaxy Contributors would pay $2.5
million (the unpaid balance of the $3.5 million), with the
remainder of the cost expected to be shared by the Galaxy
Contributors and the Spectron Contributors on a formula based on
gallons contributed. Under such an arrangement the Company's
liability is estimated to be approximately $35,000.
The Company is informed that the Galaxy Contributors
contributed approximately 10,200,000 gallons and the Spectron
Contributors contributed approximately 19,200,000 gallons to the
site. The Company is not a Galaxy Contributor.
The Company cannot estimate at this time the cost of any
further cleanup activities for the site nor its portion of any
liability, if any. The Company is not an active participant in
the proceedings.
Fort Smith, Arkansas
Until 1984 the Company operated a leased facility in Fort
Smith, Arkansas. The lessor was a trust for the benefit of,
among others, members of the Gross family, including two present
directors of the Company. In 1989, the Company, along with the
owner of the property, retained a consultant to perform a
limited environmental investigation. The preliminary
investigation revealed the possibility of soil contamination,
consisting of petroleum hydrocarbons and heavy metals. The
results of this limited investigation warrant further
investigation. The Company may have liability for environmental
conditions at the property. Until a more extensive
investigation is conducted, the Company cannot evaluate the
extent of the contamination or the appropriate remedial
response, if any, or the ultimate cost of responding to the
contamination.
Double Eagle Site, Oklahoma City
In 1991, the Company received a 104(e) information request from
the EPA under CERCLA with respect to the Double Eagle site to
which it responded. Information available to the Company
indicates that the facility recycled used oil into finished
lubricating oil, and began operating as early as 1929. The
Double Eagle site has been identified as a wetland, and the EPA
has placed the site on the National Priorities List.
The Company has not yet received any general or special notice
letters indicating that the EPA views it as a potentially
responsible party at this site. In 1992 conversations with the
Assistant Regional Counsel of the EPA, it was indicated that the
EPA did not view the Company as a major contributor of waste to
the site and that most of the contamination at the site had
occurred prior to 1985. The Company's records indicate that it
began shipping waste mineral spirits and blend oil to Double
Eagle in 1985 and continued shipments until 1988.
At this time no formal proceedings have been initiated by the
EPA against the Company, and the Company has not paid, nor has
it been billed for, any amount. The Company cannot
estimate the liability, if any, which might result with respect
to the Double Eagle Site, and believes that it may qualify for
treatment as a de minimis party.
City of Industry, California
In June, 1992, the Company was notified that contamination was
discovered in soil at a site at 825 Lawson Street, City of
Industry, California at which the Company conducted operations
from about 1969 to 1981. Solvents of the type used by the
Company in its operations had impacted the soil and shallow
groundwater at the site. These same solvents are found in the
soil and groundwater at numerous other sites in the City of
Industry and surrounding Puente Valley. To date, the Company's
response to the matter has been one of cooperation with the
authorities and other potentially responsible parties.
The potentially responsible parties with respect to the 825
Lawson Street property are the Company, the current landowner,
another prior operator at the site, and a prior landowner. The
Company, the other prior operator and the prior landowner have
conducted a subsurface investigation of the site at the request
of the California Regional Water Quality Control Board (the
"Water Board"), a state agency to which the EPA has delegated
CERCLA enforcement authority for any soil contamination at this
site. The site assessment, completed in July, 1994, revealed
volatile organic compounds in the soil and shallow groundwater
beneath the Lawson Street property. The Site Assessment Report
has been submitted to the Water Board.
The Water Board has not yet responded to the Site Assessment
Report, but the Company believes that the Water Board will
require cleanup of the property. It is too early to predict the
cleanup methodology to be required by the Water Board, or the
cost of the cleanup. The Company has interviewed consultants
who have proposed cleanup approaches, however, which would cost
in the range of $500,000 to $750,000. Under the present Cost
Sharing Agreement with the other two parties who funded the Site
Assessment Report, the Company would be responsible for paying
one-third of the cost of the cleanup of the Lawson Street
property. The Company and the other parties to this Agreement
are also considering pursuit of the current property owner for
its share of these costs.
On a related matter, in April, 1993, the Company was named by
the EPA as one of 57 potentially responsible parties from whom
the EPA would solicit an offer to investigate and clean up
groundwater contamination in the Puente Valley operable unit of
the San Gabriel Valley, where the City of Industry is located.
The other three 825 Lawson parties referred to above also
received this "special notice" letter. The Company, the other
prior operator and the prior land owner have joined the Puente
Valley Steering Committee ("PVSC"), which includes approximately
43 of the special notice recipients. The group's members
include several large industrial corporations.
On September 30, 1993, this group of potentially responsible
parties entered into an administrative Consent Order (the
"Consent Decree") with EPA, pursuant to which the participants
would perform a remedial investigation and feasibility study
(RI/FS) for the Puente Valley operable unit. The current
estimates for the total cost of the RI/FS range from $2.8
million to $4.2 million. The participants also executed an
allocation agreement covering the payments required by the
Consent Decree, under which the 825 Lawson Street property was
assigned approximately 3.75 percent of the cost. The Company
has agreed to pay one-third of this amount. Assuming the cost
to be $2.8 million, the Company's liability would be
approximately $34,700. The Company has already paid
approximately $15,000 of this amount.
The cost of any remedial groundwater action, if any, in the
Puente Valley is unknown at this time, and the participants
have not begun to negotiate an allocation to pay for any such
cost. If such work was required, it would not begin until the
RI/FS is finished, and the remediation would likely take several
years to complete.
Beech Creek, Pennsylvania TCE Contamination
In May, 1991 the Pennsylvania Department of Environmental
Resources (PADER) notified the Company that there was evidence
of trichloroethylene and trichloroethane in the soil, and
possibly the groundwater under the Company's Beech Creek
facility. PADER requested that the Company conduct an
investigation to determine the source and extent of the
contamination, and perform any required cleanup.
The Company retained a qualified environmental consultant to
prepare a site investigation plan. In June of 1992, PADER
approved the investigation plan. The plan included extensive
soil testing and ground water monitoring. The consultant has
now completed the investigation and reported the findings to
PADER. Cleanup has now commenced at the Beech Creek plant.
Cleanup consists of the venting of volatile organic gases from
soil, and the pumping and treating of groundwater. While it is
too early to predict the total cost of the remediation, the
Company's consultant has predicted cleanup costs will be
approximately $90,000 during 1995, and approximately another
$6,000 per month of operation thereafter. While its prediction
is preliminary and tentative, the consultant anticipates that
the cleanup system will need to operate for approximately 18 to
24 months.
Insurance Coverage Litigation
The Company has filed a complaint in Illinois State Court, in
DuPage County, against its insurance carriers for a declaration
that the insurance carriers are liable for all the Company's
defense, investigation and cleanup costs at the Beech Creek and
City of Industry sites.
The Company has reached a cost sharing agreement with certain
carriers regarding payment of past defense costs through
January, 1995 and certain future defense costs through November,
1995 with respect to the Beech Creek and City of Industry sites.
The payment for past defense costs is expected to be
approximately $300,000. The Company has agreed to temporarily
stay future litigation against the insurers on indemnification
costs pending additional developments at the sites.
Summary
Although the ultimate outcome is not determinable, management
believes that the resolution of these matters will not have a
material impact on the Company's financial condition or
operating results.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
During the fourth quarter of the fiscal year ended January 1,
1995 the Company did not submit any matter to a vote of
shareholders, through the solicitation of proxies or otherwise.
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Company's Common Shares are traded on The NASDAQ Stock
Market under the symbol "CREB". As of April 11, 1995, there
were 830 holders of record of the Company's Common Shares. This
number does not include beneficial owners of Common Shares whose
shares are held in the name of banks, brokers, nominees or other
fiduciaries.
The information appearing in the following table on the range
of high and low trade prices for the Company's Common Shares was
obtained from NASDAQ quotations in the NASD's Monthly
Statistical Reports.
Fiscal Fiscal
Year Ended Year Ended
January 1, 1995 January 2, 1994
Low High Low High
Quarter Ended Price Price Price Price
March 31 3-3/4 4-5/8 2-7/8 3-7/8
June 30 2-7/8 4-1/2 3-1/4 6-5/8
September 30 4 5 4-7/8 7-1/4
December 31 3 4-5/8 4-1/8 6-5/8
Under the Company's amended and restated credit agreement, the
Company is not permitted to pay dividends.
