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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. For the fiscal year ended December 31, 1998
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Transition Period from________to ______.
Commission File Number 0-13601
DURAKON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2492342
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2101 N. Lapeer Road, Lapeer, Michigan 48446
Registrant's telephone number, including area code: (810) 664-0850
Securities registered pursuant to Section 12(b)of the Act: None
Securities registered pursuant to Section 12(g)of the Act: Common Stock, without 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 18, 1999, computed by reference to
the last sale price for such stock on that date as reported on The Nasdaq Stock
Market, was $55,064,864.
At March 19, 1999, the number of shares outstanding of the registrant's
Common Stock, without par value, was 6,125,200.
Portions of the registrant's Proxy Statement for its 1999 Annual Meeting
of Shareholders have been incorporated by reference in Part III of this Annual
Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Durakon Industries, Inc. (the "Company") was incorporated in Michigan on
December 21, 1983, and is the successor by merger to Durakon, Inc. which was
incorporated in Michigan in 1979. The Company operates its business in two
segments, the Vehicle Accessories segment and the Towing & Recovery segment.
Vehicle Accessories Segment. This segment's principal product is a
one-piece, seamless pickup truck bedliner, custom engineered and molded in
various sizes to fit most domestic and foreign pickup trucks. A matching
protector is supplied with each bedliner to protect the truck's tailgate.
Bedliners are constructed of high-density polyethylene plastic, and are designed
to protect the entire bed area including the floor, front panel and sidewalls.
The Company markets bedliners under the Duraliner(R), AllStar(R) and Bodygard(R)
brand names and also manufactures for private labels. Purchasers of the
Duraliner(R) product also receive proprietary cargo restraining board pockets
(Duraloc(TM)), two tier stacking capability and other premium features.
The Company's marketing strategy for pickup truck bedliners is to
service the aftermarket through distributors of light truck accessories, camper
top manufacturers, retail chains and mass merchandisers as well as directly
servicing original equipment manufacturers. Management believes that purchasers
of light trucks generally prefer to purchase add-on accessories, such as a
pickup truck bedliner, at the time they purchase their truck. This allows
installation of the bedliner prior to delivery, before damage to the truck
occurs, and also permits the buyer to finance the bedliner in conjunction with
the truck.
The Company also manufactures and markets the DuraSport(TM) cargo liner,
a protective liner for back interiors of vans, sport utility vehicles and
passenger car trunks; van liners to protect the interiors of cargo vans; and
chassis cab covers. Other products manufactured for the Company on a proprietary
basis include the Durasport(TM) bedmat, a rubber mat designed to protect the
floor area of pickup truck beds and DuraTrunk(R), a high-density polyethylene
plastic storage container.
The Company disposed of its Duraliner USA network in 1998. The Company
had distributed products through its Duraliner USA network, which consisted of
nine warehouses located throughout the country. In addition to products
manufactured by and for the Company, Duraliner USA sold and distributed a
variety of other accessories such as hood protectors, bumpers and tonneau covers
manufactured by other companies.
Towing & Recovery Segment. Through its wholly-owned subsidiary Jerr-Dan
Corporation ("Jerr-Dan"), the Company manufactures and distributes rollback
carriers and tow trucks for use in the vehicle transportation, towing and
recovery industry.
Rollback carriers are fabricated from aluminum, steel and wood to
provide platforms, which hydraulically tilt to allow a vehicle to be loaded
thereon for transportation. Carriers equipped with a towbar attachment can tow
an additional vehicle behind the unit. Some models are also available with an
optional platform above the driver's cab enabling an additional vehicle to be
transported. The Wrangler(TM), Shark(TM), Vector(TM), Rustler(TM), Elite(TM),
and Stingray(TM) models are designed for transporting automobiles and light-duty
vehicles, while the Transporter(TM) and Super Series(TM) models, with deck
capacities up to 30,000 pounds, can also transport heavy equipment. Rollback
carriers are typically purchased by salvage dealers, towing companies,
automobile dealers, industrial equipment distributors, and antique and race car
owners.
Jerr-Dan also manufactures and markets towing and recovery equipment.
These products lift disabled vehicles by their wheels for general towing
applications. Wheel-lift trucks have supplanted the conventional hook and sling
equipment by providing for damage-free towing to vehicles with plastic front-end
components and/or front-wheel drive. Jerr-Dan's medium and heavy-duty units are
equipped with frame-fork attachments to enable a disabled vehicle to be picked
up by its front axle. Units are customarily supplied with boom and winch
features for use in vehicle recovery applications. Jerr-Dan's towing and
recovery line includes the HPL(TM), HDL(TM), and Powergrid(TM) models.
Jerr-Dan's marketing strategy is to compete nationally through its
independently-owned distributor network with innovative products of high quality
and superior customer service. Methods used to accomplish this objective include
advertising in trade journals, trade show participation, publication of the
Company's "Write-Carrier" magazine and utilization of the distributor/customer
in product development and improvement activities.
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Jerr-Dan's manufacturing operations include the machining and
fabrication of steel and aluminum parts and assemblies, and the manufacture of
hydraulic componentry. Jerr-Dan's products are assembled, tested and installed
on truck chassis purchased by Jerr-Dan or its customers, or sold in kit form for
installation by its distributors.
OTHER CORPORATE MATTERS
Employment. At December 31, 1998, the Company and its subsidiaries
employed 811 persons. Approximately 30% of its employees are covered by a
collective bargaining agreement with the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America. The most recent
agreement was ratified by the union on March 4, 1997, expires February 29, 2000,
and covers 242 employees at the Lapeer, Michigan plant.
Significant Customers. The Company's sales to Ford Motor Company
represented 12% of consolidated net sales in 1998. No other customer accounts
for more than 10% of consolidated net sales.
Competition. In the opinion of management, the competitive factors in
each industry in which the Company and its subsidiaries operate include brand
recognition, total quality, marketing support, price, customer service, prompt
delivery and reputation. The Company emphasizes all of these factors in its
operating strategy.
The Vehicle Accessories segment markets its products in the United
States and in selected foreign markets to independent aftermarket distributors
and original equipment manufacturers. The Company's primary competitor in all of
these markets is Penda Corporation, a privately owned company headquartered in
Portage, Wisconsin. While no market data is readily available, the Company
believes it has the largest share of the market for pickup truck bedliners.
There are many other manufacturers of pickup truck bedliners but the Company
believes that none of them maintains a market share comparable to the Company or
Penda.
In the Towing & Recovery segment, the Company primarily sells in the
United States. While the Company is not aware of any source of market data on
this industry, it believes that Miller Industries, Inc., a publicly held company
headquartered in Atlanta, Georgia has the largest market share. There are
several smaller manufacturers of towing and recovery equipment. The Company
believes it maintains the second largest market share in the towing and recovery
industry.
Patents. The Company has a policy of filing patent applications for its
important product designs and manufacturing methods. The Company's patents begin
to expire in 1999.
Backlogs. Neither the Vehicle Accessories segment nor the Towing &
Recovery segment maintain a sales backlog as sales orders are generally filled
within one month.
Raw Materials. Raw materials used in the production of the Company's
products are available from several sources. Management believes that its
present sources and adequate replacement sources will be available to meet the
Company's anticipated demand for the foreseeable future. High-density
polyethylene resin, which is the principal raw material of the Vehicle
Accessories segment, is subject to significant price fluctuation.
