FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________1997
Commission File Number: 0-23238
DEFLECTA-SHIELD CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 42-1411117
(State or other jurisdiction of (I.R.S. Employer
of incorporation or Identification No.)
incorporation or
organization)
1800 North 9th Street, 50125
Indianola, 50125 Iowa (Zip Code)
(AddressAddress of principal
executive offices)
(515) 961-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date:
As of November 13, 1996,August 14, 1997, 4,800,000 shares of the registrant's
Common Stock were outstanding.
DEFLECTA-SHIELD CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Page
PART I. Financial Information . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . .3
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 . . . . 3
Condensed Consolidated Balance Sheets at December 31, 1995 and
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of OperationsIncome for the
Three Months ended SeptemberJune 30, 19951997 and 1996 . . 4
Consolidated Statements of Income for the
Six Months ended June 30, 1997 and 1996 . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the Nine
Months ended September, 1995 and 1996 . . . . . . . . . . . . . 5
Condensed
Consolidated Statements of Cash Flows for
the NineSix Months ended SeptemberJune 30, 19951997 and 1996 . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . 9
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 8
PART II. Other Information14
Item 1. Legal Proceedings . . . .4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 1415
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 1415
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
DEFLECTA-SHIELD CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in($ in thousands)
December 31, September 30,
1995 1996
---- ----
(Unaudited)
ASSETS
-------
Current assets:
Cash . . . . . . . . . . . . . . $ 533 $486
Accounts receivable, less
allowance for doubtful
accounts of $623 and
$800, respectively . . . . . . . 9,708 10,314
Inventories . . . . . . . . . . . 10,580 10,184
Deferred income taxes . . . . . . 1,635 1,635
Prepaid expenses . . . . . . . . 912 164
------- -------
Total current assets . . . . 23,368 22,783
Property and equipment, net . . . . 9,344 9,268
Intangible assets . . . . . . . . . 12,601 12,229
Other assets . . . . . . . . . . . 97 93
------- -------
$45,410 $44,373
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term
debt . . . . . . . . . . . . . $1,523 $ 81
Accounts payable . . . . . . . . 4,233 4,883
Accrued expenses . . . . . . . . 2,423 2,722
------- -------
Total current liabilities . 8,179 7,686
Deferred taxes . . . . . . . . . . 275 275
Long-term debt, less current maturities 12,345 8,877
Stockholders' equity (Note 2):
Common stock . . . . . . . . . . 48 48
Additional paid-in capital . . . 18,556 18,556
Retained earnings . . . . . . . . 6,007 8,931
------- -------
Total stockholders equity . 24,611 27,535
------- -------
$45,410 $44,373
======= =======
June 30 December 31
1997 1996
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 915 $ 459
Accounts receivable, less 10,547 10,326
allowance for doubtful accounts
of $904 and $703, respectively
Inventories 10,876 10,123
Deferred income taxes 1,380 1,328
Prepaid expenses 598 304
Total current assets 24,316 22,540
Property and equipment, net 9,723 9,383
Goodwill and intangibles, net 11,896 12,117
Other assets 108 107
$46,043 $44,147
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current maturities of long-term
debt $ 9 $ 9
Accounts payable 5,111 4,830
Accrued expenses 2,549 2,461
Total current liabilities 7,669 7,300
Deferred income taxes 289 280
Long-term debt, less current
maturities 7,380 8,024
Total liabilities 15,338 15,604
Stockholders equity:
Common stock 48 48
Additional paid-in capital 18,556 18,556
Retained earnings 12,101 9,939
30,705 28,543
Commitments and contingencies - -
$46,043 $44,147
The accompanying notes are an integral part of these
statements.
3
DEFLECTA-SHIELD CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(inINCOME
($ in thousands, except per share amounts)
Three Months Ended September 30,
1995 1996
Net sales . . . . . . . . . . . . . $16,007 $18,465
Cost of sales . . . . . . . . . . . 11,167 12,035
------- -------
Gross profit . . . . . . . . . . . 4,840 6,430
Operating expenses:
Selling . . . . . . . . . . . . . 2,552 2,386
General and administrative . . . 1,593 1,707
Amortization of other assets . . 131 113
------- -------
Income from operations . . . . . . 564 2,224
Interest expense . . . . . . . . . 407 250
------- -------
Income before income taxes . . . . 157 1,974
Income tax expense . . . . . . . . 61 729
------- -------
Net income . . . . . . . . . . . . $ 96 $ 1,245
======= ========
Net income per share . . . . . . . $ .02 $ 26
======= ========(Unaudited)
Three Months Ended June 30,
1997 1996
Net sales $18,425 $18,255
Cost of sales 11,646 11,917
Gross Profit 6,779 6,338
Operating expenses:
Selling 2,488 2,648
General and administrative 1,882 1,794
Amortization 111 113
Income from operations 2,298 1,783
Interest expense 125 241
Income before income taxes 2,173 1,542
Income tax expense 891 585
Net income $1,282 $ 957
Net income per share $ .27 $ .20
Weighted average common 4,800 4,800
shares outstanding . . . . . . . . 4,800 4,800
The accompanying notes are an integral part of these
statements.