Only for purposes of the calculation of aggregate market value
of the Common Shares held by non-affiliates of the Company as
set forth on the cover page of this report, the Common Shares
held by Echlin Inc., RGP Holding, Inc., the Company's Employee
Stock Ownership Plan and Profit Sharing and Thrift Plan, and
shares held by members of the families of the children of
Elizabeth Gross, the mother of two of the Company's directors,
were included in the shares held by affiliates. Certain of such
persons and entities may not be affiliates.
Item 6.
Selected Financial Data (Note 1)
(Reported in thousands, except per share data)
1994 1993 1992 1991 1990
NET SALES $95,337 $100,040 $96,743 $111,741 $122,288
COSTS AND EXPENSES:
Operating Costs (Note 2) 99,050 95,769 103,923 108,501 115,697
Interest - net 2,423 2,282 2,248 3,397 4,617
------- ------ ------- ------- -------
101,473 98,051 106,171 111,898 120,314
------- ------ ------- ------- -------
EARNINGS (LOSS) BEFORE INCOME
TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (6,136) 1,989 (9,428) (157) 1,974
INCOME TAXES (BENEFIT) (297) 176 (1,644) 77 849
------- ------ ------- ------- -------
EARNINGS (LOSS) BEFORE EXTRA-
ORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (5,839) 1,813 (7,784) (234) 1,125
EXTRAORDINARY ITEM (net of
income taxes) (Note 4) (419)
------- ------ ------- ------- -------
NET EARNINGS (LOSS) $ (5,839) $ 1,813 $(7,784) $ (653) $ 1,125
======= ====== ======= ======= =======
AVERAGE COMMON SHARES OUT-
STANDING AND COMMON SHARE
EQUIVALENTS 3,655 3,655 3,655 3,655 3,653
EARNINGS (LOSS) PER COMMON
SHARE:
Primary and fully diluted:
Earnings (loss) before
extraordinary item $ (1.60) $ .50 $ (2.13) $ ( .06) $ .31
Extraordinary item,
net of income taxes ( .12)
------- ------ ------ ------- -------
NET EARNINGS (LOSS) $ (1.60) $ .50 $ (2.13) $ ( .18) $ .31
======= ====== ====== ======= =======
AT YEAR-END
Total assets (Note 3) $ 53,312 $ 56,147 $59,895 $ 68,902 $ 72,649
Long-term obligations
(Note 3) $ 1,451 $ 19,281 $24,802 $ 29,332 $ 26,889
Note 1: Results for 1992 reflect the reclassification of a
foreign joint venture.
Note 2: Restructuring charges of $3,400,000 in 1994, $3,223,000
in 1992 and $1,034,000 in 1991, are included in operating costs.
Note 3: Total Assets and Long-Term Obligations in 1991 and 1990
have been restated. See Note 1 to the Company's Consolidated
Financial Statements. In 1994, long term obligations reflect
acceleration of amounts due on the bank credit agreement and
other maturities due to default of credit agreement. See Note 3
to the Company's Consolidated Financial Statements.
Note 4: In November, 1991, the Company redeemed $12,160,000 of
its subordinated debt resulting in an extra-ordinary charge,
net of income taxes, of $419,000 for unamortized discount and
bond issuance costs.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1994 Compared to 1993
Net sales for the year ended January 1, 1995 (referred to as
"1994") were $95.3 million or $4.7 million (4.7%) less than net
sales for the year ended January 2, 1994 (referred to as
"1993") of $100 million. In the fourth quarter of 1993, the
Company experienced a significant decrease in sales volume
compared with prior quarters. This lower volume continued
throughout 1994. The decreased sales resulted primarily from
lower sales to existing automotive and one heavy duty customers.
The Company's ability to maintain its current market position
is dependent upon meeting customer expectations and market
competition in product offering, price, quality and delivery.
The Company has initiated various programs in an effort to
improve its operating performance. There are no assurances the
Company's efforts will succeed.
The Company's carburetor sales volume in 1994 was higher than
that in 1993. Sales of the Company's automotive and heavy duty
electrical products (starters, alternators and generators) and
mechanical products (water pumps and clutches) were lower in
1994 than in 1993. The Company's sales of front wheel drive
constant velocity joints increased significantly during the
year, primarily as a result of volume from initial stocking
orders for new customers. However, in February 1995 one of the
Company's primary constant velocity joint customers informed the
Company that it would be switching to a competitor. The Company
is making efforts to replace this business with new customers.
The Company anticipates continued overall market volume growth
in the constant velocity joint product line as the number of
front wheel drive vehicles entering the prime repair age
increases. However, there can be no assurance the Company will
be able to replace the lost constant velocity joint business or
overall sales volume.
Product and core returns, reflected as reduction in net sales,
were 38% in 1994 and 40% in 1993.
Carburetors, which have a higher gross margin than the
Company's product line as a whole, continue to be a significant
part of the Company's sales and are expected to remain so for
several years. Since the mid-1980's, carburetors have been
installed in fewer new vehicles sold in the United States and
Canada due to the increased use of fuel injection systems.
However, the Company continues to sell replacement units for
older vehicles, many of which use carburetors. Net carburetor
sales were $23.9 million in 1994 versus $21.9 million in 1993.
Carburetor sales represented approximately 25% of net sales for
1994 compared to 22% in 1993. The increase in carburetor sales
in 1994 was due to the Company increasing its market share as
the number of competitors in the carburetor market decreased.
The Company expects that carburetor sales will decline in future
years. In addition, carburetor margins may be negatively
impacted in the future as customers seek to return product
during periods of declining demand. The Company has a customer
product return policy and has established inventory reserves to
help mitigate this effect.
Costs of products sold were 84.4% of net sales in 1994 compared
to 79.1% in 1993. 1994 results were significantly impacted by a
$2.2 million fourth quarter provision to revalue the Company's
inventory. Of this incremental provision, approximately $1
million related to an adjustment to the Company's constant
velocity joint inventory to reflect current estimated values.
Because of improved inventory management systems initiated in
the second half of the year, the Company was able to more
definitively evaluate this inventory in the fourth quarter. The
remainder of the inventory provision was recorded to reflect a
change in the Company's management of component and core
inventories which should result in carrying lower quantities
than it historically has.
Overall margins were negatively impacted during the year due to
the lower sales volume and related lower absorption of
manufacturing overhead costs. Management believes 1994 results
do not fully reflect the benefits from the Company's plant
consolidation plan which it expects to fully complete in 1995.
The Company believes that its total plant overhead spending,
which trended downward in the fourth quarter, will continue to
reflect the plant consolidation savings in future quarters.
Modestly favorable labor costs in the fourth quarter, attributed
to the efficiencies gained from the plant consolidation,
somewhat offset increases in material costs during the year
which resulted from procuring higher cost components to satisfy
demand for late model applications.
Also negatively impacting the Company's margins during the year
was a significant decrease in sales to a customer in the high
margin heavy duty product line. These losses were only
partially offset by an increase in carburetor and late model
sales.
Selling, distribution and administrative expenses decreased
$1.4 million (8.4%) to $15.2 million in 1994 from $16.6 million
in 1993. Lower distribution and selling costs resulting from
lower sales volume and reductions in discretionary spending were
the primary items affecting the decrease.
In the first quarter of 1994, the Company recorded a pretax
special charge of $3.4 million to reflect a plan to consolidate
manufacturing capacity. Of the total charge, $2.5 million
related to reserves for personnel and plant closure costs and
$0.9 million related to write-downs of property, plant and
equipment. The Company charged approximately $1.8 million to
reserves for actual personnel and plant closure related costs
during 1994. The Company expects to incur substantially all
remaining accrued costs in 1995.
Interest expense was $2.4 million in 1994 compared to $2.3
million in 1993. The increase reflected higher average
borrowings and increases in variable interest rates.
The Company's effective tax rate was a 5% benefit in 1994
versus a 9% provision in 1993. The Company was not able to
benefit from the 1994 losses due to limited tax carryback
availability. In 1993 the effective tax rate was lowered due to
utilization of net operating loss carryforwards and recognition
of deferred tax assets not previously recognized.