Regulatory Requirements. The Company, as a manufacturer utilizing
plastic substances, is subject to provisions of state and federal laws governing
discharges of pollutants into the environment and the exposure of employees to
harmful substances. The Company believes that it is currently in compliance with
such applicable provisions and that continued compliance will not require
material capital expenditures.
ITEM 2. PROPERTIES ($ in 000's)
Vehicle Accessories Segment. The Company has two domestic manufacturing
locations for pickup truck bedliners. The largest one is owned, the other
facility is leased. The owned facility is a 326,800 square foot building complex
on 135 acres of land in Lapeer, Michigan. This facility also houses the
Company's warehouse facility, distribution center and administrative offices.
The leased facility is 102,000 square feet on seven acres of land in Clinton,
Tennessee. The lease expires in 2003; rental under this lease was approximately
$255 in 1998. Additional warehousing space of 20,000 square feet is leased in
Greenbrier, Tennessee.
The Company's Mexican subsidiary leases a 47,000 square foot
manufacturing facility in Lerma, Mexico. Rental under this lease agreement was
$118 during 1998.
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In 1998 the Company disposed of six leased locations. The Company is
still obligated under leases for three locations; one operates as a consignment
warehouse, located in Westland, Michigan and the other two locations, which are
located in Ft. Lauderdale and Lakeland, Florida have been sub-let to a third
party.
Towing & Recovery Segment. The Company owns a 112,000 square foot
manufacturing facility located on 12.5 acres of land in Greencastle,
Pennsylvania. This location also houses storage facilities and administrative
offices.
The Company leases two additional manufacturing and assembly facilities
in Greencastle, Pennsylvania. A 126,000 square foot manufacturing building on 10
acres has an annual rent of $360 with a lease expiration of June 30, 2011. A
research and development location of approximately 6,000 square feet with an
annual rent of $25 is leased on a month-to-month basis.
Additional warehousing and assembly space of 60,000 square feet is
leased in Las Vegas, Nevada to provide inventory availability for Jerr-Dan's
western distributors. Annual rent was $349 in 1998. This lease expires July 31,
2000.
Adequacy of Facilities and Production Capacity. In the opinion of
management, the facilities and manufacturing capacity for both business segments
are adequate to operate at current market conditions.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged from time to time in various litigation incident
to both segments of its business. Much of such litigation is covered in whole or
in part by insurance. Management of the Company believes that the Company is not
at present a party to any legal proceedings, which if decided in a manner
adverse to the Company, would be likely to have a material adverse effect on the
Company's results of operations or financial condition. The Company is a party
to the class action lawsuits described below.
Class Action Lawsuits
In the fourth quarter of 1996 and the first quarter of 1997, nine class
action lawsuits were filed in state and federal courts against the Company and
various other manufacturers of pickup truck bedliners. Four of those cases were
dismissed voluntarily and one was dismissed for failure to prosecute. The four
pending cases are Tennyson Smith, et al. V. Durakon Industries, Inc., et al.,
filed in the Circuit Court of Genesee County, Alabama on November 7, 1996; Susan
Stricklett, et al. V. Durakon Industries, Inc., et al., filed in Champaign
County, Illinois on November 7, 1996; Joseph Jetton et al. v. Durakon
Industries, Inc., filed in the United States District Court for the Eastern
District of Missouri on November 8, 1996; and Jimmy E. Brown, et al. v. Durakon
Industries, Inc., et. al., filed in the United States District Court for the
Southern District of Mississippi, Hattiesburg Division on November 6, 1996.
The foregoing cases are purportedly brought on behalf of all owners of
pickup truck bedliners made by the defendant manufacturers. None of these cases
seek damages for personal injuries. The complaints allege that the bedliners
manufactured by the defendants are defective and unreasonably dangerous because
the bedliners supposedly prevent the discharge of static electricity which can
accumulate on or in portable fuel containers and thereby create the potential
for an explosion if a container is filled with fuel while sitting on a bedliner.
The complaints allege that the defendants were aware of the alleged danger but
failed to provide a proper warning. The complaints filed in these cases, while
not identical, raise substantially similar legal theories, primarily claims of
breach of warranty, fraudulent misrepresentation, negligent misrepresentation,
negligence and strict liability in tort. The plaintiffs seek damages in
unspecified amounts and equitable relief, including a recall and replacement of
all bedliners, or a refund, and notification to all bedliner owners of the
purported danger. The complaints either request punitive damages or reserve the
right to seek punitive damages at a later date. The complaints all seek an award
of attorney's fees and costs.
The Company believes the claims in these lawsuits are without merit and
it has specifically denied any fault or omission or any liability or violation
of the law in connection with the claims asserted therein. However, due to the
uncertainties of litigation, especially where jury trials are involved, and the
cost and distraction of defending multiple lawsuits in various jurisdictions,
the Company has determined that it would be in its best interest to explore the
possibility of settlement. Settlement negotiations have resulted in a tentative
agreement to settle all the cases, but the final terms of a settlement agreement
have not been agreed upon and no agreement has
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been signed by any of the parties. If and when the parties enter into a
settlement agreement, it will be subject to review and approval by one or more
courts.
There can be no assurance that a settlement will be reached or, if
reached, that it will receive court approval. If a final settlement is not
reached, or if a settlement agreed to by the parties were not approved by the
court, the Company intends to vigorously defend these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq Stock Market under
the symbol "DRKN". The following table sets forth the high and low sale prices
reported on the Nasdaq Stock Market for the quarterly periods indicated:
1998 1997
Quarter High Low Quarter High Low
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First $ 9 1/4 $ 7 First $15 $10 3/4
Second 11 1/4 9 1/4 Second 11 1/2 9 1/4
Third 13 9 Third 9 1/2 8 1/2
Fourth 11 1/2 9 1/2 Fourth 9 3/4 7 3/4
On March 18, 1999, the last available sale price for shares of the
Common Stock of the Company, as reported on the Nasdaq Stock Market, was
$12.375. As of such date, the approximate number of record holders of the Common
Stock was 307.
Durakon has not paid a dividend on the Common Stock since the date on
which the Common Stock was first offered to the public. The Company's policy is
not to pay dividends, but to use excess cash to fund future growth.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below have been
derived from the Company's Consolidated Financial Statements which have been
audited by PricewaterhouseCoopers LLP, and should be read in conjunction with
the Consolidated Financial Statements and related Notes.
1998 1997 1996 1995(1) 1994
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($ in 000's, except per
share amounts)
OPERATIONS STATEMENT DATA:
Net sales $192,358 $179,908 $183,628 $172,051 $144,483
Operating income 12,354 735 13,133 5,171 19,487
Interest income, net 411 69 629 358 427
Net income 7,909 1,103 8,904 2,299 12,101
Net income per common share - Basic 1.28 .18 1.36 .35 1.86
Net income per common share - Diluted 1.27 .18 1.34 .35 1.82
BALANCE SHEET DATA:
Working capital $ 41,767 $ 31,681 $ 35,150 $ 25,696 $ 25,539
Total assets 87,768 83,092 84,079 78,869 75,542
Long-term obligations 801 554 795 1,572 2,641
Shareholders' equity 68,903 62,286 65,760 56,556 54,237
PERCENTAGES AND RATIOS:
Gross profit 18.1% 16.9% 21.6% 21.1% 29.0%
Return on sales 4.1% .6% 4.8% 1.3% 8.4%
Current ratio 3.6 2.7 3.2 2.3 2.4
Ratio of long-term obligations to
total capitalization .01 .01 .01 .03 .05
(1) Includes pre-tax charges of $2,900 for the loss on disposition of the ZZ
Wheelz subsidiary, $1,455 for re-engineering and consolidation of pickup
truck bedliner manufacturing operations, and $1,103 related to
settlement of a patent issue and write-off of a license agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relating to the three years ended December 31,
1998, should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes:
CORPORATE DEVELOPMENT. In 1998, the Company disposed of all distribution
warehouse operations that sold vehicle accessories under the names "Duraliner
USA" and "Duraliner of California".