4
DEFLECTA-SHIELD CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(inINCOME
($ in thousands, except per share amounts)
Nine Months Ended
September 30,
1995 1996
---- ----
Net sales . . . . . . . . . . . . . . . $52,704 $54,743
Cost of sales . . . . . . . . . . . . . 34,733 36,185
------- -------
Gross profit . . . . . . . . . . . . . 17,971 18,558
Operating expenses:
Selling . . . . . . . . . . . . . . . 8,063 7,681
General and administrative . . . . . 4,864 5,066
Amortization of other assets . . . . 357 372
------- -------
Income from operations . . . . . . . . 4,687 5,439
. . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . 1,059 799
------- -------
Income before income taxes . . . . . . 3,628 4,640
Income tax expense . . . . . . . . . . 1,415 1,716
------- -------
Net income . . . . . . . . . . . . . . $2,213 $2,924
======= =======
Net income per share . . . . . . . . . $ .46 $ .61
======= =======(Unaudited)
Six Months Ended June 30,
1997 1996
Net sales $35,318 $36,278
Cost of sales 22,586 24,150
Gross Profit 12,732 12,128
Operating expenses:
Selling 4,791 5,295
General and administrative 3,736 3,285
Amortization 221 259
Income from operations 3,984 3,289
Interest expense 319 549
Income before income taxes 3,665 2,740
Income tax expense 1,503 1,061
Net income $2,162 $1,679
Net income per share $ .45 $ .35
Weighted average common shares
outstanding . . . . . . . . . . 4,800 4,800
The accompanying notes are an integral part of these
statements.
5
DEFLECTA-SHIELD CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1995 1996
---- ----
Cash flow from operating activities:
Net income . . . . . . . . . . . . . . $ 2,213 $2,924
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation . . . . . . . . . . . 1,085 1,471
Amortization of other assets . . . 357 372
Change in deferred tax liability 395 -
Add (deduct) changes in assets and
liabilities:
Accounts receivable . . . . . . 942 (606)
Inventories . . . . . . . . . . (3,515) 396
Prepaid expenses . . . . . . . (658) 748
Other Assets . . . . . . . . . (436) 4
Accounts payable . . . . . . . (1,138) 650
Accrued expenses . . . . . . . (277) 299
------- -------
Net cash (used) provided by operating
activities . . . . . . . . . . . . . . . (1,032) 6,258
------- -------
Cash flows from investing activities:
Purchases of property and equipment . . (3,731) (1,395)
------- -------
Cash used by investing activities . . . (3,731) (1,395)
------- -------
Cash flows from financing activities: . .
Net proceeds (repayment) on line of credit 5,636 (3,461)
Repayment of debt . . . . . . . . . . . (1,059) (1,449)
------- -------
Net cash provided (used) by
financing activities . . . . . . . . . . 4,577 (4,910)
------- -------
Net decrease in cash . . . . . . . . . . (186) (47)
Cash at beginning of period . . . . . . . 747 533
------- -------
Cash at end of period . . . . . . . . . . $ 561 $ 486
======= =======
Cash paid during the period for interest $ 1,050 $ 815
Cash paid during the period for income taxes $ 2,237 $1,263
Six Months Ended June 30
1997 1996
Cash flow from operating activities:
Net income $2,162 $1,679
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 1,038 939
Amortization 221 259
Deferred income taxes (43) -
Add (deduct) changes in assets and
liabilities:
Accounts receivable (221) (672)
Inventories (753) 779
Prepaid expenses (294) 596
Other assets (1) (4)
Accounts payable 281 909
Accrued expenses 88 (81)
Net cash provided by operating activities 2,478 4,404
Cash flow from investing activities:
Purchases of property and equipment (1,378) (809)
Cash used by investing activities (1,378) (809)
Cash flow from financing activities:
Net proceeds (repayment) of revolving
line of credit (640) (3,316)
Repayment of other debt (4) (402)
Net cash used by financing activities (644) (3,718)
Net increase (decrease) in cash 456 (123)
Cash at beginning of period 459 533
Cash at end of period $915 $410
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $353 $590
Cash paid during the period for income
taxes $1,176 $645
The accompanying notes are an integral part of this statement.these
statements.
