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 sport utility vehicles; van liners to protect the interiors of cargo vans; chassis cab covers and combination storage and protective trays for the back of vans, sport utility vehicles and passenger car trunks. 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; DuraTrunk(R), a high density polyethylene plastic storage container; and DuraSport(TM) steps and running boards for pickup trucks and sport utility vehicles constructed of polyurethane.
The Company also distributes products through its Duraliner USA network, which consists of eight warehouses located throughout the country. In addition to products manufactured by and for the Company, Duraliner USA also sells and distributes 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), Powergrid(TM), and DeWalt(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.
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, 1997, the Company and its subsidiaries employed 847 persons. Approximately 29% 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 249 employees at the Lapeer, Michigan plant.
Significant Customers. No one customer accounts for more than 10% of consolidated net sales and no material part of the Company's business is dependent upon a single customer.
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 worldwide to original equipment manufacturers and to independent aftermarket distributors. 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 North America. 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 patents the Company considers most valuable expire after 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.
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 7 acres of land in Clinton, Tennessee. The lease expires in 2003; rental under this lease was approximately $255 in 1997.
Additional warehousing space of 20,000 square feet is leased in Greenbrier, Tennessee to provide inventory availability for the Ford business.
The Company's Mexican subsidiary leases a 46,692 square foot manufacturing facility in Lerma, Mexico. Rental under this lease agreement was $116 during 1997.
The Company has 8 leased locations, which operate under the name "Duraliner U.S.A." that are primarily used as wholesale distribution centers. These facilities, located in City of Industry, California; Ft. Lauderdale and Lakeland, Florida; New Orleans, Louisiana; Westland, Michigan; Ft. Worth and Houston, Texas; and Charleston, West Virginia, have approximately 9,000 to 21,000 square feet per location. Aggregate rentals under these leases were approximately $435 in 1997. The expiration dates for these leases range from 1997 to 2002.
In June 1997, the Company entered into a joint venture with respect to its Stockton, California wholesale distribution center to operate as "Duraliner of California". In December 1997, the Springfield, Massachusetts warehouse was closed with distribution in the territory contracted to a dedicated warehouse operated by a third-party logistics firm.
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. An assembly location of approximately 6,000 square feet with an annual rent of $25 is leased on a month-to-month basis.
The Company also leases a manufacturing location in Channelview, Texas. This facility is approximately 13,000 square feet at an annual rent of $50. The lease expires November 30, 1999. In December 1997, the company decided to transfer manufacturing operations of its DeWalt Division to Greencastle, Pennsylvania. The Company is negotiating to terminate the lease in Channelview.
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 is $336 in 1997 and $349 thereafter. 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. In 1997, the company recognized a need for additional warehouse space to accommodate new business in the Towing and Recovery segment.
ITEM 3.
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. The cases are Jude Vanderhoff, et al. v. Durakon Industries, Inc., et al., filed in the Circuit Court of Jefferson County, Kentucky on February 6, 1997; James S. Sherman et al. v. Durakon Industries, Inc., et al., filed in the Common Pleas Court of Montgomery County, Ohio on January 23, 1997; Tennyson Smith, et al. v. Durakon Industries, Inc., et al., filed in the Circuit Court of Greene County, Alabama on November 7, 1996; Mary Ann Boyer, et al. v. Durakon Industries, Inc., et al., filed in the United States District Court for the Southern District of Florida on November 8, 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., et al., filed in the United States District Court for the Eastern District of Missouri on November 8, 1996; 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; Jon Brown v. Durakon Industries, Inc., filed in the United States District Court for the Northern District of Texas on February 10, 1997; and William Earl Crabtree, et al. v. Durakon Industries, Inc., et. al., filed in the United States District Court for the Middle District of Louisiana on November 13, 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.
On March 20, 1997, the United States District Court for the Southern District of Mississippi, Hattiesburg Division, entered an Order Conditionally Certifying Class for Settlement Purposes, Designating Class Counsel, Staying Discovery and Pending Motions and Issuing Injunction in the Jimmy Brown case (the "Order"). Pursuant to the Order, the court has (i) conditionally certified the class for settlement purposes only and has stayed discovery and motions, except for certain limited activities, in the Jimmy Brown case, (ii) enjoined all members of the class and their attorneys from filing, commencing, continuing or otherwise participating in any lawsuit based on or relating to the facts and circumstances underlying the claims and causes of action set forth in the Jimmy Brown lawsuit. In connection with the entry of the Order, the Vanderhoff, Sherman and Jon Brown cases have been dismissed without prejudice and the parties to the Smith, Boyer, Stricklett, Jetton, and Crabtree cases have jointly requested the courts in those cases to stay all discovery and motion practice pending the completion of settlement negotiations among the parties.