In November 1998, Jerr-Dan introduced its new light-duty wrecker, the
HIP40. Designed primarily for the export market, this composite-body unit is
also targeted as a domestic entry-level product. The HIP40's innovative design
enables the wrecker body to fit a large range of chassis sizes with minimal
modification.
In March 1998, the DeWalt(TM) heavy-duty wrecker was discontinued and
replaced with a composite body unit, the HDL (TM). With this introduction, the
payload capacity was upgraded from 50 to 55 tons. This unit, together with the
HIP40, further complements the Company's range of towing and recovery equipment
and continues the trend towards lighter, rust-resistant models.
In December 1997, Jerr-Dan closed its Channelview, Texas manufacturing
facility. Production of the DeWalt(TM) heavy-duty towing and recovery vehicles
was moved to the Greencastle, Pennsylvania location.
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In January 1997, the Vehicle Accessories segment was awarded the Ford
bedliner contract. The Company distributes light-truck bedliners to Ford
dealerships in the United States, Canada and Mexico. The contract will be up for
renewal December 31, 2000.
In July 1996, Jerr-Dan leased approximately 126,000 square feet of
additional manufacturing space to accommodate the production of its new
medium-duty towing vehicle. Several innovative and patentable features are
incorporated into this product including an industry-first, corrosion-resistant
composite body.
NET SALES. ($ in 000's) The following table summarizes net sales by
business segment for the last three years:
Segment 1998 % 1997 % 1996 %
- ------- ---- - ---- - ---- -
Vehicle Accessories $ 92,122 48% $ 92,250 51% $ 85,109 46%
Towing & Recovery 100,236 52% 87,658 49% 98,519 54%
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Total $192,358 100% $179,908 100% $183,628 100%
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Net sales increased 7% to $192,358 in 1998 versus 1997. In 1997 sales
decreased 2% to $179,908 compared to 1996.
In the Vehicle Accessories segment, 1998 net sales decreased $128 or
0.1% from 1997. Bedliner unit sales increased 0.4% from 1997. Unit volume
increased for OEM Ford, which was partially offset by a decrease in unit volume
for domestic aftermarket and international markets. Ford bedliner units
increased 80% over 1997. While this continues to be a strong line of business
for the Company, management does not expect the Ford unit volume to increase so
dramatically in subsequent years. Domestic aftermarket unit volume decreased
13%, primarily due to the disposition of "Duraliner USA" operations.
International unit volume was down 14% due to weak economies in South America.
In 1997, net sales increased $7,141 or 8% from 1996. Bedliner unit sales
increased 11.7% from the prior year primarily due to the Ford business. Ford
contributed to an increase in OEM unit volume of 97% versus 1996. International
unit sales increased by 52% in 1997 compared to 1996. Aftermarket unit sales
decreased 16% in 1997 compared to 1996. Average bedliner net selling prices were
down 2.6% from 1996 due to the increased domestic aftermarket competition and
OEM-Ford volume, which carries a lower selling price than average aftermarket
products.
In the Towing and Recovery segment, 1998 sales increased $12,578 or 14%
from 1997. The increase reflects a 10% increase in sales of manufactured
equipment and service and an 18% increase in sales of truck chassis. Unit sales
of rollback carriers increased 15%, while unit sales of tow truck bodies
decreased by 8%. Average net selling prices for both rollback carriers and tow
truck were 4% higher than in 1997. The higher selling prices are attributable to
a modest price increase in the first quarter of 1998 and a shift in sales mix
toward more expensive models. In 1997, net sales decreased $10,861 or 11% from
1996 due to the loss of three distributors that were purchased by a competitor.
The decrease reflected a 7% decline in sales of manufactured equipment and
service and a 14% decline in sales of truck chassis. Unit sales of rollback
carriers decreased by 18% while the decrease in unit sales of tow vehicle bodies
was 5%. Average net selling prices for rollback carriers were 2% higher in 1997
than in 1996, primarily due to sales mix. Average net selling prices of tow
vehicle bodies were 22% higher in 1997 than in 1996 reflecting a greater
proportion of sales of medium-duty tow vehicle bodies. There were no sales price
increases in 1997.
GROSS PROFIT. ($ in 000's) The following table summarizes gross profit
in dollars and as a percent of sales by segment for the last three years:
Segment 1998 % 1997 % 1996 %
- ------- ---- - ---- - ---- -
Vehicle Accessories $ 23,320 25% $ 20,007 22% $ 24,946 29%
Towing & Recovery 11,498 12% 10,346 12% 14,732 15%
-------- --- -------- --- -------- ---
Total $ 34,818 18% $ 30,353 17% $ 39,678 22%
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In the Vehicle Accessories segment, gross margin in 1998 was 25%
compared to 22% in 1997. Higher margins were attributable to improved
manufacturing efficiencies and decreased cost for high-density polyethylene
resin. In 1997, gross margin in the Vehicle Accessories segment decreased from
29% to 22%.
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Margins were down due to lower net average selling prices, which were caused by
competition along with lower average margins on OEM sales. Freight costs were
$2.9 million higher in 1997 versus 1996 primarily due to distribution costs for
a major OEM.
In the Towing and Recovery segment, gross margin in 1998 was 12%, which
was even with 1997. The margin on manufactured equipment and service was 20% in
1998, down 1% from 1997, which reflects the impact of increased sales of lower
margin rollback carriers in 1998, and the cost of product enhancements which
were not passed on to customers. In 1997 gross margin was 12% compared to 15% in
1996. The gross margin on manufactured equipment and service was 21% in 1997,
down 5% from 1996, which reflected the impact of increased sales of lower-margin
towing vehicles in 1997. Lower sales volumes in 1997 also had the effect of
reducing gross margins due to less favorable absorption of fixed overhead costs
than in 1996. Margins on rollback carriers and light-duty tow trucks decreased
by 3% on a year to year basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ($ in 000's) The following
table presents selling, general and administrative expenses by business segment
and as a percent of net sales for the last three years:
% Net % Net % Net
Segment 1998 Sales 1997 Sales 1996 Sales
- ------- ---- ----- ---- ------ ---- ------
Vehicle Accessories $ 14,817 16% $ 19,930 22% $ 17,949 21%
Towing & Recovery 7,647 8% 9,688 11% 8,596 9%
-------- --- -------- --- -------- ---
Total $ 22,464 12% $ 29,618 16% $ 26,545 14%
======== === ======== === ======== ===
Selling, general and administrative expenses (SG&A) were 24% lower in
1998 compared to 1997, and four points lower as a percentage of net sales. In
1997, SG&A expenses were 12% higher than in 1996, and two points higher as a
percentage of net sales.
In the Vehicle Accessories segment, 1998 SG&A was $5,113 lower than in
1997 and as a percentage of net sales was six percentage points lower. The
decrease in SG&A was due to the disposition of the Duraliner USA operations,
reduced legal expenses, and reduced spending resulting from the 1997 profit
improvement programs which was partially offset by year 2000 compliance
expenditures. In 1997, SG&A was $1,981 higher than in 1996 and as a percentage
of sales was one point higher. The increase in SG&A was primarily due to legal
reserves associated with the nine class action lawsuits filed against the
Company and various other manufacturers of pickup truck bedliners. In addition,
professional fees, relating largely to the Company's profit improvement program,
adversely impacted 1997 SG&A.