6
DEFLECTA-SHIELD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)($ in thousands except per share amounts)
NOTE 1 - BASIS OF PRESENTATION OF UNAUDITED FINANCIAL
STATEMENTS
The accompanying unaudited consolidated financial
statements of Deflecta-Shield Corporation and its
subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting
principles for interim financial information. In the
opinion of management, all adjustments (which were of a
normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the
three and ninesix months ended SeptemberJune 30, 19961997 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1996.1997. For further information, refer to
the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-
K10-K for the
fiscal year ended December 31, 1995.1996.
NOTE 2 - CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Additional
Common Paid-In Retained
Stock Capital Earnings
------- ------- --------
Balance at December 31, 1995 . . $ 48 $18,556 $6,007
Net income for the nine months
ended September 30, 1996 . . . -- -- 2,924
------- ------- -------
Balance at September 30, 1996 . $ 48 $18,556 $8,931
======= ======= =======
INVENTORIES
Inventories at June 30, 1997 and December 31, 1996
consisted of the following:
June 30, December 31,
1997 1996
(Unaudited)
Raw materials $ 4,446 $ 4,606
Finished goods and 6,430 5,517
work-in-process $10,876 $10,123
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share, which must
be adopted by the Company for all financial statements
issued after December 15, 1997. The Company has reviewed
the effects of the provisions of the standard and determined
that the net income per share for the three and six months
ended June 30, 1996 would not be affected. If the Company
would have adopted the provisions of the standard during the
second quarter and six months of 1997, basic earnings per
share would have been equal to the earnings per share of
$.27 and $.45 presented on the face of the Consolidated
Statements of Income. However, diluted earnings per share
would have been $.26 and $.44, respectively.
7
The FASB issued SFAS No. 130, Reporting Comprehensive
Income, which will require the Company to disclose, in
financial statement format, all non-owner changes in equity.
SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Adoption of this standard is not
expected to have a material impact on disclosures in the
Company's financial statements, except that the tax benefit
obtained by the Company upon exercise of employee stock
options would be included as an element of comprehensive
income.
The FASB has issued SFAS No. 131, Disclosures About
Segments Of An Enterprise And Related Information, which
established a new accounting principle for reporting
information about operating segments in annual financial
statements and interim financial reports. It also
established standards for related disclosures about products
and services, geographic areas and major customers. SFAS
No. 131 is effective fiscal years beginning after December
15, 1997. The Company is currently evaluating the
applicability of this standard. However, the Company does
not expect a material impact on disclosures in the Company's
financial statements.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSManagement's Discussion and Analysis of Financial
Condition and Results of Operations
($ in thousands except per share amounts)
The following discussion and analysis of the financial
condition and results of operations should be read in
conjunction with the
condensed consolidated financial statements
included elsewhere herein and in conjunction with the
Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Annual
Report on Form 10-K for the Fiscal Year ended December 31,
1995.1996.
Results of Operations
The following tables settable sets forth, for the periods
indicated, certain operating data as a percentage of net
sales.
Percentage of Net Sales
Three Months Six Months
Ended March 31, Ended June 30,
1997 1996 1997 1996
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.2 65.3 63.9 66.6
Gross profit 36.8 34.7 36.1 33.4
Selling expenses 13.5 14.5 13.6 14.6
General and the percentage change
in the dollar amounts of such items compared to the prior period.
Percentage of Net Sales Percentage
Increase (Decrease)
Three Months Ended Three Months Ended
September 30, September 30,
1996 over
1995 1996 1995
---- ---- ----
Net sales . . . . . . . . 100.0% 100.0% 15.4%
Cost of sales . . . . . . 69.8 65.2 7.8
----- ----- -----
Gross profit . . . . . . 30.2 34.8 32.9
Selling expenses . . . . 15.9 12.9 (6.5)
General and administrative
expenses . . . . . . . . 10.0 9.3 7.2
Amortization of other
assets . . . . . . . . . .8 .6 (13.7)
----- -----
Income from operations . 3.5 12.0 294.3
Interest expense . . . . 2.5 1.3 (38.6)
----- -----
Income before income
taxes . . . . . . . . . . 1.0% 10.7% 1,157.3
===== =====
Percentage of Net Sales Percentage
Increase (Decrease)
Nine Months Ended Nine Months Ended
September 30, September 30,
1996 over
1995 1996 1995
---- ---- ----
Net sales . . . . . . . . 100.0% 100.0% 3.9%
Cost of sales . . . . . . 65.9 66.1 4.2
------ ------
Gross profit . . . . . . 34.1 33.9 3.3
Selling expenses . . . . 15.3 14.0 (4.7)
General and administrative
expenses . . . . . . . . 9.2 9.3 4.2
Amortization of other
assets . . . . . . . . . .7 .7 4.2
------ ------
Income from operations . 8.9 9.9 16.0
Interest expense . . . . 2.0 1.4 (24.6)
------ ------
Income before income
taxes . . . . . . . . . . 6.9% 8.5% 27.9
====== ====== ======
8
10.2 9.9 10.6 9.1
administrative expenses
Amortization .6 .6 .6 .7
Income from operations 12.5 9.7 11.3 9.0
Interest expense .7 1.3 .9 1.5
Income before income
taxes 11.8 8.4 10.4 7.5
Income tax expense 4.8 3.2 4.3 2.9
Net income 7.0% 5.2% 6.1% 4.6%
Three Months ended SeptemberJune 30, 19961997 Compared to
Three Months Ended SeptemberJune 30, 19951996
Net Sales. Net sales were $18,465,000$18,425 for the three months
ended SeptemberJune 30, 1996,1997, compared to $16,007,000$18,255 for the three
months ended SeptemberJune 30, 1995,1996, an increase of $2,458,000,$170, or 15.4%.9%.