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. The court's reason for entering the Order was for the limited purpose of allowing the parties to enter into settlement negotiations. The Order will remain effective for 90 days from the date it was entered or for such longer time as the parties, in the discretion of the court, are engaged in meaningful settlement discussions. If a settlement is reached, it will be subject to approval by the court. Any defendant may withdraw from the conditional certification after obtaining leave of the court, which may be granted without a showing of cause. The withdrawal of any defendant will not affect the conditional certification with respect to the remaining parties.
While settlement negotiations are continuing, there can be no assurance that a settlement will be reached. In the event that settlement negotiations should terminate, 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.
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.
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:
On March 20, 1998, the last available sale price for shares of the Common Stock of the Company, as reported on the Nasdaq Stock Market, was $8.813 As of such date, the approximate number of record holders of the Common Stock was 341.
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 for future growth.
ITEM 6.
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 Coopers & Lybrand L.L.P., and should be read in conjunction with the Consolidated Financial Statements and related Notes.
(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.
(2) Includes a pre-tax gain of $2,358 relating to the sale of a warrant to purchase a minority share of DFM Corporation.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relating to the three years ended December 31, 1997, should be read in conjunction with the Company's Consolidated Financial Statements and related Notes:
CORPORATE DEVELOPMENT. ($ in 000's) In December of 1997, Jerr-Dan closed its Channelview, Texas manufacturing facility. Production of the DeWalt(TM) heavy-duty towing and recovery vehicles has been moved to the Greencastle, Pennsylvania location. A $289 pre-tax charge was recorded in the fourth quarter of 1997 to provide for anticipated costs to transfer the DeWalt operation in Channelview to Greencastle, PA.
In January of 1997, the Vehicle Accessories segment was awarded the Ford service parts business. The company distributes light truck bedliners to Ford dealerships in the United States, Canada and Mexico, through owned and non-owned distribution centers. The contract will be up for renewal December 31, 2000.
In July of 1996, Jerr-Dan leased approximately 126,000 square feet of additional manufacturing space to accommodate the production of its new medium-duty towing vehicle. The addition of the medium-duty towing vehicle model to its product line enables the Company to offer a full range of towing and recovery equipment to its distributors. Several innovative and patentable features are incorporated into this new product including an industry-first corrosion-resistant composite body.
On December 12, 1995, the Company decided to dispose of its ZZ Wheelz subsidiary. The operation acquired in 1994 did not fit the long-term focus of the Company. A $2,900 pre-tax charge was recorded in the fourth quarter of 1995 to write-off the investment and provide for anticipated costs to close the facility.
Effective July 1, 1995, Jerr-Dan acquired substantially all the assets of DeWalt Manufacturing, Inc., a manufacturer of heavy-duty towing and recovery vehicles in Channelview, Texas. Jerr-Dan's DeWalt Division provides a proven product line in the heavy-duty market segment previously not serviced by the Company.
Also in July 1995, Jerr-Dan opened a warehouse in Las Vegas, Nevada to provide improved service to the Company's West Coast distributors. Inventory is available in both kit and turnkey configurations.
NET SALES. ($ in 000's) The following table summarizes net sales by business segment for the last three years:
Net sales decreased 2% to $179,908 in 1997 versus 1996. In 1996 sales increased 7% or $11,577 compared to 1995.
In the Vehicle Accessories segment 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 provided 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 aftermarket. In 1996, sales increased $3,425 or 4% from 1995. Bedliner unit sales increased 12.5% from 1995. International unit sales increased 21% in 1996 compared to 1995. Average bedliner net selling price was down 6.2% from 1995.
In the Towing & Recovery segment, 1997 net sales decreased $10,861 or 11% from 1996. The decrease reflects 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. In 1996, sales increased $8,152 or 9% from 1995. The increase reflects a 10% improvement in sales of manufactured
equipment and an 8% rise in sales of truck chassis. Unit sales of rollback carriers increased by less than 1% while the increase in unit sales of tow vehicle bodies increased by 8%. Average selling prices for rollback carriers were higher by 4% in 1996 as compared to 1995. Average tow vehicle bodies equipment selling prices increased by 20% in 1996 over 1995 reflecting increased sales of medium and heavy-duty models.