In the Towing & Recovery segment, 1998 SG&A was $2,041 lower than 1997
and 3% lower as a percentage of net sales. The decrease is attributable to cost
containment efforts, consolidation of operations in Greencastle, Pennsylvania,
and closure of the DeWalt facility in Channelview, Texas. In 1997 SG&A was
$1,092 higher than in 1996 and 2% higher as a percentage of net sales. The
increase was due to costs associated with the closing of the DeWalt facility in
Channelview, Texas. The remainder of the increase in SG&A was attributable to
the expansion of the Company's product engineering capability and promotional
expenses related to the medium-duty towing vehicle product.
INTEREST INCOME, NET. ($ in 000's) Net interest income was $411 in 1998,
$69 in 1997, and $629 in 1996. The increase in net interest income was due to a
higher average cash balance. The decrease in net interest income in 1997 was a
direct result of lower average cash balances during 1997 compared to 1996.
OTHER INCOME/(EXPENSE), NET. ($ In 000's) Other net expense in 1998 was
$386 versus other net expense of $114 in 1997 and other net income of $59 in
1996. In 1998, other net expense was largely due to a loss on disposal of fixed
assets and other expenses related to the Mexican operation. In 1997, other net
expense primarily related to a loss on disposal of fixed assets. In 1996, other
income related primarily to a gain on disposal of fixed assets and Duramex
royalties.
MINORITY INTEREST. ($ in 000's) Minority interest reflects the minority
shareholders' portion of the net income of Duramex that began operations in
April 1993, as well as Duraliner of California, a joint venture formed in June
1997. The minority interest was $288 in 1998 compared to $247 and $124 in 1997
and 1996, respectively.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 35% in
1998, (149%) in 1997, and 35% in 1996. The effective tax rate in 1998 was equal
to the statutory rate. In 1997, the Internal Revenue Service
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completed its audits of the Company's 1993, 1994 and 1995 tax returns. Upon
completion of the audits, the Company reversed the amount accrued in excess of
the adjustment required as a result of the audits. The effective tax rate in
1996 was equal to the statutory rate.
NET INCOME. ($ in 000's) Net income was $7,909 in 1998, $1,103 in 1997,
and $8,904 in 1996. The increase of $6,806 in 1998 was primarily due to higher
sales in Towing and Recovery segment, manufacturing efficiencies and lower resin
cost in the Vehicle Accessories segment and reduced SG&A in both segments. The
decrease of $7,801 in 1997 was primarily due to lower gross margins in both
business segments, lower average net selling prices in the Vehicle Accessories
segment, lower sales in the Towing and Recovery segment due to the loss of three
distributors which were purchased by a competitor, and professional fees
associated with implementing a profit improvement program.
YEAR 2000. Computer software that uses two digits rather than four to
identify the applicable year may be unable to interpret appropriately the
calendar Year 2000, and thus could cause disruption of normal business
activities. The Company uses software in various aspects of its business,
including manufacturing, product development and many administrative functions,
and much of this software will be unable to interpret the Calendar Year 2000
appropriately unless it is modified or replaced.
The Company is addressing this Year 2000 issue with a corporate-wide
initiative. The initiative includes the identification of affected software, the
development of a plan for correcting that software in the most effective manner,
the implementation of that plan and the monitoring of that implementation. The
program also includes communications with the Company's significant suppliers
and customers to determine the extent to which the Company's systems are
vulnerable to any failures by them to address the Year 2000 issue. In most
instances, the Company has older software with Year 2000 compliant programs and
systems. Although the timing of these replacements is influenced by the Year
2000 issue, in most instances they will involve capital expenditures that would
have occurred in the normal course of business. The Company expects that all of
the modifications and replacements will be in place before the end of second
quarter of 1999.
Given the information available at this time, management
currently anticipates that the amount the Company will spend to modify or
replace software in order to remediate the Year 2000 issue should not have a
materially adverse effect on the Company's liquidity or results of operations.
The Company incurred approximately $.7 million and committed to $.5 million
capital lease in 1998 relating to the assessment and implementation of the Year
2000 compliant programs and systems, and estimates the Company will not spend
more than $1.7 million for Year 2000 remediation. At year-end the
Vehicle Accessories segment was substantially complete and the Towing and
Recovery segment was approximately one-third complete with the Year 2000
implementation.
The Company does not currently have contingency plans in place. Such
contingency plans will be developed in the second quarter, should the current
implementation plans fall behind schedule. As the Year 2000 project continues,
the Company may discover additional Year 2000 problems, may not be able to
develop, implement, or test remediation or contingency plans, or may find that
the costs of these activities exceed current expectations. In many cases, the
Company must rely on assurance from suppliers that new and upgraded information
systems as well as key services will be Year 2000 compliant. While the Company
plans to validate supplier representations, it cannot be sure that its efforts
will be adequate, or that, if problems are identified, they will be addressed in
a timely and satisfactory manner. Even if the Company completes all of its
assessments, implements and tests all remediation plan, in a manner believed to
be adequate, and develops contingency plans believed to be adequate, some
problems may not be identified or corrected in time to prevent materially
adverse consequences or business interruptions to the Company.
9
10
LIQUIDITY AND CAPITAL RESOURCES ($ in 000's)
At year-end 1998, the Company's cash balance was $15,433, compared to
$7,907 at year-end 1997 and $8,597 at year-end 1996. The current ratio was 3.6
at December 31, 1998 versus 2.7 in 1997 and 3.2 in 1996. During 1998, cash of
$11,252 was provided by operations versus $9,780 in 1997 and $3,350 in 1996.
Cash used in investing activities in 1998 was $2,704 compared to $5,404 in 1997
and $5,774 in 1996. In 1998 the main use of cash was the purchased 120,092
shares of outstanding common stock in open market transactions at an average
price of $9.87 per share. In 1997, the primary uses of cash were purchases of
equipment relating to production and the repurchases and retirement of 400,000
shares of outstanding common stock at a price of $13 per share.
The Company's anticipated internal cash flow is expected to provide
sufficient liquidity to fund its near-term working capital needs. The Company
believes that its long-term working capital and other investment needs will be
satisfied through its internal cash flow and future borrowings, if necessary.
The Company also maintains a $20,000 revolving credit facility. There were no
borrowings against this facility as of December 31, 1998. However, letters of
credit have been issued against the credit line totaling $1,450 at December 31,
1998.
The Company intends to spend approximately $3.6 million in 1999 and $3.5
million in 2000 for capital associated with a new product to be sold to one of
the "Big Three" automotive companies beginning in the year 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information included
in this Report are set forth on the Index to Consolidated Financial Statements
and Financial Statement Schedule appearing on page F-1 of this Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by the items within this part will be
included in the Company's 1998 Proxy Statement, and is incorporated herein by
reference, as follows:
Captions(s) in 1998
Proxy Statement
---------------
ITEM 10. Directors and Executive Officers of the "Election of Directors", "Other Information
Registrant Relating To Directors" and "Executive Officers"
ITEM 11. Executive Compensation "Compensation of Executive Officers and Directors"
ITEM 12. Security Ownership of Certain "Election of Directors"
Beneficial Owners and Management
ITEM 13. Certain Relationships and Related "Certain Transactions with Management"
Transactions
10
11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The financial statements filed with this Report are listed on
page F-1.