Net
sales of light truck products increased by $2,192,000 andWhile net sales of air deflectors and aluminum products were
down for the quarter, net sales increased in heavy truck
products, increased by $266,000. Netshock absorbers and suspension systems, and other
light truck accessories as a group. Because the Company
moved away from some mass merchandisers and retail chains to
whom sales of Delta
III products increased by $289,000were made in the three months ended
September 30,second quarter of 1996, as compared to the three months ended September
30, 1995. The remainder of the changean
increase in net sales in air deflectors was not anticipated.
With the introduction of light trucka new aluminum products a net increasecatalog
late in the second quarter of $1,903,000, was primarily attributable to
bug deflectors and running board products.1997, the Company expects
9
sales of these products will respond positively in the
coming months.
Gross Profit. Gross profit was $6,430,000$6,779 for the three
months ended SeptemberJune 30, 1996,1997, compared to $4,840,000$6,338 for the
three months ended
September 30, 1995,comparable period of 1996, an increase of $1,590,000,$441, or 32.9%7.0%.
The increaseThis favorable trend in gross profit was primarily attributabledue to an increasehigher net
sales, improvements in manufacturing efficiency and an increase in the average sale priceefficiencies, decreased
costs of some light truck products.raw material components, and favorable shifts
in product mix. As a percentage of net sales, gross profitmargins
increased to 34.8%36.8% from 34.7% for the same quarter of 1996.
Selling Expenses. Selling expenses were $2,488 for the
three months ended SeptemberJune 30, 1996,1997, compared to 30.2%$2,648 for the
three months ended September 30,
1995, an increasecomparable period of 4.6% of net sales. This increase in gross
profit percentage was primarily attributable to increased sales of
light truck products.
Selling Expenses. Selling expenses were $2,386,000 for the three
months ended September 30, 1996, compared to $2,552,000 for the three
months ended September 30, 1995, a decrease of $166,000,$160, or 6.5%6.0%. As
a percentage of net sales for the same periods, selling
expenseexpenses decreased to 12.9% for the
three months ended September 30, 1996,13.5% from 15.9% for the three
months ended September 30, 1995. This decrease of 3.0% of net sales
was primarily attributable to a decrease14.5%. The reduction in variable
selling expenses is a function of: (i) the timing of
2.1%spending for catalogs and other advertising and promotional
materials that was greater in the second quarter of net sales for1996,
and (ii) a reduction in outbound freight. The higher and
better balanced inventory levels in the three months ended September 30, 1996,second quarter of
1997 allowed the Company to ship more product on time and at
improved fill rates to customers, thus resulting in fewer
less-than-truckload ("LTL") shipments to customers compared
to the three months ended September 30, 1995. The remaining
change in selling expenses, a decreasesame period of 0.9% of net sales was
primarily attributable to a decrease in advertising expense.1996.
General and Administrative Expenses. General and
administrative expenses were $1,707,000$1,882 for the three months
ended SeptemberJune 30, 1996,1997, compared to $1,593,000$1,794 for the three months
ended SeptemberJune 30, 1995,1996, an increase of $114,000,$88, or 7.2%. This increase was primarily
attributable to an increase in product development expense of
$125,000 for the three months ended September 30, 1996, compared to
the three months ended September 30, 1995. As a percentage of net
sales, general and administrative expense decreased to 9.3% for the
three months ended September 30, 1996, from 10.0% for the three
months ended September 30, 1995.
Interest Expense. Interest expense was $250,000 for the three
months ended September 30, 1996, compared to $407,000 for the three
months ended September 30, 1995, a decrease of $157,000, or 38.6%.
Interest bearing debt averaged approximately $9,269,000 for the three
months ended September 30, 1996, compared to approximately
$17,422,000 for the three months ended September 30, 1995.