GROSS PROFIT. ($ in 000's) The following table summarizes gross profit in dollars and as a percent of sales by segment for the last three years:
In 1997, gross margin in the Vehicle Accessories segment decreased from 29% to 22%. 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 $2.9 million higher in 1997 versus 1996 primarily due to the Ford distribution costs. In 1996, gross margin in the Vehicle Accessories segment increased 2 percentage points from 1995. Margin rates improved primarily due to improved efficiencies and cost reduction efforts in the manufacturing area. Manufacturing fixed cost absorption rates also improved due to increased production volumes in 1996. Manufacturing cost improvements were offset by a marked reduction in average unit selling prices in the latter part of 1996. The implementation of an aggressive pricing strategy was required to combat new competition in the aftermarket channels.
In the Towing & Recovery segment, gross margin in 1997 was 12% compared to 15% in 1996. The margin on manufactured equipment and service was 21% in 1997, down 5% from 1996, which reflects the impact of increased sales of lower-margin towing vehicles in 1997. Lower sales volumes in 1997 also had the effect of reducing gross margins due to less favorable absorption of fixed overhead costs than in 1996. Margins on rollback carriers and light-duty tow trucks decreased by 3% on a year to year basis. In 1996 gross margin was 15% compared to 16% in 1995. The margin on manufactured equipment and service was 26% in 1996, down 1% from 1995, which reflects the impact of increased sales of lower-margin medium and heavy-duty tow trucks in 1996. Margins on rollback carriers and light-duty tow trucks remained consistent year to year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ($ 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:
Selling, general and administrative expenses (SG&A) were 12% higher in 1997 compared to 1996, and two points higher as a percentage of net sales. In 1996, SG&A expenses were 6% less compared to 1995, and two points less as a percentage of net sales.
In the Vehicle Accessories segment, 1997 SG&A was $1,981 higher than in 1996 and as a percentage of net sales was one percentage point higher. The increase in SG&A is primarily due to legal reserves associated with the nine class action lawsuits filed against the Company and various other manufacturers of pickup truck bedliners and professional fees. The increase in professional fees relates largely to the company's profit improvement program. In 1996, SG&A was $426 less than in 1995 and as a percentage of sales were two points lower. The overall spending reduction was primarily the result of the elimination of costs associated with ZZ Wheelz, which was closed in 1995.
In the Towing & Recovery segment, 1997 SG&A was $1,092 higher than 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 is attributable to expansion of the Company's product engineering capability and promotional expenses related to the medium-duty tow vehicle product. In 1996 SG&A was $1,317 lower than 1995 and 2% lower as a percentage of net sales. The reduction is primarily
due to approximately $1,103 in one-time charges related to patent litigation and the write-off of a license agreement which are reflected in 1995 expenses, together with savings attained in other areas in 1996.
DISPOSITION OF SUBSIDIARY ($ in 000's) In December 1995 the Company decided to close its ZZ Wheelz operations. The pre-tax charge of $2,900 to write off the investment and provide for anticipated costs to close the operation was recorded in the fourth quarter of 1995.
INTEREST INCOME/(EXPENSE), NET. ($ in 000's) Net interest income was $69 in 1997, $629 in 1996 and $358 in 1995. The decrease in net interest income is a direct result of lower cash balance during 1997 compared to 1996. The 1996 increase in net interest income primarily reflects lower interest expense in 1996 due to lower outstanding debt.
OTHER INCOME/(EXPENSE), NET. ($ In 000's) Other net expense in 1997 was $114 versus other net income of $59 in 1996 and other net expense of $411 in 1995. In 1997, other net expense primarily relates to a loss on disposal of fixed assets. In 1996, other income related primarily to a gain on disposal of fixed assets and Duramex royalties. In 1995, other expense relates primarily to transaction and devaluation losses associated with the Mexican peso.
MINORITY INTEREST. ($ in 000's) Minority interest reflects the minority shareholders' portion of the net income of Duramex that began operations in April 1993 and Duraliner of California, which began a joint venture in June 1997. The minority interest was $247 in 1997 compared to $124 and $73 in 1996 and 1995, respectively.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was (149%) in 1997, 35% in 1996 and 54% in 1995. During 1997 and 1996, the Internal Revenue Service completed its audits of the Company's 1993, 1994, and 1995 tax returns. Upon completion of the audits, the Company recovered the amount accrued in excess of the adjustment required as a result of the audit. The effective tax rate in 1996 was equal to the statutory rate of 35%. The difference between 1995 effective rate and the statutory rate of 35% was primarily due to the non-deductible portion of the loss on disposition of ZZ Wheelz and a provision for state income taxes.