2. Financial Statement Schedule:
The financial statement schedule filed with this Report is listed
on page F-1. Other financial statement schedules, for which
provision is made in the applicable accounting regulations of the
Securities and Exchange Commission, are not required under the
related instructions or are inapplicable and, therefore, have
been omitted.
3. Exhibits:
The exhibits filed with this Report are listed on the "Exhibit
Index" on page E-1.
(b) Reports on Form 8-K.
The Company was not required to file any current reports on Form
8-K during the quarter ended December 31, 1998, and none was
filed during that period.
11
12
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on March 18, 1999.
DURAKON INDUSTRIES, INC.
By: /s/ David W. Wright
-----------------------------------
David W. Wright, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated on March 18, 1999.
Signature Title
/s/David W. Wright Director (Principal Executive Officer)
- ---------------------------------------
David W. Wright
/s/James C. Smith Secretary and Treasurer - Corporate
- -------------------------------------- Controller
James C. Smith
/s/David Aronow Director
- ---------------------------------------
David Aronow
/s/Phillip Wm. Fisher Director
- ---------------------------------------
Phillip Wm. Fisher
/s/ Richard J. Jacob Director
- ---------------------------------------
Richard J. Jacob
/s/ Robert M. Teeter Director
- ---------------------------------------
Robert M. Teeter
13
DURAKON INDUSTRIES, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Durakon Industries, Inc. are
referred to in Item 8:
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Income - Years ended
December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7 to F-18
The following consolidated financial statement schedule of Durakon Industries,
Inc. is included herein:
Schedule II -- Valuation and qualifying accounts S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Durakon Industries, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1), present fairly, in all material respects, the
financial position of Durakon Industries, Inc. and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
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 audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 19, 1999
F-2
15
DURAKON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
($ in 000's)
1998 1997
---- ----
ASSETS
Current assets:
Cash and equivalents $ 15,433 $ 7,907
Accounts receivable, less allowances of $1,005 and $1,252 22,743 20,039
Inventories 16,177 16,748
Prepaid expenses and other current assets 1,532 2,401
Deferred income taxes 1,685 2,973
-------- --------
Total current assets 57,570 50,068
Property, plant and equipment less accumulated depreciation
of $29,479 and $26,765 19,945 21,943
Goodwill 9,923 10,601
Patents, less accumulated amortization of $2,070 and $1,939 139 270
Other assets 191 210
-------- --------
TOTAL ASSETS $ 87,768 $ 83,092
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 271 $ 248
Accounts payable 9,301 10,308
Other current liabilities 6,231 7,831
-------- --------
Total current liabilities 15,803 18,387
-------- --------
Long-term obligations 801 554
Deferred income taxes 1,727 1,184
Minority interest 534 681
-------- --------
Total long-term liabilities 3,062 2,419
-------- --------
Shareholders' equity:
Preferred stock, $1 par value - 100,000 shares authorized; none issued -- --
Common stock, without par value - 15,000,000 shares authorized;
6,125,200 and 6,245,292 shares issued and outstanding 16,059 17,244
Accumulated other comprehensive loss (397) (290)
Retained earnings 53,241 45,332
-------- --------
Total shareholders' equity 68,903 62,286
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 87,768 $ 83,092
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
16
DURAKON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ in 000's, except per share amounts)
1998 1997 1996
---- ---- ----
Net sales $ 192,358 $ 179,908 $ 183,628
Cost of products sold 157,540 149,555 143,950
--------- --------- ---------
Gross profit 34,818 30,353 39,678
Selling, general and
administrative expenses 22,464 29,618 26,545
--------- --------- ---------
Operating income 12,354 735 13,133
Interest income 540 199 778
Interest expense (129) (130) (149)
Other income/(expense), net (386) (114) 59
Minority interest (288) (247) (124)
--------- --------- ---------
Income before income taxes 12,091 443 13,697
Provision/(benefits) for income taxes 4,182 (660) 4,793
--------- --------- ---------
Net income $ 7,909 $ 1,103 $ 8,904
========= ========= =========
Basic earnings per share of common stock $ 1.28 $ 0.18 $ 1.36
========= ========= =========
Diluted earnings per share of common stock $ 1.27 $ 0.18 $ 1.34
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
17
DURAKON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ in 000's, except shares)
Shares Equity
---------- --------------------------------------------------------------
Accumulated
Other Total
Common Common Retained Comprehensive Shareholders'
Stock Stock Earnings Loss Equity
---------- -------- -------- ------------- --------------
Balance at December 31, 1995 6,520,292 $ 21,506 $ 35,325 $ (275) $56,556
---------- -------- -------- -------- -------
Comprehensive income
Net Income 8,904 8,904
Foreign currency translation (14) (14)
-------
Total Comprehensive Income 8,890
Exercise of stock options 45,000 146 146
Tax benefit of exercised options 168 168
---------- -------- -------- -------- -------
Balance at December 31, 1996 6,565,292 $ 21,820 $ 44,229 $ (289) $65,760
---------- -------- -------- -------- -------
Comprehensive income
Net Income 1,103 1,103
Foreign currency translation (1) (1)
-------
Total Comprehensive Income 1,102
Exercise of stock options 80,000 409 409
Tax benefit of exercised options 215 215
Repurchase of shares (400,000) (5,200) (5,200)
---------- -------- -------- -------- -------
Balance at December 31, 1997 6,245,292 $ 17,244 $ 45,332 $ (290) $62,286
---------- -------- -------- -------- -------
Comprehensive income
Net Income 7,909 7,909
Foreign currency translation (107) (107)
-------
Total Comprehensive Income 7,802
Repurchase of shares (120,092) (1,185) (1,185)
---------- -------- -------- -------- -------
Balance at December 31, 1998 6,125,200 $ 16,059 $ 53,241 ($397) $68,903
========== ======== ======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
18
DURAKON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
($ in 000's)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,909 $ 1,103 $ 8,904
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,692 4,984 4,179
Increase/(decrease) in minority interest, net (147) 506 116
Increase/(decrease) in deferred income taxes 1,831 (379) 1,153
Gain/(loss) on disposal of property, plant and equipment (181) 74 (36)
Net decrease/(increase) of other assets 19 (18) (82)
Increase/(decrease) due to changes in operating assets and liabilities:
Accounts receivable (2,704) 136 (2,711)
Inventories 571 1,679 (6,282)
Prepaid expenses and other current assets 869 (396) (859)
Accounts payable (1,007) 368 (124)
Accrued expenses and other current liabilities (1,600) 1,723 (908)
-------- -------- --------
Net cash provided by operating activities 11,252 9,780 3,350
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,827) (5,622) (5,932)
Proceeds from sale of property, plant and equipment 123 188 158
-------- -------- --------
Net cash used in investing activities (2,704) (5,434) (5,774)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Decrease in long-term debt (265) (244) (1,868)
Borrowing of long-term debt 535 -- --
Repurchase of common stock (1,185) (5,200) --
Cash proceeds from exercise of stock options -- 409 146
-------- -------- --------
Net cash used in financing activities (915) (5,035) (1,722)
-------- -------- --------
Effect of exchange rate changes on cash (107) (1) (14)
-------- -------- --------
CASH AND EQUIVALENTS:
Increase/(decrease) for year 7,526 (690) (4,160)
Balance, beginning of year 7,907 8,597 12,757
-------- -------- --------
BALANCE, END OF YEAR $ 15,433 $ 7,907 $ 8,597
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
19
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Durakon
Industries, Inc.,"The Company", and its domestic subsidiaries and foreign
majority-owned subsidiary, "Duramex". All significant intercompany
accounts and transactions have been eliminated.