9
Nine Months ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net Sales. Net sales were $54,743,000 for the nine months ended
September 30, 1996, compared to $52,704,000 for the nine months ended
September 30, 1995, an increase of $2,039,000, or 3.9%. Net sales of
light truck products increased by $2,862,000 and net sales of heavy
truck products decreased by $823,000. The increase in net sales of
light truck products was attributable to sales increases of $985,000
in Delta III products, $467,000 in Trailmaster products, and $466,000
in Fibernetics products. The remainder of the change in net sales of
light truck products, an increase of $944,000, was primarily
attributable to bug deflector products. Sales of heavy truck
products in the nine months ended September 30, 1996 were affected by
lower sales of new heavy trucks during the first six months of 1996
which adversely affected demand for the Company's heavy truck
products.
Gross Profit. Gross profit was $18,558,000 for the nine months
ended September 30, 1996, compared to $17,971,000 for the nine months
ended September 30, 1995, an increase of $587,000, or 3.3%. The
increase in gross profit was primarily attributable to an increase in
manufacturing efficiency and an increase in the average sale price of
some light truck products, offset by cost increases in raw materials,
the incurrence of additional overhead to accommodate planned business
consolidations, and the decrease in heavy truck product sales. As a
percentage of net sales, gross profit decreased to 33.9% for the nine
months ended September 30, 1996, compared to 34.1% for the nine
months ended September 30, 1995, a decrease of 0.2% of net sales.
This decrease in gross profit percentage was primarily attributable
to decreased sales of heavy truck products, offset in part by an
increase in gross profit on sales of light truck products.
Selling Expenses. Selling expenses were $7,681,000 for the nine
months ended September 30, 1996, compared to $8,063,000 for the nine
months ended September 30, 1995, a decrease of $382,000, or 4.7%. As
a percentage of net sales, selling expense decreased to 14.0% for the
nine months ended September 30, 1996, from 15.3% for the nine months
ended September 30, 1995. This decrease of 1.3% of net sales was
primarily attributable to a decrease in variable selling expenses of
1.6% of net sales for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995, and a decrease
in sales personnel expense (compensation and associated costs,
including travel, decreased as a percentage of net sales by 0.4% for
the nine months ended September 30, 1996, compared to the nine months
ended September 30, 1995). The remaining change in selling expenses,
an increase of 0.7% of net sales, was primarily attributable to an
increase in advertising expense and an increase in bad debts expense.
General and Administrative Expenses. General and administrative
expenses were $5,066,000 for the nine months ended September 30,
1996, compared to $4,864,000 for the nine months ended September 30,
1995, an increase of $202,000, or 4.2%4.9%. As a
percentage of net sales, general and administrative expenses
increased to 9.3%10.2% compared to 9.9% for the ninecomparable
period in 1996. The majority of the increase is due to (i)
increased headcount in senior management, (ii) training,
manpower, and development costs for a new information
system, and (iii) costs related to consolidation of
facilities and manufacturing processes.
Interest Expense. Interest expense was $125 for the
three months ended SeptemberJune 30, 1997, compared to $241 for the
three months ended June 30, 1996, from 9.2%a decrease of $116, or
48.1%. Interest rates were more favorable in 1997 and
interest-bearing debt averaged approximately $8,052 for the
ninethree months ended SeptemberJune 30, 1995. This1997, compared to approximately
$10,896 for the three months ended June 30, 1996.
Income Tax Expense. The effective income tax rate was
41.0% for the three months ended June 30, 1997, compared to
37.9% for the comparable period of 1996.
Net Income Per Share. As a result of the improvement
in net income to $1,282 for the three months ended June 30,
1997, compared to $957 for the three months ended June 30,
1996, and no change in the weighted average common shares
10
outstanding, net income per share increased to $.27 per
share from $.20 per share, an increase of 0.1%$.07 per share, or
35%.
Six Months ended June 30, 1997 Compared to
Six Months Ended June 30, 1996
Net Sales. Net sales were $35,318 for the six months
ended June 30, 1997, compared to $36,278 for the six months
ended June 30, 1996, a decrease of $960, or 2.6%. The
overall net sales decline occurred in the first quarter of
1997 which was below the comparable period of 1996 by
$1,130, or 6.3%. In general, the light truck accessory
market was soft in the first six months of 1997. In
addition, the Company's promotions in late 1996 resulted in
reduced ordering in early 1997, and, by repositioning some
product lines, the Company moved away from some customers to
whom sales were made in the comparable six month period of
1996.
Gross Profit. Offsetting the shortfall in net sales,
gross profit was $12,732 for the six months ended June 30,
1997, compared to $12,128 for the comparable period of 1996,
an increase of $604, or 5.0%. As a percentage of net sales,
was
primarily attributablegross margins increased to an increase36.1% from 33.4% for the same
period of 0.8%1996. The increased gross profit percentage is
due to improvements in manufacturing processes and
efficiencies, decreased costs of some raw material
components, and favorable shifts in product mix.