NET INCOME. ($ in 000's) Net income was $1,103 in 1997, $8,904 in 1996, and $2,299 in 1995. 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 improvement program. The increase of $6,605 in 1996 reflects improved gross margins and lower SG&A expenses.
YEAR 2000 DATE CONVERSION. Management has implemented a Company-wide initiative to ensure that the Company's information systems and systems applications are capable of processing data and transactions pertaining to the year 2000. The initiative utilizes both Company resources and external resources to identify systems and applications affected, to correct existing systems or to acquire replacement systems, and to test the systems and applications for compliance with the requirements for processing year 2000 information. The Company is in the process of determining the total cost associated with the required modifications and conversions.
Management does not believe that inflation had a significant impact on the Company's operations during the last three years.
LIQUIDITY AND CAPITAL RESOURCES ($ in 000's)
At year-end 1997, the Company's cash balance was $7,907, compared to $8,597 at year-end 1996 and $12,757 at year-end 1995. The current ratio was 2.7 at December 31, 1997 versus 3.2 in 1996 and 2.3 in 1995. During 1997, cash of $9,780 was provided by operations versus $3,350 in 1996 and $8,944 in 1995. Cash used in investing activities in 1997 was $5,434 compared to $5,774 in 1996 and $6,636 in 1995. 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. In 1997, the decrease in inventories of $1.7 million and the increase in other liabilities due to the class action lawsuit had a positive impact on net cash provided by operating activities. The main usage of cash in 1996 was to build inventories to service the Ford program in the first quarter of 1997 and for the purchase of equipment. In 1995, the main use of cash was for the
purchase of equipment. Financing activities resulted in a net cash use of $5,035 in 1997 compared to $1,722 in 1996 and $1,462 in 1995. The decrease in cash in 1997 was $690 versus a net cash decrease of $4,160 in 1996.
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, 1997. However, letters of credit have been issued against the credit line totaling $950 at December 31, 1997.
ITEM 8.
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 of this Report.
ITEM 9.
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 1997 Proxy Statement, and is incorporated herein by reference, as follows:
PART IV
ITEM 14.
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.
2. Financial Statement Schedule:
The financial statement schedule filed with this Report is listed on page. 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, 1997, and none was filed during that period.
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 23, 1998.
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 23, 1998.
Signature Title --------- ----- /s/David W. Wright Director (Principal Executive Officer) - --------------------------------- David W. Wright
/s/James C. Smith Corporate Controller - --------------------------------- (Acting Financial and Accounting Officer) 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
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:
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Durakon Industries, Inc.:
We have audited the consolidated financial statements and financial statement schedule of Durakon Industries, Inc. and Subsidiaries listed in the index on page of this Form 10-K. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Durakon Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand, L.L.P.
Detroit, Michigan February 20, 1998
DURAKON INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
($ in 000's)
The accompanying notes are an integral part of the consolidated financial statements.
DURAKON INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
($ in 000's, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
DURAKON INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
($ in 000's, except shares)
The accompanying notes are an integral part of the consolidated financial statements.
DURAKON INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
($ in 000's)
The accompanying notes are an integral part of the consolidated financial statements.
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, 1997, 1996 and 1995, 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 not exceeding 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.
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 operates in two business segments, Vehicle Accessories and Towing & Recovery.
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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS:
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, Disclosures about Segments of an Enterprise and Related Information." The Company will adopt the provisions of both these statements, as required, for the year ended December 31, 1998. At this time the Company is evaluating the effects these statements will have on its financial reporting and disclosures. Management believes the statements will have no significant impact on the Company's Consolidated Financial Statements.
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES
Inventories are summarized below ($ in 000's):
The LIFO method of inventory valuation is used to value the inventory of the Towing & Recovery segment, which represented approximately 49% of total inventory at December 31, 1997 and 54% at December 31, 1996. The effect of LIFO adjustments was to reduce net income by $37 in 1997 and $181 in 1996. At December 31, 1997 and 1996, the Company's LIFO reserve was $1,518 and $1,547, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is shown below ($ in 000's):
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OTHER CURRENT LIABILITIES
A summary of other current liabilities is shown below ($ in 000's):
5. RETIREMENT PLANS
Employer contributions to the 401(k) retirement plans amounted to $572 in 1997, $435 in 1996 and $389 in 1995.