1993 Compared to 1992
Net sales for the year ended January 2, 1994 (referred to as
"1993") were $100 million or $3.3 million (3.4%) greater than
the year ended January 3, 1993 (referred to as "1992") net sales
of $96.7 million. The increase was due to higher sales volume
in the Company's higher priced carburetors and constant velocity
joint (CV) product lines and modest growth in automotive
electrical products (starters, alternators and generators).
These increases were partially offset by lower heavy duty sales
and continued competitive pricing pressures in the water pump
product line.
Product and core returns, reflected as reductions in net sales,
were 40% of sales in 1993 and 1992.
Net carburetor sales were $21.9 million in 1993 versus $19.5
million in 1992. Carburetor sales represented approximately 22%
of net sales for 1993, compared to 20% in 1992. The increase in
carburetor sales in 1993 was due to the Company increasing its
market share.
Costs of products sold were 79.1% of net sales in 1993 compared
to 84.8% in 1992. The decrease was due primarily to inventory
write downs in 1992, including provisions for excess and
obsolete inventory, and workers compensation expense, resulting
in $3.5 million of incremental cost over 1993. The Company has
improved procedures to set core values in 1993 as a means to
better control inventory value. The Company experienced a
modest increase in material costs in 1993 as a result of
procuring higher cost components for late model applications.
Selling, distribution and administrative expenses decreased
$2.1 million (11.2%) to $16.6 million in 1993 from $18.7 million
in 1992. The major factors contributing to the decrease were
lower payroll expense due to headcount reductions early in 1993,
lower variable selling and distribution expenses and a decrease
in administrative costs.
Interest expense was $2.3 million in 1993 and 1992. The
Company's effective tax rate was 9% in 1993 versus 17% in 1992.
The decrease was due to utilization of net operating loss
carryforwards and recognizing deferred tax assets not previously
recognized.
Factors Which May Affect Future Results
The Company expects the existing over-capacity in the
automotive aftermarket and consolidation within the distribution
channels to cause continued selling price pressure for the
foreseeable future. The present competitive environment is
causing change in traditional aftermarket distribution channels
resulting in retailers gaining additional market presence at the
expense of traditional wholesalers. In response, the Company
has diversified its customer base and currently serves all major
segments, including automotive warehouse distributors and
jobbers, original equipment manufacturers of automotive
equipment and large volume automotive retailers. The
anticipated decline in sales from the profitable carburetor
product line over the longer term and continued part number
proliferation, which requires shorter production runs, will
impact future results. The Company will seek to offset these
impacts through improvements in its manufacturing processes and cost
containment with a strong focus on capacity utilization.
The Company has three customers which accounted for an
aggregate of 48% of the Company's total sales in 1994. The
Company sells to various distribution locations within these
customers' groups and has recently been receiving increased
pressure to modify its pricing structure and provide additional
services. The loss of some or all of the sales to any one of
these three customers would have a material adverse impact on
the Company's results given the Company's current manufacturing
cost structure, recent operating results and financial
condition. In the first quarter of 1995, the Company continued
to experience soft sales primarily due to lower overall market
demand for automotive electrical products. In February 1995 one
of the Company's primary constant velocity joint customers
informed the Company that it would be changing suppliers. If
the Company cannot replace the lost sales volume, it could have
a material adverse impact on the Company.
While the Company has established reserves for potential
environmental liabilities that it believes to be adequate, there
can be no assurance that the reserves will be adequate to cover
actual costs incurred or that the Company will not incur
additional environmental liabilities in the future. See "Legal
Proceedings" for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital at January 1, 1995, was $5.6 million, down from
$27.8 million at the end of 1993. This decrease was primarily
attributable to the Company classifying outstanding loans under
its bank credit agreement and a long term capitalized lease
obligation as current due to the Company's default of its Bank
Credit Agreement. (See the following section on Debt for
further discussion.) In addition, a decrease in inventory and
increase in accounts payable and accrued expenses, offset by an
increase in accounts receivable, contributed to the overall
decrease.
Accounts receivable at the end of 1994 were $10.8 million, up
$3.8 million, or 53%, from the previous year-end balance of $7.0
million. An increase in accounts receivable days outstanding to
more normal levels at the end of 1994 as compared to 1993 and
slightly higher sales in the current year fourth quarter
accounted for the increase.
Inventory at the end of 1994 decreased to $26.9 million, from
$31.5 million at the end of the prior year. Consolidation of
finished goods inventory due to the plant consolidation and an
increase in reserves against inventory caused the decrease.
Cores represented approximately 52% of total inventory value at
January 1, 1995.
Accounts payable and interest and other accrued expenses
increased $2.8 million as a result of the Company extending
terms with its suppliers and due to remaining reserves related
to the Company's first quarter decision to consolidate
manufacturing capacity.
Debt
In March 1994, the Company amended its bank credit agreement
to extend its maturity until April 1, 1995; removed one of the
participating banks; reduced the commitment level to $23
million; reset certain prospective financial covenants in
anticipation of a 1994 special charge for a proposed plan to
realign the Company's manufacturing capacity; and allowed the
Company additional borrowing capability against accounts
receivable and inventories.
At January 1, 1995, the Company had available $18.1 million
under the Company's credit agreement of which $17.9 million was
borrowed.
The Company was not in compliance with certain financial
covenants of its bank credit agreement during the fourth quarter
and in subsequent months. The Company's current credit
agreement expired April 1, 1995. It had negotiated with
its lenders waivers for the noncompliance and an extension of
the credit agreement to July 1, 1995 conditioned upon the $5
million sale of Preferred Stock to RGP by April 17, 1995. (See
Part 1, Item 1, "Recent Developments" for a description of the
equity infusion transaction.) On April 17, 1995 RGP notified
the Company pursuant to and in accordance with the Preferred
Stock Purchase Agreement, that it would not consummate the sale,
which caused the Company to be in default of the credit
agreement. Discussions are underway with the Company's lending
banks to reach agreement on a credit facility which would allow
for continued funding of operations. Two of the three banks
party to the credit agreement had indicated to the Company that
they did not intend to extend long term financing to the
Company. There can be no assurances that the banks will agree
to a new facility.
The Company is also in default of a $1.1 million standby
letter of credit and a $1.5 million capitalized lease obligation
under cross default provisions.
Discussions with other financial institutions, including one of
the Company's current banks, are also underway to secure a new
long term facility through 1995. The discussions contemplated
the Preferred Stock sale. The Company is unable to predict
whether these institutions would enter into a credit facility in
light of the failure to close the Preferred Stock sale.
As a result, the Company has reflected outstanding amounts
under the credit agreement and the capitalized lease obligation
as current in its financial statements.
Without an extension of the current credit agreement or a
replacement facility, the Company would not have sufficient
funds to pay its debts should the lenders demand payment. The
Company's financial statements have been prepared on a going
concern basis and do not contain adjustments which may be
necessary should the Company be forced to liquidate assets or
take other actions to satisfy debt payments.
In the first quarter of 1992, Echlin Inc. exercised its limited
market value protection right received under the Stock Purchase
Agreement entered into when Echlin purchased 600,000 common
shares of the Company in 1987. Under the terms of this
agreement, the Company delivered to Echlin a promissory note for
$2.4 million, payable in quarterly installments of $0.2 million.
The note carries an interest rate of 1% above the prime rate.
The Company reduced its paid-in capital by $2.4 million as a result
of this transaction. In March 1992, the Company amended its revolving
credit agreement to permit the execution of the note and the issuance
of a $1.2 million letter of credit to partially secure the note. At
year end, the Company had a remaining balance of $0.4 million on the
note and $0.2 million outstanding on the letter of credit. The Company
has not paid the final installment of $200,000 due April 8, 1995.
Echlin has notified the Company that it is in default on the note.
The Company has guaranteed a loan secured by an Employee Stock
Ownership Plan trust to acquire shares of the Company's stock.
The Company intends to provide the funds to the trust needed to
satisfy principal and interest payments. The final principal
payment of $514,000 was made in April, 1995.
The Company has a direct guarantee of Canadian $500,000 of the
bank debt of a joint venture and is joint and several guarantor
of Canadian $1,500,000 with its venture partner. As part of the
1992 restructuring charge, the Company provided a reserve for a
contingent liability to the venture's bank. The venture was not
in default of its debt facility at January 1, 1995.