Selling Expenses. Selling expenses were $4,791 for the
six months ended June 30, 1997, compared to $5,295 for the
comparable period of 1996, a decrease of $504, or 9.5%. As
a percentage of net sales for the same periods, selling
expenses decreased to 13.6% from 14.6%. The reduction in
selling expenses is a function of: (i) the timing of
spending for product development expense. The remaining changeadvertising that was greater in the
first six months of 1996, and (ii) a reduction in outbound
freight resulting from a combination of decreased sales
volume and better utilization of LTL shipments to customers.
General and Administrative Expenses. General and
administrative expenses were $3,736 for the six months ended
June 30 1997, compared to $3,285 for the six months ended
June 30, 1996, an increase of $451, or 13.7%. As a
percentage of net sales, general and administrative expenses
increased to 10.6% compared to 9.1% for the comparable
period in 1996. The increase is principally the result of
(i) increased headcount in senior management, (ii) increased
product design and development costs, (iii) training,
manpower, and development costs for a decreasenew information
system, and (iv) costs related to consolidation of
0.7% of net sales, was
primarily attributable to a decrease of generalfacilities and administrative
wages and associated costs, including travel.
10manufacturing processes.
11
Interest Expense. Interest expense was $799,000$319 for the
ninesix months ended SeptemberJune 30, 1996,1997, compared to $1,059,000$549 for the ninesix
months ended SeptemberJune 30, 1995,1996, a decrease of $260,000,$230, or 24.6%41.9%.
Interest bearingrates were more favorable in 1997 and
interest-bearing debt averaged approximately $11,221,000$7,872 for the
ninesix months ended SeptemberJune 30, 1996,1997, compared to approximately
$15,367,000$11,713 for the ninesix months ended SeptemberJune 30, 1995.1996.
Income Tax Expense. The effective income tax rate was
41.0% for the six months ended June 30, 1997, compared to
38.7% for the comparable period of 1996.
Net Income Per Share. The increase in net income to
$2,162 for the six months ended June 30, 1997, from $1,679
for the six months ended June 30, 1996, resulted in a
commensurate increase in earnings per share to $.45 per
share from $.35 per share, an increase of $.10 per share, or
29%.
Seasonality and Quarterly Data
Although the Company deviated from the pattern in 1995,at one
time, it has historically generated the majority of its net
sales and income from operations in the second and third
quarters of each year. The Company expects results to move toward the historical
pattern to continue in 19961997 and future years. This seasonal
pattern combined with effects of new product introductions
and the timing of customer orders can cause the Company s
results of operations to vary from quarter to quarter.
Liquidity and Capital Resources
The Company's primary sources ofCompany s liquidity requirements arise primarily
from working capital are cash flowand capital expenditure requirements.
The Company maintains a $21 million revolving credit
facility which expires on July 21, 1999. The Company
believes that funds generated from operations and borrowings byfunds
available under the Company underrevolving credit facility will be
adequate to meet its credit
facility.working capital, debt service and
capital expenditure requirements through the next twelve
months.
As of SeptemberJune 30, 1996,1997, the Company had cash balances of
approximately $486,000$915 and working capital of approximately
$15,097,000.
Net cash$16,647. The current ratio at
June 30, 1997 was 3.2:1 compared to 3.1:1 at December 31,
1996. Cash flows provided (used) by operating activities was approximately
$6,258,000 and ($1,032,000)were
$2,478 for the ninesix months ended SeptemberJune 30, 1996,1997 compared to
cash flows provided by operating activities of $4,404 for
the six months ended June 30, 1996. The primary use of cash
from operating activities for the six months ended June 30,
1997 was for the increase in finished goods inventory.
Accounts receivable of $10,547 increased by 2.1% at
June 30, 1997 while days sales outstanding decreased to 51.5
from 52.8 at December 31, 1996. Inventories of $10,876 at
12
June 30, 1997 increased by $753 or 7.4%, from $10,123 at
December 31, 1996. This represents an increase in days
sales in inventory to 87.0 days from 77.5 days. The
finished goods inventory was increased in order to balance
the inventory mix and Septemberto allow the Company to respond to
customer s orders without significant delays in the second
and third quarters of 1997. Inventory levels were $11,101
at quarter end March 31, 1997.
Capital expenditures of $1,378 for the six months ended
June 30, 1995, respectively.1997 were primarily for product molds and tooling
and manufacturing and data processing equipment. The Company'sCompany
anticipates that capital expenditures totaledin the remainder of
1997 will be approximately $1,395,000$2,000 absent further
consolidation of manufacturing and $3,731,000 fordistribution facilities
discussed below.
As of June 30, 1997, the nine months ended September 30,
1996, and September 30, 1995, respectively.