6. LEASES Rental expense under operating leases approximated $3,038 in 1997, $2,539 in 1996 and $2,396 in 1995. At December 31, 1997, future minimum lease commitments under these leases were as follows:
Year ending December 31 ($ in 000's):
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 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 $8,550 and $8,502 at December 31, 1997 and 1996, respectively. The Company has incurred no material losses related to these agreements.
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt consisted of the following at December 31 ($ in 000's):
Maturities of long-term debt during the next five years are $248, $176, $75, $75, and $29.
The Company has a $20,000 unsecured revolving credit agreement with Comerica Bank, which expires June 30, 2000. The related debt outstanding at the close of business on December 31, 1997 was $0.
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, 1997, 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, 1997, there were 350,000 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 1997, no options were exercised under this agreement
Information concerning stock options are as follows:
During 1997, no options were granted. The fair value of options granted in 1996 was estimated as of the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
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:
* The pro forma disclosures may not be representative of the effects on reported net income and earnings per share because only stock options granted beginning in 1995 are reflected in the pro forma amounts. Other factors that may impact pro forma disclosures in future years include the vesting period of stock options, timing of additional grants and number of additional shares granted.
The following table summarizes the status of the Company's stock options outstanding and exercisable at December 31, 1997:
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BUSINESS SEGMENTS
The Company operates in two segments, Vehicle Accessories and Towing & Recovery. 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. Foreign assets, revenues and export sales each represent less than 10% of the Company's total.
Information regarding the Company's segments follows ($ in 000's):
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The provisions for income taxes are summarized below ($ in 000's):
Temporary differences which give rise to the deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows ($ in 000's):
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):
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.
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STATEMENT OF CASH FLOWS ADDITIONAL INFORMATION
Supplemental disclosures of cash flow information ($ in 000's):
Supplemental non-cash investing activities:
In 1997 the Company received a $215 tax benefit from exercise of stock options. In 1996 the Company received a $168 tax benefit from the exercise of stock options. In 1995 there were no stock options exercised.
13. OTHER INCOME AND (EXPENSE) ($ IN 000'S)
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.
Net other expense for 1995 of ($411) represents a loss due to the change in exchange rates of the Mexican peso of ($438) which was offset by miscellaneous income items.
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents financial data regarding the Company's quarterly results of operations for 1997 and 1996 ($ in 000's, except per share amounts):
(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 $651 accrued in excess required as result of the 1993, 1994 and 1995 tax audits.
15. DISPOSITION OF SUBSIDIARY ($ IN 000'S, EXCEPT PER SHARE AMOUNTS)
On December 12, 1995, the Company decided to dispose of its ZZ Wheelz subsidiary in Richardson, Texas. The disposal of ZZ Wheelz was substantially completed in 1996. A $2,900 charge was recorded in the fourth quarter of 1995 to write-off the investment and provided for anticipated costs to close the facility. The operation had a net loss of $560 or $0.08 per share in 1995.
DURAKON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share." The Statement simplifies the standards for computing earnings per share (EPS) and makes them comparable to international EPS standards. The statement requires the presentation of both "basic" and "diluted" EPS on the face of the income statement with a supplementary reconciliation of the numerators and denominators used in the calculations. The statement is effective for financial statements issued for the periods after December 15, 1997, including interim periods.
A reconciliation of the numerators and denominators used in the "basic" and "diluted" EPS calculation follows:
There were 247,500, 190,000, and 230,000 options outstanding as of December 31, 1997,1996, and 1995, respectively, which are not included in the computation of diluted EPS because to do so would have been antidilutive for the years then ended. Earnings per share for the years ended December 31, 1996 and 1995 have been restated to conform to SFAS No. 128.
DURAKON INDUSTRIES, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ($ in 000's)
(1) Bad debts written off, net of recoveries.
(2) Amount represents addition to goodwill, patent and non-compete agreement.
(3) Adjustment for write off of ZZ Wheelz.
S-1 EXHIBIT INDEX
E-1
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)
22* Subsidiaries of the Registrant
23.1* Consent of Independent Accountants
27.9710K Financial Data Schedule
27.9510K Financial Data Schedule
27.961Q Financial Data Schedule
27.962Q Financial Data Schedule
27.963Q Financial Data Schedule
27.9610K Financial Data Schedule
27.971Q Financial Data Schedule
27.972Q Financial Data Schedule
27.973Q 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.
(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, 1997, and incorporated herein by reference.
E-2