CASH AND EQUIVALENTS:
At December 31, 1998, 1997 and 1996, substantially all cash was held at
Comerica Bank.
For purposes of the statement of cash flows, cash and equivalents include
cash on hand, amounts due from banks and debt instruments purchased with
an original maturity of three months or less.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for the Vehicle Accessories segment
and the last-in, first-out (LIFO) method for the Towing & Recovery
segment.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets.
Upon retirement or disposal of assets the costs and accumulated
depreciation are removed from the related accounts, and any gain or loss
is included in income.
INTANGIBLES:
Goodwill is being amortized using the straight-line method over a period
of 20 years. At each balance sheet date, management assesses whether there
has been an impairment in the carrying value of goodwill, primarily by
comparing current and projected sales, operating income and annual cash
flows with the carrying value of the assets. Purchase costs of patents are
being amortized using the straight-line method over the legal lives of the
patents, not to exceed 17 years.
RETIREMENT PLANS:
The Company has defined contribution retirement plans covering
substantially all employees. The Company's policy is to fund retirement
costs accrued.
INCOME TAXES:
Deferred income taxes are recorded to reflect the tax liability/benefit on
future years of differences between the tax basis and financial reporting
amount of assets and liabilities at each year-end.
FOREIGN CURRENCY TRANSLATION:
The assets and liabilities of the Company's foreign operation are
translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
translation adjustments are reflected as a separate component of
shareholders' equity. Currency transaction gains and losses are reported
in income.
F-7
20
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE OF COMMON STOCK:
Net income per share of common stock is calculated in accordance with
Statement of Financial Accounting Standards (FASB) No. 128.
SEGMENTS:
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1998. SFAS No. 131 established standards for
reporting information about operating segments that are used by management
for making operating decisions. The operating segments are managed
separately because each operating segment represents a strategic business
unit that offers different products and serves different markets. The
Company operates in two operating segments, Vehicle Accessories and Towing
& Recovery. Adoption of SFAS 131, had no impact on segments as previously
reported.
REPORTING:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-8
21
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES
Inventories are summarized below ($ in 000's):
December 31,
------------
1998 1997
---- ----
Raw materials and work in process ................................... $ 9,222 $ 8,279
Finished goods ...................................................... 6,955 8,469
------- -------
Total ............................................................... $16,177 $16,748
======= =======
The LIFO method of inventory valuation is used to value the
inventory of the Towing & Recovery segment, which represented
approximately 56% of total inventory at December 31, 1998 and 49% at
December 31, 1997. The effect of LIFO adjustments was to reduce net
income by $333 in 1998 and $37 in 1997. At December 31, 1998 and
1997, the Company's LIFO reserve was $1,809 and $1,518,
respectively.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is shown below ($ in 000's):
December 31,
------------
1998 1997
---- ----
Land .............................................................. $ 2,041 $ 2,033
Buildings ......................................................... 8,757 8,537
Machinery and equipment ........................................... 38,626 38,138
------- -------
Total property, plant and equipment ............................... 49,424 48,708
Less accumulated depreciation ..................................... 29,479 26,765
------- -------
Net property, plant and equipment ................................. $19,945 $21,943
======= =======
Property, plant and equipment are stated at cost. Depreciable property
is depreciated over the estimated useful lives of the assets, using the
straight-line method for building and improvements at 20 to 25 years
and machinery and equipment 5 to 15 years.
F-9
22
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OTHER CURRENT LIABILITIES
A summary of other current liabilities is shown below ($ in 000's):
December 31,
------------
1998 1997
---- ----
Accrued compensation .................... $1,974 $1,585
Legal reserve ........................... 977 1,808
Workers' compensation ................... 213 524
Accrued income taxes .................... 877 605
Reserve for disposition of subsidiary and
distribution stores ................. 105 334
Commission and royalties ................ 267 417
Health insurance ........................ 374 424
Other ................................... 1,444 2,134
------ ------
Total ................................... $6,231 $7,831
====== ======
5. RETIREMENT PLANS ($ in 000'S)
Employer contributions to the 401(k) retirement plans amounted to $580
in 1998, $572 in 1997, and $435 in 1996.
6. LEASES
Rental expense under operating leases approximated $2,587 in 1998,
$3,038 in 1997, and $2,539 in 1996. At December 31, 1998, future
minimum lease commitments under these leases were as follows:
Year ending December 31 ($ in 000's):
1999 ............................ $1,836
2000 ............................ 1,277
2001 ............................ 898
2002 ............................ 775
2003 and thereafter .............. 3,359
------
$8,145
------
7. CONTINGENCIES ($ in 000'S)
Various legal actions and other claims are pending or could be asserted
against the Company. Litigation is subject to many uncertainties; the
outcome of individual litigated matters is not predictable with
assurance, and it is reasonably possible that some of these matters may
be decided unfavorably to the Company. It is the opinion of management
that the ultimate liability, if any, with respect to these matters will
not materially affect the financial position or results of operations
of the Company. The Company is contingently liable under the terms of
agreements covering certain of its customer's financing arrangements.
The agreements provide for the repurchase of products sold to customers
in the event of default by the customer to the financing company. The
contingent liability under these agreements was approximately $8,667
and $8,550 at December 31, 1998 and 1997, respectively. The Company has
incurred no material losses related to these agreements.
F-10
23
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM OBLIGATIONS($ in 000's):
Long-term obligations consisted of the following at December 31
1998 1997
---- ----
Duramex note payable to bank, interest at Libor plus 2.675%, which was
7.8% and 8.4% at December 31, 1998 and 1997, respectively, due in
semi-annual installments of $51 through 1999 ........................ 102 205
Loan payable to Pennsylvania Industrial Development Association,
interest at 2%, due in monthly installments of $3, through 2009 .... 312 339
Loan payable to Machinery and Equipment Loan Fund, interest at 2%,
due in monthly installments of $4, through 2001 .................... 142 187
Duramex note payable to bank, interest at Libor plus 2.675%, which was
7.8% and 8.4% at December 31, 1998 and 1997, respectively, due in
semi-annual installments of $33, through 1998 ....................... -- 71
Capital lease obligations through September 2003; monthly
installments of $10 including interest at 6% net of interest of $80.. 516 --
------ ------
Less current maturities .............................................. 271 248
------ ------
Total long-term obligations .......................................... $ 801 $ 554
====== ======
Maturities of long-term obligations during the next five years are
$177, $184, $145, $121 and $171.
The Company maintains a $20,000 revolving credit facility with
Comerica Bank, which expires June 30, 2000. There were no borrowing
against this facility as of December 31, 1998. However, letters of
credit have been issued against the credit line totaling $1,450 at
December 31, 1998.
F-11
24
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", effective with the 1996 financial
statements. The Company, however, has elected to continue to measure
compensation cost using the intrinsic value method, in accordance
with APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees".
The Company has stock options outstanding under the 1988 Stock
Option Plan and the 1996 Stock Option Plan. Under the 1988 Stock
Option Plan, the Company has made available 500,000 shares of common
stock for key employees. The options vest and become exercisable in
equal annual installments, generally over a period of 4 years. In
the 1988 and 1996 plans, the options expire after a period of 10
years. Certain options, which were issued in 1995, were immediately
exercisable. At December 31, 1998, there were 163,234 shares that
remained available for grant under the 1988 plan.