In August 1994, the Company initiated the construction of a new
distribution facility in Indianola, Iowa. Total capital expendituresoutstanding principal balance
of the Company associated withs debt was $7,389, a decrease of $644 from
the Indianola, Iowa facility,
including computer hardware and software, were $3.7 million, with
approximately $1.6 million expended in 1994 and approximately $2.1
million expended in 1995. Phase I of the facility was operational in
early January, 1995. Phase II of the facility, an expansion of
approximately 60,000 square feet was completed and occupied in July
1995. The costs incurred in the fourth quarter of 1994 and in the
first six months of 1995 in connection with this project, primarily
consisting of costs and expenses associated with acquiring and
training the initial workforce for the Indianola facility, were
expensed as these costs were incurred.outstanding balance at December 31, 1996.
The Company is currently studyingin the appropriate meansprocess of consolidatingimplementing
a reorganization of several of its manufacturing facilities
and processes. The Company is developing a strategic plan
designed to minimize short-term disruptions, inefficiencies
and costs resulting from the contemplated reorganization,
which is expected to include consolidation of portions of
itsthe Company s manufacturing and distribution facilities.
TheThere has not been a final determination of which locations
into which various activities would be consolidated, have not been determined.but it
is currently anticipated that there will be consolidation
into a new facility located in the same metropolitan area as
one of the Company s existing facilities. The Company
anticipates that costs and expenses associated with any
relocation and consolidation of the Company s distribution and
manufacturing functions would ultimately be
substantially offset by cost savings generated through such relocation and consolidation. Thethereby.
However, it is currently anticipated that the reorganization
will negatively impact earnings in the short term.
Furthermore, the timing ofrelationship between the incurrence
of such charges in relationwith respect to the reorganization and the
generation of suchanticipated savings may cause the Company'sCompany s
results of operations to vary from quarter to quarter.
On July 21, 1994,During the second quarter of 1997, the Company
entered in to a $24 million
Revolving Credit and Acquisition Facility (the "Credit Agreement")
with Heller Financial, Inc. (the "Lender"), pursuant to which the
Lender is providing Deflecta-Shield with a $6.0 million revolving
credit facility (the "Revolver") and an $18.0 million acquisition
facility (the "Acquisition Facility"). Approximately $2 million of
the Revolver was used to finance the purchase of the assets of
11
Trailmaster Products, Inc., with the balance of the purchase price
paid with cash generated from operations of Deflecta-Shield's
subsidiaries. Approximately $5.8 million of the Acquisition Facility
was used to finance the purchase of Delta III, Inc., with the balance
of the purchase price paid with a note made by the acquired
subsidiary for approximately $1.5 million. Deflecta-Shield's
obligations under the Credit Agreement are guaranteed by its direct
and indirect wholly owned subsidiaries. Some of these guarantees are
secured by the assets of certain subsidiaries. Availability under
the Acquisition Facility is subject to the sole and absolute
discretion of the Lender. It is anticipated that future acquisitions
by Deflecta-Shield and its subsidiaries will be funded primarily
through the Acquisition Facility. No such acquisitions are currently
contemplated.
The Credit Agreement provides for the revolving credit and
acquisition loans up to the amount of the respective commitments
until July 21, 1999. Under the terms of the Credit Agreement,
Deflecta-Shield paid a closing fee of $60,000, and is obligated to
pay a fee of .5% per annum of the unused Revolver and .2% per annum
of the unused portion of the Acquisition Facility during the term of
the Credit Agreement. The Revolver is limited by levels of inventory
and receivables which, together with other assets, secure the
borrowings under the Credit Agreement. Interest on all loans under
the Credit Agreement is payable at varying rates, ranging from the
Lender's base rate (the "Base Rate") plus .5% for loans under the
Revolver, to a maximum of the Base Rate plus 2% for the final $6
million drawn under the Acquisition Facility.
The Credit Agreement contains certain covenants covering Deflecta-
Shield and its subsidiaries on a consolidated basis, including,
without limitation, covenants relating to the maximum amount of
indebtedness which the entities may incur and limitations on capital
expenditures and payment of dividends by Deflecta-Shield.
As of September 30, 1996, the outstanding principal balance,
together with accrued interest, under the credit facility was
approximately $8,934,000. During 1995, the Lender agreed to make
$3,000,000 of the Acquisition Facility available on a revolving
basis. At September 30, 1996, the aggregate amount available under
the revolving credit facility and the revolving portion of the
acquisition facility was approximately $66,000. The Company believes
that cash flow from operations and available borrowings under the
credit facility are adequate to meet the Company's liquidity needs
for the next 12 months.