Cash Flow
The Company increased its debt, net of cash, by $0.7 million
in 1994. The Company continued to make scheduled payments of
$1.2 million on long term debt obligations. These payments and
the cash required to fund operations resulted in an increase in
the Company's borrowings under its bank credit facility of $2.7
million in 1994. The following summarizes significant items
affecting the change in total debt (amounts in thousands).
January 1, January 2,
1995 1994
Net income (loss), changes
in working capital, other $ (4,878) $ 3,325
Special Charge 3,400 ---
Depreciation and Amortization 1,587 1,793
Capital Expenditures (831) (916)
-------- --------
(Increase) Decrease in total debt,
net of cash $ (722) $ 4,202
======== ========
The Company has generally financed major capital additions
through medium and long-term borrowing, including the use of
industrial revenue bond financing. Working capital requirements
have generally been financed by internally generated funds and
bank borrowings. The Company had an interest rate swap
agreement which fixed the effective interest rate on $12,000,000
of borrowings at 8.3%. This agreement expired in October 1994.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data called for by
this item are listed in the accompanying table of contents for
consolidated financial statements and financial statement
schedule and are filed herewith.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
Report on Form 8-K dated October 28, 1993, reporting a change
in Certifying Accountant is hereby incorporated by reference.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors and Executive Officers of Registrant
Persons elected as directors of the Company hold office until
the next annual meeting of shareholders at which directors are
elected.
The by-laws of the Company provide that officers shall be
elected by the board of directors at its first meeting after
each annual meeting of shareholders, to hold office until their
successors have been elected and have qualified.
Principal Occupation Served as a
and Positions with Director
Name (Age) the Company Since
Thomas W. Blashill (35) Director, Executive Vice President, 1993
Secretary and Treasurer of the Company
Calvin A. Campbell, Jr. (60) President and Chief Executive Officer, 1993
Goodman Equipment Corporation,
Bedford Park, Illinois
John R. Gross (63) Owner, Chaney Auto Parts, Inc., 1966
Crest Hill, Illinois
Raymond F. Gross (56) Vice President, Erecta Shelters, Inc., 1968
Ft. Smith, Arkansas; consultant to
the Company
Gary S. Hopmayer (55) Director, Original American Scones, Inc., 1987
Chicago, Illinois
Barry L. Katz (43) President and General Counsel, 1993
RGP Holding, Inc.
Edward R. Kipling (63) Retired 1987
Raymond G. Perelman (77) Chairman of the Board of the Company; 1988
Chairman of the Board and Chief Executive
Officer, RGP Holding, Inc., Philadelphia,
Pennsylvania and General Refractories
Company, Bala Cynwyd, Pennsylvania
Donald G. Santucci (58) President and Chief Executive Officer of 1975
the Company
Roger L. Wilson (48) Vice President, Sales and Marketing
Mr. Blashill joined the Company in August, 1992 as Director of
Financial Operations. He has held the position of Executive
Vice President, Secretary and Treasurer since March 1993. He
was Vice President and Treasurer of Washington Steel Corporation
from 1991 to 1992. He was Director of Finance of Washington
Steel Corporation from 1988 to 1991.
Mr. Campbell has been President and Chief Executive Officer of
Goodman Equipment Corporation, a designer and manufacturer of
underground mining equipment, since 1971 and a designer and
manufacturer of blow molding machinery since 1979. He has been
Chairman of The Dratt-Campbell Company, a consulting firm, since
its founding in 1991. From 1985 to 1994 Mr. Campbell also
served as a director of Cyprus Amax Minerals Company, Inc.
("Cyprus"), a publicly held mineral resource company listed on
the New York Stock Exchange. Mr. Campbell was Chairman of
Cyprus from May 1991 until May 1992, and President and Chief
Executive Officer of Cyprus from February 1992 until May 1992.
Mr. Campbell is also a director of Eastman Chemical Company, a
publicly held company listed on the New York Stock Exchange, and
Mine Safety Appliances Company, Inc. listed on NASDAQ. Mr.
Campbell has informed the Company that he will not be a nominee
for reelection as a director at the 1995 Annual Meeting of
Shareholders.
Mr. John R. Gross is currently the owner of Chaney Auto Parts,
Inc., a retailer of auto parts. John R. Gross is the brother of
Raymond F. Gross.
Mr. Raymond F. Gross has been the Vice President of Erecta
Shelters Inc., a manufacturer and distributor of metal
buildings, since 1985. He has also been a consultant to the
Company since June, 1984. Prior to June, 1984 he was a Vice
President of the Company. Raymond F. Gross is the brother of
John R. Gross.
Mr. Hopmayer was President of Original American Scones, Inc., a
privately owned specialty baker, from 1987 to 1993. He is
currently a Director of Original American Scones, Inc. Prior to
that time he was President of Mega International, Inc. a
manufacturer and distributor of automotive electrical parts.
Mega International, Inc., founded by Mr. Hopmayer, was sold to
Echlin Inc. in October, 1986.
Mr. Katz has served as a director of the Company since December
1993. From December 16, 1992 to January 19, 1993 he held the
position of Senior Vice President of the Company. Since 1993
Mr. Katz has been President and General Counsel for RGP Holding,
Inc., and its operating subsidiaries, and was its Senior Vice
President and General Counsel since May 1992. From March 1990
to 1994, he served as Senior Vice President and General Counsel
for General Refractories Company, and since that time has been
its President.
Mr. Kipling was Vice President and General Manager of the Rayloc
Division of Genuine Parts Company, a remanufacturer of
automotive parts, for more than five years prior to January,
1987, and has since been retired.
Mr. Perelman has served as Chairman of the Board since December
16, 1992 and was President and Chief Executive Officer from
December 16, 1992 to January 19, 1993. He has been Chairman of
the Board of RGP Holding, Inc., a privately-held holding company
with subsidiaries operating in manufacturing businesses, since
May 1992. Since 1985, he was the Chairman of the Board and
Chief Executive Officer of General Refractories Company.
Mr. Donald G. Santucci was elected as the Company's President
and Chief Executive Officer in March 1993. He has been a
director of the Company since 1975. He has served as President
and CEO of DEK, Inc., a closely held manufacturer of engineered
plastic products that was founded by Mr. Santucci. Mr. Santucci
has also served as a consultant to American Hospital Supply, was
a member of the board of directors of Marmion Military Academy,
and recently completed a three-year directorship with the Fox
Valley Industrial Association.
Mr. Wilson joined the Company in September, 1993 as Vice
President of Sales and Marketing. Prior to joining the Company
he served as Vice President of Sales of Maremont Exhaust (owned
by Arvin Industries, Inc.) in 1992. He was Vice President of
Field Sales for Arvin Aftermarket in 1991. From 1987 to 1990 he
served in various management positions for Maremont Corporation
which was acquired by Arvin Industries, Inc. in 1987.
(b) Arrangements Concerning the Board of Directors
Except for directors who are officers of the Company, and except
as indicated below, each director received a fee of $10,000 for
service as a director during the Company's fiscal year ended
January 1, 1995. In addition, directors are reimbursed for
their reasonable travel expenses incurred in attending meetings
and in connection with Company business.
The Company has an indemnification agreement with each director
of the Company that provides that the Company shall indemnify
the director against certain claims that may be asserted against
him by reason of serving on the Board of Directors.
The Company and Raymond F. Gross, a director of the Company, are
parties to an agreement providing for his engagement as a
consultant to the Company for a period ending December 31, 1995.
The agreement provides for annual compensation of $10,000
through December 31, 1995 plus certain insurance and other
benefits. Mr. Gross received $5,000 in directors' fees in 1994.
Messrs. Hopmayer and Kipling serve as directors pursuant to a
Stock Purchase Agreement dated March 18, 1987 between the
Company and Echlin Inc. Under that Agreement, the Company
agreed to nominate not fewer than two persons designated by
Echlin Inc. for director, provided that if Echlin Inc. disposes
of Common Shares of the Company, the Company and Echlin Inc.
shall modify the number of persons designated by Echlin Inc. to
be nominated by the Company. See "Ownership of Voting
Securities" below for additional information concerning Echlin
Inc. and transactions between the Company and Echlin Inc.