Under the 1996 Stock Option Plan, the Company has made available
500,000 shares of common stock for key employees. The options vest
and become exercisable in equal annual installments as defined in
the agreements. At December 31, 1998, there were 248,000 shares that
remained available for grant under this plan.
In addition to the aforementioned plans, the Company has a stock
option agreement under which the Company has made available and
granted 100,000 shares of common stock for this agreement. During
1998, no options were exercised under this agreement
Information concerning stock options is as follows:
1998 1997 1996
-------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
-------------------- ----------------------- -----------------------
Outstanding at January 1 347,500 $10.33 570,000 $11.01 468,334 $ 9.74
Options granted 148,000 $ 7.50 -- 150,000 $12.69
Options exercised -- -- 80,000 $ 5.11 45,000 $ 3.25
Options canceled 37,500 $16.00 142,500 $16.00 3,334 $12.25
Outstanding at December 31 458,000 $ 8.95 347,500 $10.33 570,000 $11.01
Exercisable at December 31 215,000 $ 8.32 205,000 $ 8.72 257,500 $ 7.44
The fair value of options granted in 1998 and 1996 was estimated as
of the date of the grant using the Black-Scholes option-pricing
model with the following asumptions:
1998 1996
---- ----
Estimated fair value per share of options granted during the year $ 3.50 $ 6.22
Assumptions:
Dividend yield 0% 0%
Common stock volatility 44.42% 45.34%
Risk-free rate of return 5.5% 6.3%
Expected option term (in years) 5 5
F-12
25
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
The Company has elected to continue applying the provisions of APB
25 and, accordingly, no stock option compensation cost is included
in income for the Stock Option Plans. Had stock option compensation
cost for these plans been determined based on the fair value at the
grant dates for awards under those Plans consistent with the
methodology of SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated
below:
1998 1997 1996
------------------------ ----------------------- -----------------------
As reported Pro forma As reported Pro forma As reported Pro forma
------------------------ ----------------------- -----------------------
Net Income (in 000's) $ 7,909 $ 7,362 $ 1,103 $ 626 $ 8,904 $ 8,286
Basic earnings per common share $ 1.28 $ 1.19 $ 0.18 $ 0.10 $ 1.36 $ 1.27
Diluted earnings per common share $ 1.27 $ 1.18 $ 0.18 $ 0.10 $ 1.34 $ 1.25
The following table summarizes the status of the Company's stock
options outstanding and exercisable at December 31, 1998:
---------------------------------------- ------------------------
Stock Options Stock Options
Outstanding Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices (000's) Life Price (000's) Price
-----------------------------------------------------------------------------------------
$ 3.25 - $ 7.49 100 2.6 $ 3.25 100 $ 3.25
$ 7.50 - $12.69 348 2.9 $10.45 105 $12.63
$12.70 - $16.00 10 5.0 $13.63 10 $13.63
-----------------------------------------------------------------------------------------
Total 458 215
-----------------------------------------------------------------------------------------
F-13
26
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The provisions for income taxes are summarized below ($ in 000's):
1998 1997 1996
---- ---- ----
Federal income taxes:
Currently payable ......................................... $ 2,980 $ (54) $ 3,156
Deferred .................................................. 1,153 (610) 1,208
------- ------- -------
4,133 (664) 4,364
State income taxes .......................................... 49 4 429
Provision for income taxes .................................. $4,182 $ (660) $ 4,793
======= ======= =======
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows ($ in
000's):
1998 1997
---- ----
Deferred Deferred Tax Deferred Deferred Tax
Tax Asset Liability Tax Asset Liability
--------- ------------ --------- -------------
Depreciation and goodwill amortization -- $1,673 -- $1,342
Bad debt allowance ................... $ 315 -- $ 438 --
Inventory ............................ 338 -- 489 --
Litigation reserve ................... 324 -- 701 --
Reserve for disposition of subsidiary 44 -- 163 --
Vacation pay accrual ................. 241 -- 219 --
Reserve for returns and allowances ... 181 -- 199 --
Warranty reserve ..................... 91 -- 79 --
Patent amortization .................. 47 -- 95 --
Reserve employee health benefit
claims ...................... 242 -- 299 --
Other miscellaneous accrued and
prepaid expenses ................ (192) -- 449 --
------ ------ ------ ------
Total deferred taxes $1,631 $1,673 $3,131 $1,342
====== ====== ====== ======
The consolidated income tax provision was different than the amount
computed using the United States statutory income tax rate for the
reasons set forth in the following table ($ in 000's):
1998 1997 1996
---- ---- ----
Tax at the statutory rate .................................... $ 4,155 $ 177 $ 4,658
State income taxes ........................................... 49 3 279
Non-deductible loss from disposition of
subsidiary .................................... -- -- (114)
Research and development credits ............................. -- (118) --
Favorable settlement of various tax issues ................... -- (651) --
Other ........................................................ (22) (71) (30)
------- ------- -------
Provision for income tax ..................................... $ 4,182 $ (660) $ 4,793
======= ======= =======
Effective tax rate ........................................... 35% (149%) 35%
======= ======= =======
During 1997 and 1996, The Internal Revenue Service completed its audits
of the Company's 1993, 1994 and 1995 tax returns. Upon completion of
the audits the Company reversed the amount accrued in excess of the
adjustment required as a result of the audits.
F-14
27
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STATEMENT OF CASH FLOWS ADDITIONAL INFORMATION
Supplemental disclosures of cash flow information ($ in 000's):
1998 1997 1996
---- ---- ----
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140 $125 $ 200
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,405 $275 $3,430
Supplemental non-cash investing activities:
In 1998 there were no stock options exercised. In 1997 the Company
received a $215 tax benefit from exercise of stock options. In 1996
the Company received a $168 tax benefit from the exercise of stock
options.
12. OTHER INCOME AND (EXPENSE) ($ in 000'S)
Net other expense for 1998 of $386 represents primarily losses on
plant, property and equipment and other expenses related to the
Mexican operation.
Net other expense for 1997 of $114 represents primarily losses on
disposal of various plant, property and equipment.
Net other income for 1996 of $59 primarily represents $36 of a gain
on the sale of property, plant and equipment and $16 of Duramex
royalties.
F-15
28
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents financial data regarding the Company's
quarterly results of operations for 1998 and 1997 ($ in 000's, except
per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998:
Net sales. . . . . . . . . . . . . . . . . . . . . . $46,068 $50,449 $47,177 $48,664
Gross profit . . . . . . . . . . . . . . . . . . . . 8,497 9,460 7,792 9,069
Net income . . . . . . . . . . . . . . . . . . . . . 1,361 2,007 1,648 2,893
Basic earnings per share of common
stock. . . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.32 $ 0.27 $ 0.47
Diluted earnings per share of common
stock. . . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.32 $ 0.26 $ 0.47
1997:
Net sales . . . . . . . . . . . . . . . . . . . . . . $40,616 $46,198 $45,209 $47,885
Gross profit . . . . . . . . . . . . . . . . . . . . 7,476 8,145 6,742 7,990
Net income . . . . . . . . . . . . . . . . . . . . . 257 390 (634)(1) 1,090(2)
Basic earnings per share of common
stock. . . . . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.06 $ (0.10) $ 0.18
Diluted earnings per share of common
stock. . . . . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.06 $ (0.10) $ 0.18
(1) Includes a $1.3 million inventory adjustment in the vehicle
accessories segment.
(2) Includes a $289 pre-tax charge to provide for anticipated costs
to terminate the Dewalt operation in Channelview, Texas and
reversal of $651 accrued in excess of the adjustment required as
a result of the settlement 1993, 1994 and 1995 tax audits.
