FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 (I.R.S. Employer of incorporation or Identification No.) organization) 1800 North 9th Street, 50125 Indianola, Iowa (Zip Code) Address 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 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 Consolidated Statements of Income for the Three Months ended June 30, 1997 and 1996 . . 4 Consolidated Statements of Income for the Six Months ended June 30, 1997 and 1996 . . . 5 Consolidated Statements of Cash Flows for the Six Months ended June 30, 1997 and 1996 . 6 Notes to 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 . . . . . . . . . . . . . . . 14 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 14 Item 5. Other Information . . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K . . . . . . . 15 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements DEFLECTA-SHIELD CORPORATION CONSOLIDATED BALANCE SHEETS ($ in thousands) 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 $44,147 The accompanying notes are an integral part of these statements. 3 DEFLECTA-SHIELD CORPORATION CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share amounts) (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 The accompanying notes are an integral part of these statements. 4 DEFLECTA-SHIELD CORPORATION CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share amounts) (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 CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) (Unaudited) 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 $645 The accompanying notes are an integral part of these statements. 6 DEFLECTA-SHIELD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ 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 six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. NOTE 2 - 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 $.44, respectively. 7 The FASB issued SFAS No. 130, Reporting Comprehensive Income, which will require the Company to disclose, in financial statement format, all non-owner changes in equity. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Adoption of this standard is not expected to have a material impact on disclosures in the Company's financial statements, except that the tax benefit obtained by the Company upon exercise of employee stock options would be included as an element of comprehensive income. The FASB has issued SFAS No. 131, Disclosures About Segments Of An Enterprise And Related Information, which established a new accounting principle for reporting information about operating segments in annual financial statements and interim financial reports. It also established standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective fiscal years beginning after December 15, 1997. The Company is currently evaluating the applicability of this standard. However, the Company does not expect a material impact on disclosures in the Company's financial statements. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ($ 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 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, 1996. Results of Operations The following table 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 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 June 30, 1997 Compared to Three Months Ended June 30, 1996 Net Sales. Net sales were $18,425 for the three months ended June 30, 1997, compared to $18,255 for the three months ended June 30, 1996, an increase of $170, or .9%. While net sales of air deflectors and aluminum products were down for the quarter, net sales increased in heavy truck products, shock 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 were made in the second quarter of 1996, an increase in net sales in air deflectors was not anticipated. With the introduction of a new aluminum products catalog late in the second quarter of 1997, the Company expects 9 sales of these products will respond positively in the coming months. Gross Profit. Gross profit was $6,779 for the three months ended June 30, 1997, compared to $6,338 for the comparable period of 1996, an increase of $441, or 7.0%. This favorable trend in gross profit was due to higher net sales, improvements in manufacturing efficiencies, decreased costs of some raw material components, and favorable shifts in product mix. As a percentage of net sales, gross margins increased to 36.8% from 34.7% for the same quarter of 1996. Selling Expenses. Selling expenses were $2,488 for the three months ended June 30, 1997, compared to $2,648 for the comparable period of 1996, a decrease of $160, or 6.0%. As a percentage of net sales for the same periods, selling expenses decreased to 13.5% from 14.5%. The reduction in selling expenses is a function of: (i) the timing of spending for catalogs and other advertising and promotional materials that was greater in the second quarter of 1996, and (ii) a reduction in outbound freight. The higher and better balanced inventory levels in the 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 same period of 1996. General and Administrative Expenses. General and administrative expenses were $1,882 for the three months ended June 30, 1997, compared to $1,794 for the three months ended June 30, 1996, an increase of $88, or 4.9%. As a percentage of net sales, general and administrative expenses increased to 10.2% compared to 9.9% for the comparable 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 June 30, 1997, compared to $241 for the three months ended June 30, 1996, a decrease of $116, or 48.1%. Interest rates were more favorable in 1997 and interest-bearing debt averaged approximately $8,052 for the three months ended June 30, 1997, 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 $.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, gross margins increased to 36.1% from 33.4% for the same period of 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 advertising 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 new information system, and (iv) costs related to consolidation of facilities and manufacturing processes. 11 Interest Expense. Interest expense was $319 for the six months ended June 30, 1997, compared to $549 for the six months ended June 30, 1996, a decrease of $230, or 41.9%. Interest rates were more favorable in 1997 and interest-bearing debt averaged approximately $7,872 for the six months ended June 30, 1997, compared to approximately $11,713 for the six months ended June 30, 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 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 the historical pattern to continue in 1997 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 liquidity requirements arise primarily from working capital and 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 funds available under the revolving credit facility will be adequate to meet its working capital, debt service and capital expenditure requirements through the next twelve months. As of June 30, 1997, the Company had cash balances of $915 and working capital of $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 by operating activities were $2,478 for the six months ended June 30, 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 to 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, 1997 were primarily for product molds and tooling and manufacturing and data processing equipment. The Company anticipates that capital expenditures in the remainder of 1997 will be approximately $2,000 absent further consolidation of manufacturing and distribution facilities discussed below. As of June 30, 1997, the outstanding principal balance of the Company s debt was $7,389, a decrease of $644 from the outstanding balance at December 31, 1996. The Company is currently in the process of implementing 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 the Company s manufacturing and distribution facilities. There has not been a final determination of which locations into which various activities would be consolidated, 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 would ultimately be substantially offset by cost savings generated thereby. However, it is currently anticipated that the reorganization will negatively impact earnings in the short term. Furthermore, the timing relationship between the incurrence of charges with respect to the reorganization and the generation of anticipated savings may cause the Company s results of operations to vary from quarter to quarter. During the second quarter of 1997, the Company announced that it has launched a $1,500 expansion of its aluminum products plant in Howe, Indiana which will expand the 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-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 s business strategies; difficulties which may be encountered in the consolidation of the Company s manufacturing and distribution facilities; changes in effective tax rates; and the fact that a substantial portion of the Company s sales are generated from orders received during the quarter, making prediction of quarterly revenues and earnings difficult. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward 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-looking statements, whether as a result of new information, future events or otherwise. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 4. Submission of Matters to a Vote 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 Company for 1997 and the 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 None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27. Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1997. 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: August 14, 1997 DEFLECTA-SHIELD CORPORATION By: /s/Ronald C. Fox Ronald C. Fox, Chief Financial Officer (Duly authorized officer and Principal Financial and Accounting Officer) 16