Messrs. Calvin A. Campbell, Jr., John Gross, Raymond Gross, Gary
Hopmayer and Edward Kipling serve on a Special Committee of the
Board which was formed in January 1995 to, among other things,
evaluate an offer by Mr. Perelman to infuse equity into the
Company. For their services, they received $500 compensation
for each meeting of the Special Committee. There were eight
meetings held through April 17, 1995. In addition, Mr. Campbell
received $5,000 to serve as Chairman of the Committee.
Mr. Katz serves as a director at the request of Mr. Perelman;
and pursuant to an agreement between Mr. Perelman, RGP Holdings,
Inc. and the Company. (See Item 12, Note 2 regarding this
agreement.)
ITEM 11: EXECUTIVE COMPENSATION
(a) Executive Officer Compensation and Arrangements
Executive Compensation
The following table sets forth information with respect to all
cash compensation paid to the Company's chief executive officer
at the end of the Company's 1994 fiscal year, and the two other
executive officers of the Company, whose annual compensation in
the Company's 1994 fiscal year exceeded $100,000 for services
rendered in all capacities to the Company, during the fiscal
years indicated.
Annual Compensation
(a) (b) (c) (d) (e)
Name and Principal Position Year Salary Bonus Other Annual
Compensation (1)
# ($) ($) ($)
Donald G. Santucci 1994 $133,300 0 ---
President and Chief
Executive Officer (3) 1993 $115,000 $70,000 ---
1992 NA NA NA
Thomas W. Blashill 1994 $128,173 0 ---
Executive Vice President,
Secretary and Treasurer (4) 1993 $108,321 $50,000 ---
1992 NA NA NA
Roger L. Wilson 1994 $105,000 $10,500 ---
Vice President Sales
and Marketing (5) 1993 $ 22,430 0 ---
1992 NA NA NA
----- Long Term Compensation -----
-------- Awards -------- Payouts
(a) (b) (f) (g) (h) (i)
Restricted Securities All Other
Stock Underlying LTIP Compensa-
Name and Principal Position Year Award(s) Options/SAR's Payouts tion (2)
# ($) (#) ($) ($)
Donald G. Santucci 1994 0 0 0 $ 300
President and Chief
Executive Officer (3) 1993 0 0 0 0
1992 NA NA NA NA
Thomas W. Blashill 1994 0 0 0 $ 3,000
Executive Vice President,
Secretary and Treasurer (4) 1993 0 0 0 0
1992 NA NA NA NA
Roger L. Wilson 1994 0 0 0 0
Vice President Sales and
Marketing (5) 1993 0 0 0 0
1992 NA NA NA NA
(1) The amounts for Messrs. Santucci, Blashill and
Wilson are below threshold reporting requirements.
(2) The amounts reported are allocations under its Employee
Stock Ownership Plan.
(3) Mr. Santucci was elected President of the Company in March 1993.
(4) Mr. Blashill was elected Executive Vice President in March 1993.
(5) Mr. Wilson joined the Company in September 1993 as Vice
President, Sales & Marketing.
Messrs. Santucci, Blashill and Wilson have severance
compensation agreements with the Company that provide for
severance pay equal to six months salary following their
termination from the Company under certain circumstances
following a change in control of the Company.
The by-laws of the Company provide that officers shall be
elected annually by the board of directors at its first meeting
after each annual meeting of shareholders, to hold office until
their successors have been elected and have qualified.
The Company also has an indemnification agreement with each
officer of the Company that provides that the Company shall
indemnify the officer against certain claims which may be
asserted against him by reason of serving as a officer of the
Company.
Options Outstanding
As of January 1, 1995, the Company had options to purchase 4,500
Common Shares outstanding under its qualified and non-qualified
option plans. None of the Company's executive officers hold
options.
During the fiscal year ended January 1, 1995, the Company did
not grant any stock options.
Compensation Committee Interlocks and Insider Participation
On December 9, 1993 the Board elected Messrs. Perelman, Kipling
and Campbell as members of the Compensation Committee. None of
these members was an officer or employee of the Company, a
former officer of the Company, or a party to any relationship
requiring disclosure under Item 404 of SEC Regulation S-K during
1994, except for Mr. Perelman, who served as President and CEO
of the Company from December 16, 1992 to January 19, 1993 and is
presently Chairman of the Board and who entered into a Preferred
Stock Purchase Agreement with the Company (See Part I, Item 1,
"Recent Developments" for a description of the transaction.).
(b) Director Compensation Arrangements
Information regarding director compensation is set forth under
Item 10(b) above.
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following tabulation shows, as of April 17, 1995, (a) the
name, address and Common Share ownership for each person known
by the Company to be the beneficial owner of more than five
percent of the Company's outstanding Common Shares, (b) the
Common Share ownership of each director (c) the Common Share
ownership for each executive officer named in the compensation
table, and (3) the Common Share ownership for all directors and
executive officers as a group.
Number of Common
Shares Beneficially Percent of Common
Beneficial Owner Owned (1) Shares Outstanding
RGP Holding, Inc.
225 City Line Avenue
Bala Cynwyd, Pennsylvania 19004 661,600 (2) 18.1% (2)
Echlin Inc.
100 Double Beach Road
Branford, Connecticut 06405 600,000 (3) 16.4% (3)
Champion Parts, Inc.
Employee Stock Ownership Plan
c/o Champion Parts, Inc.
2525 22nd Street
Oak Brook, Illinois 60521 246,965 (4) 6.8% (4)
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401 197,700 (5) 5.4% (5)
Calvin A. Campbell, Jr.,
Director 1,000 *
John R. Gross,
Director (8) 110,212 3.0%
Raymond F. Gross,
Director (8) 29,164 *
Gary S. Hopmayer,
Director (3) ---- ----
Barry L. Katz,
Director (2) 5,000 *
Edward R. Kipling,
Director (3) 2,000 *
Raymond G. Perelman,
Director, Chairman of the Board 661,600 (2) 18.1% (2)
Donald G. Santucci,
Director, President and
Chief Executive Officer 5,747 (6) *
Thomas W. Blashill,
Director, Executive Vice President,
Secretary and Treasurer (7) 4,014 (6) *
Roger L. Wilson
Vice President, Sales & Marketing ---- *
All directors and executive officers
as a group (10 persons) (7) 821,237 22.5%
* Not greater than 1%.
___________
(1) Information with respect to beneficial ownership is based on
information furnished to the Company or contained in filings
made with the Securities and Exchange Commission.
(2) RGP Holding, Inc. is indirectly controlled by Mr. Perelman.
Pursuant to an agreement between the Company, Mr. Raymond G.
Perelman and RGP Holding, Inc. dated September 20, 1993 Mr.
Perelman and RGP granted to the proxy holders appointed by the
Board of Directors of the Company the proxy to vote all shares
beneficially owned by them, including shares held by any
affiliates (the "Perelman Shares"), for the election of certain
nominees. Mr. Perelman and RGP have also agreed, among other
things, not to solicit proxies in opposition to such nominees.
The Company and the Board have agreed that if shareholders of
the Company vote shares in person or by proxy for nominees other
than such nominees, the proxy holders appointed by the Company
will cumulate their votes in such manner as to attempt to elect
Mr. Katz prior to the election of Mr. Campbell, and Mr. Campbell
prior to the election of Mr. Blashill.
(3) All shares owned by Echlin Inc. ("Echlin") are subject to a
Stock Purchase Agreement dated March 18, 1987 between the
Company and Echlin. Under the Stock Purchase Agreement, Echlin
may vote its shares in its discretion. At the time the Company
entered into the Stock Purchase Agreement, the Company entered
into a Supply Agreement with Echlin whereby the Company agreed
to purchase certain automotive parts manufactured by Echlin as
required by the Company, provided that Echlin is able to meet
the Company's delivery requirements and competitive prices.
During the fiscal year ended January 1, 1995, the Company
purchased approximately $2.6 million of components used in the
remanufacture of automotive parts from Echlin. On March 9,
1992, Echlin notified the Company that it was exercising its
limited market protection rights under the Stock Purchase
Agreement. Accordingly, the Company issued a $2,400,000
promissory note to Echlin which has been and is to continue to
be paid to Echlin in quarterly installments of $200,000. The
note carries an interest rate of 1% above prime and one-half the
current outstanding balance is secured by a letter of credit.