F-16
29
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the
"basic" and "diluted" EPS calculation follows ($ in 000's, except
shares):
Year ended
December 31,
1998 1997 1996
---- ---- ----
Net income used for both "basic"
And "diluted" EPS calculation $ 7,909 $ 1,103 $ 8,904
Denominator:
Weighted average shares outstanding
for the period - used for "basic"
EPS calculation 6,160,584 6,254,804 6,540,450
Weighted average options outstanding
For the period 86,403 49,176 92,228
------ ------ ------
Weighted average shares outstanding
for the period - used for "diluted"
EPS calculation 6,246,987 6,303,980 6,632,678
There were 210,000, 247,500, and 190,000 options outstanding as of
December 31, 1998, 1997, and 1996, respectively, which are not included
in the computation of diluted EPS because to do so would have been
antidilutive for the years then ended. Earnings per share for the year
ended December 31, 1996 have been restated to conform to SFAS No. 128.
F-17
30
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT REPORTING
The Company has determined the reportable operating segments to be
Vehicle Accessories and Towing and Recovery which is consistent with
FAS 14, "Financial Reporting for Segments of Business Enterprise". The
accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Management
evaluates their performance and business strategy based upon operating
income. The Vehicle Accessories segment manufactures and distributes
pickup truck bedliners and other vehicle accessories. The Towing &
Recovery segment manufactures and mounts systems on purchased and
customer-supplied truck chassis, which provide the converted trucks
with the ability to transport vehicles ranging in size from automobiles
to heavy equipment. The Company has no intersegment sales.
Information regarding the Company's segments follows ($ in 000's):
Operating Segments
Vehicle Towing &
Accessories Recovery Total
----------- -------- -----
1998
- ----
Total net sales $92,122 $100,236 $192,358
Operating Income 8,503 3,851 12,354
Identifiable Assets 62,717 25,051 87,768
Capital Expenditures 2,554 273 2,827
Depreciation/Amortization 4,405 1,287 5,692
1997
- ----
Total net sales $92,250 $ 87,658 $179,908
Operating Income 77 658 735
Identifiable Assets 58,312 24,780 83,092
Capital Expenditures 3,582 2,040 5,622
Depreciation/Amortization 3,844 1,140 4,984
1996
- ----
Total net sales $85,109 $ 98,519 $183,628
Operating Income 6,997 6,136 13,133
Identifiable Assets 56,290 27,789 84,079
Capital Expenditures 3,227 2,705 5,932
Depreciation/Amortization 3,413 766 4,179
Information concerning principal geographic areas was as follows($ in 000's):
1998 1997 1996
---- ---- ----
United States $173,752 $158,817 $168,064
Foreign 18,606 21,091 15,564
-------- -------- --------
Total Consolidated Sales $192,358 $179,908 $183,628
======== ======== ========
F-18
31
DURAKON INDUSTRIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
($ in 000's)
Balance at Charged to
beginning costs and Other Charges Balance at
Year Description of year expenses accounts add (deduct) end of year
- ---- ----------- --------------------------------------------- ------------ -----------
1998 Allowance for doubtful
accounts. . . . . . . . . . . . ($1,252) ($394) $641 (1) ($1,005)
Patents, net of accumulated
amortization. . . . . . . . . . $270 ($131) $139
Goodwill, net of accumulated
amortization. . . . . . . . . . $10,601 ($678) $9,923
1997 Allowance for doubtful
accounts. . . . . . . . . . . . ($637) ($853) $238 (1) ($1,252)
Patents, net of accumulated
amortization. . . . . . . . . . $406 ($136) $270
Goodwill, net of accumulated
amortization. . . . . . . . . . $11,278 ($677) $10,601
1996 Allowance for doubtful
accounts. . . . . . . . . . . . ($640) ($478) $481 (1) ($637)
Patents, net of accumulated
amortization. . . . . . . . . . $507 ($131) ($26)(3) $56 (2) $406
Non-compete, net of
accumulated amortization $143 ($143) $0
Goodwill, net of accumulated
amortization. . . . . . . . . . $13,870 ($676) ($1,916)(3) $11,278
(1) Bad debts written off, net of recoveries.
(2) Amount represents addition to goodwill, patent and non-compete agreement.
(3) Adjustments to prior acquisitions within last 18 months.
S-1
32
EXHIBIT INDEX
Exhibit Sequential
Number Description of Exhibit Page Number
- ------ ---------------------- -----------
3(a) Articles of Incorporation of Durakon Industries, Inc., as amended (4)
3(b) By-laws of Durakon Industries, Inc., as amended (4)
10.1 Employees' Retirement Savings Plan, as amended and restated (5)
10.5 $20,000,000 Revolving Credit Loan Agreement by and between
Durakon Industries, Inc. and Comerica Bank, dated October 17,
1994, as amended (2)
10.6 Amendment to Revolving Credit Agreement, dated June 30, 1997 (7)
10.20 Consulting Agreement, dated August 1, 1994, by and between
Durakon Industries, Inc. and Robert Teeter (2)
10.22 Non-Qualified Stock Option Agreement, dated August 5, 1991,
between Durakon Industries, Inc. and Robert Teeter (4)
10.26 Indemnity Agreement, dated June 11, 1991, between Durakon
Industries, Inc. and Phillip Wm. Fisher (4)
10.28 Indemnity Agreement, dated August 8, 1991, between Durakon
Industries, Inc. and Robert Teeter (4)
10.30 Indemnity Agreement, dated June 11, 1991, between Durakon
Industries, Inc. and David W. Wright (4)
10.31 Indemnity agreement, dated October 25, 1993, between Durakon
Industries, Inc. and Richard J. Jacob (3)
10.32 Indemnity Agreement, dated May 16, 1995, between Durakon
Industries, Inc. and James P. Kelly (1)
10.33 Indemnity Agreement, dated July 18, 1995, between Durakon
Industries, Inc. and David S. Aronow (1)
10.34 Employment Agreement, dated June 27, 1996, effective July 1,
1996, by and between Durakon Industries, Inc. and David Wright (6)
10.35 Non-Qualified Stock Option Agreement, dated June 27, 1996
between Durakon Industries, Inc. and David Wright (6)
10.36 Employment Agreement, dated July 1, 1996 by and between
Durakon Industries, Inc. and Jim Kelly (6)
E-1
33
10.37 1996 Stock Option Plan (6)
10.40 Non-Qualified Stock Option Agreement, dated April 1, 1996 between
Durakon Industries, Inc. and David Wright (6)
10.41 Non-Qualified Stock Option Agreement, dated January 25, 1999
between Durakon Industries, Inc. and David S. Aronow *
10.42 Change of Control Agreement, dated March 1, 1999 between Durakon
Industries, Inc. and Craig B. Parr *
10.43 Change of Control Agreement, dated March 1, 1999 between Durakon
Industries, Inc. and James C. Smith *
10.44 Change of Control Agreement, dated March 1, 1999 between Durakon
Industries, Inc. and Jeffrey L. Weller *
21* Subsidiaries of the Registrant
23.1* Consent of Independent Accountants
27* Financial Data Schedule
* Filed with this Report
(1) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference.
(2) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference.
(3) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1993 and incorporated herein by reference.
(4) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1991, and incorporated herein by reference.
E-2
34
(5) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1990, and incorporated herein by reference.
(6) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by reference.
(7) Previously filed under the corresponding Exhibit Number as an exhibit to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1997, and incorporated herein by reference
E-3