In the ordinary course of business, the Company is subject to
examination by the Internal Revenue Service (the IRS ). In October
1993, the IRS initiated an examination of the 1990 Federal income tax
return of DFM Corp. The examination was subsequently expanded to
include the 1991 and 1992 Federal income tax returns. As of
September 1996, the examination has been substantially completed, and
the Company anticipates settlement of all matters in connection with
this examination for a total assessment of between $245,000 and
$300,000 in additional Federal income tax for the periods examined.
The Company believesannounced that it has made adequate provisions forlaunched a $1,500 expansion of its
aluminum products plant in Howe, Indiana which will expand
the additional assessment of taxes.
12
plant from 78,500 square feet to 95,100 square feet.
When completed in early 1998, the Howe facility will house
all aluminum manufacturing and distribution.
Forward Looking Information
Information included in this Report on Form 10-Q
relating to sales and earnings expectations constitutes
forward-looking statements that involve a number of risks
13
and uncertainties. From time to time, information provided
by the Company or statements made by its employees may
contain other forward-looking statements. Factors that
could cause actual results to differ materially from the
forward-
lookingforward-looking statements include but are not limited to:
general economic conditions, including their impact on the
sale of new light trucks; sales of new heavy trucks, which
are cyclical; competitive factors, including pricing
pressures; changes in product and sales mix; the timely
development and introduction of competitive new products by
the Company and market acceptance of those products;
inventory risks due to changes in market demand or the
Company'sCompany s business strategies; difficulties which may be
encountered in the consolidation of the Company'sCompany s
manufacturing and distribution facilities; changes in
effective tax rates; and the fact that a substantial portion
of the Company'sCompany s sales are generated from orders received
during the quarter, making prediction of quarterly revenues
and earnings difficult. The words believe, expect, anticipate, project,"believe," "expect,"
"anticipate," "project," and similar expressions identify
frowardforward looking statements. Readers are cautioned not to
place undue reliance on these forward looking statements,
which speak only as of the date made. The Company
undertakes no obligation to publicly update or revise any
forward-
lookingforward-looking statements, whether as a result of new
information, future events or otherwise.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's insurer has, along with the other defendants to the
suit, reached a settlement in the caseNone
Item 4. Submission of Emitee v. Toyota, et al.
Pursuant to the settlement, the Company's insurer will contribute
$30,000Matters to a global settlementVote of Security Holders
On May 22, 1997, the Company held its annual meeting of
stockholders. At the meeting, William V. Glastris, Jr.,
Ronald D. Katz, Mark C. Mamolen, Douglas T. Mergenthaler,
Charles S. Meyer, and Russell E. Stubbings were elected to
serve as directors of the claim.
The Company's Trailmaster subsidiary has been named a defendant in
Nyilos v. Trailmaster Products Inc., et al., a breach of warranty and
negligence lawsuit pending in Macomb County, Michigan. The suit arises
out of a rollover accident which occurred on October 1, 1994. The
complaint alleges that Trailmaster had made and breached certain
warranties and that it was negligent and claims unspecified damages in
excess of $10,000. This case is at a very early stageCompany for 1997 and the
ultimate
outcome cannot yet be determined.appointment of Price Waterhouse LLP as independent
accountants for the Company was approved.
14
The following table provides the number of votes cast
for, against or withheld, as well as the number of
abstentions and broker non-votes as to each matter submitted
to a vote of stockholders at the meeting.
Matter
Broker
Election of Directors: For Withheld Non-Votes
William V. Glastris, Jr. 4,348,341 4,950 0
Ronald D. Katz 4,348,341 4,950 0
Mark C. Mamolen 4,348,341 4,950 0
Douglas T. Mergenthaler 4,348,341 4,950 0
Charles S. Meyer 4,348,341 4,950 0
Russell E. Stubbings 4,348,341 4,950 0
Broker
For Against Abstention Non-Votes
Approval of 4,348,541 4,100 650 0
Independent Accountants
Item 5. Other Information
Ronald C. Fox was hired as Chief Financial Officer of the Company
effective October 28, 1996.None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.(iii)(A)(1) Amended and Restated Deflecta-Shield
Corporation 1993 Stock Plan.
Exhibit 10.(iii)(A)(1)(a) Amended and Restated Deflecta-Shield
Corporation 1996 Stock Plan.
Exhibit 10.(iii)(A)(7) Employment Letter Agreement dated October
28, 1996 between the Company and Ronald C.
Fox.
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
NoneNo reports on Form 8-K were filed during the fiscal quarter
ended SeptemberJune 30, 1996.
141997.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Date: November 13, 1996August 14, 1997
DEFLECTA-SHIELD CORPORATION
By: /s/ RONALDRonald C. FOX
--------------------Fox
Ronald C. Fox,
Chief Financial Officer
(Duly authorized officer
and Principal Financial
and Accounting Officer)
1516