See Part II, Item 7 for a discussion of the Company's default of
this note.
Messrs. Hopmayer and Kipling serve as directors pursuant to the
Stock Purchase Agreement.
(4) Shares held by this plan are voted by Messrs. Santucci,
Blashill and Mark Smetana, Director of Finance and Corporate
Controller, as trustees. Employees participating in the Stock
Ownership Plan are entitled to direct the trustees as to the
voting of shares allocated to their accounts. The other Stock
Ownership Plan shares will be voted in the same manner,
proportionately, as the allocated Stock Ownership Plan shares
for which voting instructions are received from employees. For
more information concerning the ownership and voting of shares
held by the Stock Ownership Plan and the trustees, see note (7)
below.
(5) According to a Schedule 13G filed with the Securities and
Exchange Commission on January 30, 1995, which reported
ownership of (1) 197,700 shares as to which the reporting entity
has sole power to dispose of or direct the disposition of and
(b) 92,600 shares as to which the reporting entity has sole
power to vote or direct the vote.
(6) Includes 122 and 1,014 shares allocated to Messrs.
Santucci's and Blashill's accounts, respectively, under the
Employee Stock Ownership Plan.
(7) Includes a total of 1,136 shares allocated to the accounts
of executive officers under the Employee Stock Ownership Plan
(the "Stock Ownership Plan"). Does not include 245,951 shares
allocated to the accounts of employees other than executive
officers. Each of the participants in the Stock Ownership Plan
(approximately 160 employees) is entitled to direct the trustees
as to the voting of shares allocated to his or her account.
(8) As of March 31, 1995 Elizabeth Gross, her children and
members of their immediate families beneficially owned 199,794
Common Shares, or approximately 5.5% of the Common Shares
outstanding. John R. Gross and Raymond F. Gross, children of
Elizabeth Gross, are directors of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item 13 is set forth above
under Part I, Item 1, "Recent Developments" and Part III, Item
12, Notes (2) and (3).
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Schedule and Exhibits:
(1. and 2.) The consolidated financial statements and schedule
listed in the accompanying table of contents for consolidated
financial statements are filed herewith.
(3.) The exhibits required by Item 601 of Regulation S-K and
filed herewith are listed in the exhibit index which follows the
consolidated financial statements and financial statement
schedule and immediately precedes the exhibits filed. Pursuant
to Regulation S-K, Item 601(b)(4)(iii), the Company has not
filed with Exhibit (4) any instrument with respect to long-term
debt (including individual bank lines of credit, mortgages and
instruments relating to industrial revenue bond financing) where
the total amount of securities authorized thereunder does not
exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis. The Company agrees to
furnish a copy of each such instrument to the Securities and
Exchange Commission on request.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K on January 17, 1995.
The Form 8-K reported a proposal by Mr. Raymond G. Perelman to
infuse equity into the Company.
The Company filed a Report on Form 8-K on February 21, 1995.
The Form 8-K reported a Letter of Intent signed between the
Company and Raymond G. Perelman.
The Company filed a Report on Form 8-K on March 23, 1995. The
Form 8-K reported a Preferred Stock Purchase Agreement between
the Company and RGP Holdings, Inc.
The Company filed a Report on Form 8-K on April 18, 1995. The
Form 8-K reported RGP Holdings, Inc.'s decision not to
consummate the Preferred Stock Purchase Agreement; the Company's
default of its bank credit agreement; and notification of its
auditors' going concern qualification on its 1994 financial
statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHAMPION PARTS, INC.
Date: April 21, 1995 By: /s/ Donald G. Santucci
Donald G. Santucci
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on March 31, 1995.
By: /s/ Donald G. Santucci By: /s/ Gary S. Hopmayer
Donald G. Santucci, Gary S. Hopmayer,
President and Director Director
By: /s/ Thomas W. Blashill By: /s/ Edward R. Kipling
Thomas W. Blashill, Edward R. Kipling
Executive Vice President, Director
Secretary and Treasurer
(Principal Financial and
Accounting Officer) and Director
By: /s/ Calvin A. Campbell, Jr. By: /s/ Raymond F. Gross
Calvin A. Campbell, Jr., Raymond F. Gross,
Director Director
By: /s/ Raymond G. Perelman By: /s/ John R. Gross
Raymond G. Perelman, Director John R. Gross, Director
By: /s/ Barry L. Katz
Barry L. Katz, Director
CHAMPION PARTS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Financial Statement
Schedule comprising Item 8 and Items 14(a)(1) and (2) for the Years Ended
January 1, 1995, January 2, 1994, and January 3, 1993, and Reports of
Independent Public Accountants.
CHAMPION PARTS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Public Accountants 32
Independent Auditors' Report 33
Consolidated Financial Statements (Item 14(a)(1)):
The following consolidated financial statements of
Champion Parts, Inc. and subsidiaries are included in
Part II, Item 8:
Consolidated balance sheets - January 1, 1995 and
January 2, 1994 34-35
Consolidated statements of operations - years ended
January 1, 1995, January 2, 1994 and January 3, 1993 36
Consolidated statements of stockholders' equity - years
ended January 1, 1995, January 2, 1994 and January 3, 1993 37
Consolidated statements of cash flows - years ended
January 1, 1995, January 2, 1994 and January 3, 1993 38
Notes to consolidated financial statements 39-53
Consolidated Financial Statement Schedule (Item 14(a)(2)):
Schedule VIII - Valuation and qualifying accounts 54
All other schedules are omitted because they are not applicable,
not required, or because the required information is included in
the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Champion Parts, Inc.
We have audited the accompanying consolidated balance sheets of
Champion Parts, Inc. (an Illinois corporation) and subsidiaries
as of January 1, 1995, and January 2, 1994, and the related
consolidated statements of operations, stockholders' equity, and
cash flows for the two years then ended. 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 consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of Champion Parts, Inc. and
subsidiaries as of January 1, 1995 and January 2, 1994, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule
listed in the Table of Contents of the consolidated financial
statements is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 3 to the financial statements, the Company is
in violation of certain covenants of its loan agreements that
give the lenders the right to accelerate the due date of their
loans, which raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to this matter are also described in Note 3. The
financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might
result should the Company be unable to continue as a going
concern.
/s/ Arthur Andersen LLP
February 21, 1995 (Except for Notes 3 and 16 which are dated
April 17, 1995.)
Chicago, Illinois
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Champion Parts, Inc.
Oak Brook, Illinois
We have audited the accompanying consolidated statements of
operations, stockholders' equity and cash flows of Champion
Parts, Inc. and subsidiaries (the "Company") for the year ended
January 3, 1993. Our audit also included the financial
statement schedule for the year ended January 3, 1993 listed in
the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule
based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the results of operations
and cash flows of Champion Parts, Inc. and subsidiaries for the
year ended January 3, 1993 in conformity with generally
accepted accounting principles. Also, in our opinion, such
financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 26, 1993
(November 23, 1993 as to the
second paragraph of Note 5)
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, January 2,
1995 1994
ASSETS
CURRENT ASSETS:
Cash $ 346,000 $ 78,000
Accounts receivable, less
allowance for uncollectible
accounts of $465,000 and
$406,000 in 1994 and 1993,
respectively 10,864,000 6,993,000
Inventories 26,866,000 31,536,000
Prepaid expenses and other assets 740,000 1,070,000
Deferred income tax asset 1,907,000 2,270,000
---------- ----------
Total current assets 40,723,000 41,947,000
PROPERTY, PLANT AND EQUIPMENT:
Land 475,000 475,000
Buildings 13,067,000 13,015,000
Machinery and equipment 17,265,000 16,707,000
Leasehold improvements 746,000 760,000
---------- ----------
31,553,000 30,957,000
Less: Accumulated depreciation 20,059,000 18,190,000
---------- ----------
11,494,000 12,767,000
OTHER ASSETS 1,095,000 1,433,000
$ 53,312,000 $ 56,147,000
========== ==========
The accompanying notes are an integral part of these statements.
_______________________________________________________________________________
January 1, January 2,
1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,167,000 $ 3,652,000
Accrued expenses:
Salaries, wages and employee benefits 1,871,000 2,167,000
Interest and other expenses 6,808,000 6,551,000
Taxes other than income 232,000 62,000
Income taxes payable 0 481,000
Current maturities on long-term debt 20,026,000 1,206,000
---------- ----------
Total current liabilities 35,104,000 14,119,000
DEFERRED INCOME TAXES 1,393,000 1,550,000
LONG-TERM DEBT - Less current maturities 1,451,000 19,281,000
STOCKHOLDERS' EQUITY:
Preferred stock - No par value;
authorized, 10,000,000 shares:
issued and outstanding, none --- ---
Common stock - $.10 par value;
authorized, 50,000,000 shares:
issued and outstanding, 3,655,266 366,000 366,000
Additional paid-in capital 15,578,000 15,578,000
Retained earnings 579,000 6,418,000
Cumulative translation adjustment (645,000) (136,000)
Guarantee of Employee Stock
Ownership Plan borrowings (514,000) (1,029,000)
---------- ----------
15,364,000 21,197,000
---------- ----------
$ 53,312,000 $ 56,147,000
========== ==========
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
_______________________________________________________________________________
January 1, January 2, January 3,
1995 1994 1993
NET SALES $ 95,337,000 $100,040,000 $ 96,743,000
COST AND EXPENSES:
Cost of products sold 80,424,000 79,133,000 82,022,000
Selling, distribution and
administration 15,226,000 16,636,000 18,678,000
Special charge 3,400,000 --- 3,223,000
----------- ----------- -----------
$ 99,050,000 $ 95,769,000 $103,923,000
----------- ----------- -----------
EARNINGS (LOSS) BEFORE INTEREST,
AND INCOME TAXES (3,713,000) 4,271,000 (7,180,000)
INTEREST EXPENSE - Net 2,423,000 2,282,000 2,248,000
----------- ----------- -----------
EARNINGS (LOSS) BEFORE
INCOME TAXES (6,136,000) 1,989,000 (9,428,000)
INCOME TAXES (BENEFIT) (297,000) 176,000 (1,644,000)
----------- ----------- -----------
NET EARNINGS (LOSS) $ (5,839,000) $ 1,813,000 $ (7,784,000)
============ =========== ============
AVERAGE COMMON SHARES OUTSTANDING
AND COMMON STOCK EQUIVALENTS 3,655,266 3,655,266 3,655,266
=========== =========== ===========
EARNINGS (LOSS) PER SHARE
OF COMMON STOCK $ (1.60) $ .50 $ (2.13)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED
JANUARY 1, 1995, JANUARY 2, 1994, AND JANUARY 3, 1993
_______________________________________________________________________________
Additional Cumulative Guarantee
Common Paid-in Retained Translation of ESOP
Reported in Thousands Stock Capital Earnings Adjustment Borrowings
BALANCE, DECEMBER 29, 1991 366 17,978 12,389 176 (2,007)
----- ------ ------ ----- -----
Net loss (7,784)
Exercise of market price
protection (2,400)
Exchange rate changes (113)
Contribution to ESOP
to fund ESOP debt 464
----- ------ ----- ----- -----
BALANCE, JANUARY 3, 1993 366 15,578 4,605 63 (1,543)
----- ------ ----- ----- -----
Net earnings 1,813
Exchange rate changes (199)
Contribution to ESOP
to fund ESOP debt 514
----- ------ ----- ----- -----
BALANCE, JANUARY 2, 1994 366 15,578 6,418 (136) (1,029)
----- ------ ----- ----- -----
Net loss (5,839)
Exchange rate changes (509)
Contribution to ESOP
to fund ESOP debt 515
BALANCE, JANUARY 1, 1995 366 15,578 579 (645) (514)
===== ====== ===== ===== =====
The accompanying notes are an integral part of these statements.
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
_______________________________________________________________________________
January 1, January 2, January 3,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(5,839,000) $ 1,813,000 $(7,784,000)
Adjustments to reconcile net earnings
loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 1,587,000 1,793,000 1,734,000
Provision for losses on accounts
receivable 80,000 3,000 622,000
Restructuring charge 3,400,000 3,223,000
Deferred income taxes (448,000) (195,000) (972,000)
Changes in assets and liabilities:
Accounts receivable (3,975,000) 4,450,000 4,190,000
Inventories 4,307,000 (2,352,000) 3,254,000
Accounts payable 2,176,000 658,000 462,000
Accrued expenses and other 1,863,000 (1,676,000) 1,400,000
Net cash used by operating --------- --------- ---------
activities (575,000) 4,494,000 6,129,000
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (831,000) (916,000) (790,000)
Proceeds from sale of property,
plant and equipment 184,000 116,000 ---
Net cash used by investing --------- --------- ---------
activities (647,000) (800,000) (790,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line
of credit agreement 2,700,000 (3,800,000) (4,800,000)
Principal payments on long-term debt
obligations (1,195,000) (1,222,000) (975,000)
Proceeds from issuance of long-term
debt --- --- 187,000
Net cash provided (used) by --------- --------- ---------
financing activities 1,505,000 (5,022,000) (5,588,000)
--------- --------- ---------
EFFECTS OF EXCHANGE RATE CHANGES
ON CASH (15,000) (6,000) (21,000)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 268,000 (1,334,000) (270,000)
CASH AND CASH EQUIVALENTS - Beginning
of year 78,000 1,412,000 1,682,000
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of
year $ 346,000 $ 78,000 $ 1,412,000
========= ========= =========
The accompanying notes are an integral part of these statements.
CHAMPION PARTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 AND
JANUARY 3, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements
include the accounts of Champion Parts, Inc. and its
subsidiaries (the "Company"). In the fourth quarter of 1992,
the Company decided to exit from its joint venture in a
previously consolidated engine remanufacturing business (Note
6). Accordingly, the Company's investment in the venture is
included in the accompanying consolidated balance sheets using
the equity method of accounting. The consolidated statements of
operations for 1992 have been reclassified to show the results
of this operation by the equity method. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Accounts Receivable - From time to time the Company's customers
may be in a net credit balance position due to the timing of
sales and core returns. At January 1, 1995 customers in a net
credit balance position totaled approximately $2,000,000.
Inventories - Inventories are stated at the lower of cost
(first-in, first-out method) or market. Inventory consists of
material, labor and overhead costs.
Property, Plant and Equipment - Property, plant and equipment
are carried at cost, less accumulated depreciation. The assets
are being depreciated over their estimated useful lives,
principally by the straight-line method. The range of useful
lives of the various classes of assets is 10-40 years for
buildings and 4-10 years for machinery and equipment. Leasehold
improvements are amortized over the terms of the lease or their
useful lives, whichever is shorter.
When properties are retired or otherwise disposed of, their cost
and accumulated depreciation are removed from the accounts and
any gain or loss is included in operations. Expenditures for
maintenance and repairs are charged to operations; major
expenditures for renewals and betterments are capitalized and
depreciated over their estimated useful lives.
Excess of Purchase Price Over Net Assets Acquired - The Company
is amortizing the excess of purchase price over net assets
acquired over a 25-year period. The unamortized amount of
goodwill was $152,000 and $174,000 in 1994 and 1993,
respectively. The accumulated amortization was $300,000 in 1994
and $278,000 in 1993.
Deferred Charges - Expenses on long-term debt are deferred and
amortized over the terms of the related issues.
Line of Business - The Company rebuilds parts principally for
the automotive aftermarket industry, which is considered to be a
single line of business.
Revenue Recognition - The Company recognizes sales when products
are shipped. Net sales reflect deductions for cores returned
for credit and other customary returns and allowances. Such
deductions and returns and allowances are recorded currently
based upon continuing customer relationships and other criteria.
The Company's customers are encouraged to trade-in rebuildable
cores for products which are included in the Company's current
product line.
Credits for cores are allowed only against purchases of similar
remanufactured products. Total available credits are further
limited by the dollar volume of purchases. Product and core
returns, reflected as reductions in net sales, were $61,234,000
(1994), $67,209,000 (1993) and $67,499,000 (1992).
2. INVENTORIES
Inventories consist of the following:
January 1, January 2,
1995 1994
Raw materials $ 10,870,000 $ 11,634,000
Work in process 5,028,000 4,641,000
Finished goods 10,968,000 15,261,000
---------- ----------
$ 26,866,000 $ 31,536,000
========== ==========
Included in inventory were cores of $14,139,000 (1994) and
$14,584,000 (1993).
The Company recorded $2,200,000 of provisions in the fourth
quarter of 1994 to revalue the Company's inventory.
Approximately $1,000,000 of the amount related to write-downs of
the Company's constant velocity joint inventory to reflect
current values. The remaining amount was recorded to reflect
changes in the Company's inventory policies.
3. DEBT
The Company entered into a Credit Agreement on August 8, 1990
with four banks. In March 1994, the Company amended its bank
credit agreement to extend its maturity until April 1, 1995;
removed one of the participating banks; reduced the commitment
level to $23 million; reset certain prospective financial
covenants, and allowed the Company additional borrowing
capability against accounts receivable and inventories. The
Company gave a security interest to the participating banks in
its accounts receivable, inventories and other assets. The
Company agreed to pay interest on outstanding borrowings at the
Prime Rate plus 1-1/2% and an annual commitment fee of 1/2% of
the facility.
At January 1, 1995, the Company had available $18.1 million
under the Company's credit agreement of which $17.9 million was
borrowed.
The terms of the Company's credit agreement require maintenance
of minimum working capital and tangible net worth levels and
prohibits the payment of dividends. The Company was not in
compliance with certain financial covenants of its bank credit
agreement throughout the fourth quarter and in subsequent
months. It had negotiated with its lenders waivers for the
noncompliance and an extension of the credit agreement to July
1, 1995, conditioned upon the sale of Preferred Stock by April
17, 1995 (See Note 16). On April 17, 1995 RGP notified the
Company that it would not consummate the sale which caused the
Company to be in default of the credit agreement. Discussions
are underway with the Company's lending banks to reach agreement
on a credit facility which would allow for continued funding of
operations. Two of the three banks party to the credit
agreement had indicated to the Company that they did not intend
to extend long term financing to the Company. There can be no
assurances that the banks will agree to a new facility.
The Company is also in default of a $1,100,000 standby letter of
credit and a $1,500,000 capitalized lease obligation under
cross default provisions.
Discussions with other financial institutions, including one of
the Company's current banks, are also underway to secure a new
long term facility through 1995. The discussions contemplated
the Preferred Stock sale. The Company is unable to predict
whether these institutions would enter into a credit facility in
light of the failure to close the Preferred Stock sale.
As a result, the Company has reflected outstanding amounts under
the credit agreement and $1,500,000 capitalized lease obligation
as current in its financial statements. Without an extension of
the current credit agreement or a replacement facility, the
Company would not have sufficient funds to pay its debts should
the lenders demand payment.
Through the first quarter of 1995, the Company continued to
experience soft sales primarily due to lower market demand for
automotive electrical products. In addition, the Company was
notified by one of its customers that it would be switching part
of its business to another supplier in the first quarter of
1995. This business accounted for approximately 3% of the
Company's 1994 net sales.
The Company's financial statements have been prepared on a going
concern basis and do not contain adjustments which may be
necessary should the Company be forced to liquidate assets or
take other actions to satisfy debt payments.
The Company did not make the final installment of $200,000 on a
scheduled payment to Echlin Inc. due April 8, 1995 pursuant to a
promissory note agreement. Echlin Inc. has notified the Company
that it is in default on the note.
The Company had an interest rate swap agreement, which fixed the
effective interest rate at 8.3% on $12,000,000 of its bank
borrowings through October 15, 1994.
The Company had an interest rate protection agreement on
$10,000,000 with a bank. Under this agreement, the Company was
protected against the average LIBOR rate exceeding the
agreement cap rate of 8-1/2% for any consecutive three month
period through August, 1993.
Long-term debt consists of the following:
January 1, January 2,
1995 1994
Bank loan, revolving credit
agreement at prime plus 1-1/2%
due July 1 , 1995 secured by
receivables, inventory and
certain other assets $ 17,900,000 $ 15,200,000
Note payable, due in quarterly
installments of $200,000. Interest
at prime plus 1%. (See Note 11) 400,000 1,200,000
ESOP loan guarantee, 8-1/2%
due in varying semiannual
installments to 1995 514,000 1,029,000
Mortgage, 12%, due in monthly
installments of $21,803 (including
interest) to 2001 (secured by property
having a book value of $2,497,578 at
January 1, 1995) 851,000 1,001,000
Capitalized lease obligations under
Industrial Revenue Bonds, at
approximately 60% of prime rate, due
in 2001, varying annual sinking fund
payments commencing in 1998 1,500,000 1,500,000
Capitalized building lease obligations
under Industrial Revenue Bonds, 7%,
due in 1995 7,000 194,000
Other 305,000 363,000
---------- ----------
21,477,000 20,487,000
---------- ----------
Less portion due within one year 20,026,000 1,206,000
---------- ----------
$ 1,451,000 $ 19,281,000
========== ==========
Long-term debt maturities (including obligations under capital
leases) are $233,000 (1996), $258,000 (1997), $288,000 (1998),
and $77,000 (1999).
In February 1988, the Employee Stock Ownership Plan ("ESOP"),
established by the Company in 1986 (Note 8), borrowed $3,600,000
from a bank and used a contribution of $100,000 from the Company
to purchase 400,000 shares of the Company's common stock at the
market price of $9.25 per share. The Company has guaranteed the
repayment of the 8-1/2% bank loan. The loan was paid in April
1995.
4. INCOME TAXES
As of the first quarter of fiscal year 1992, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". SFAS 109 uses an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns.
The income tax provision (benefit) consists of the following:
CURRENT 1994 1993 1992
Federal $ (181,000) $ 660,000 $ (715,000)
Foreign (27,000) (75,000) 37,000
State and local (33,000) 171,000 6,000
--------- --------- ---------
$ (241,000) $ 756,000 $ (672,000)
--------- --------- ---------
DEFERRED
Federal $ (67,000) $ (640,000) $ (559,500)
Foreign 11,000 75,000 (310,000)
State and local --- (15,000) (102,500)
--------- --------- ---------
(56,000) (580,000) (972,000)
--------- --------- ---------
$ (297,000) $ 176,000 $ (1,644,000)
========= ========= =========
The Company has provided a valuation reserve to write-down
deferred tax assets due to limited ability to carryback tax
losses.
At January 1, 1995, the Company had approximately $623,000 of
tax credits which can be carried forward indefinitely.
The effective tax rate differs from the U.S. statutory federal
income tax rate of 34% as described below:
1994 1993 1992
Income tax (benefit)
at statutory rate $ (2,086,000) $ 676,000 $ (3,205,000)
Utilization of net operating
loss (NOL) carryforward --- (566,000) ---
Federal valuation
allowance, other than NOL 1,884,000 (45,000) 1,723,000
State income taxes
net of federal income tax (22,000) 25,000 (96,500)
Effect of foreign
operations (55,000) 66,000 (129,500)
Other (18,000) 20,000 64,000
--------- --------- ---------
$ (297,000) $ 176,000 $ 1,644,000
========= ========= =========
No provisions have been made for possible international and
U.S. income taxes payable on the distribution of approximately
$210,000 of undistributed earnings of its foreign subsidiary and
affiliate which have been or will be reinvested abroad or, in
the opinion of management, are expected to be returned to the
United States with no material United States income tax effect.
It is not practicable to determine the hypothetical U.S. federal
income tax liability if all such earnings were remitted.
Deferred tax assets and liabilities are comprised of the
following at January 1, 1995 and January 2, 1994.
--------- 1994 -------- --------- 1993 --------
Assets Liabilities Assets Liabilities
Inventory Reserves $ 1,470,000 $ --- $ --- $ ---
Accrued vacation 427,000 --- 466,000 ---
Fringe benefits 1,093,000 --- 1,248,000 ---
Depreciation $ 1,350,000 --- $ 1,510,000
Bad debts 531,000 --- 646,000 ---
Write-off foreign
subsidiary 215,000 --- 248,000 ---
Restructuring Reserves 565,000 --- --- ---
Net operating loss
carryforward --- --- 18,000 ---
Tax credit
carryforward 623,000 ---