SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number: 0-16319
LUND INTERNATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1568618
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
911 Lund Boulevard, Anoka Minnesota
55303 (Address of principal executives offices including Zip Code)
Registrant's telephone number, including area code: (612) 576-4200
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At the close of business on March 18, 1999, 6,310,782 shares of the Company's
Common Stock, 1,493,398 shares of the Company's Class B-1 Common Stock and
323,830.3 shares of Series B Preferred Stock were issued and outstanding. The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1999 was approximately $20,128,438 based upon the
last sale price of the registrant's Common Stock on such date.
Documents incorporated by reference:
Portions of the registrant's Proxy Statement are incorporated by reference into
Part III.
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PART I.
Item 1. BUSINESS
General
Lund International Holdings, Inc. ("Holdings" or "the Company") was incorporated
on November 10, 1986, pursuant to the Delaware General Corporation Law. Lund
Industries, Incorporated ("Lund") was incorporated as a Minnesota corporation in
1965 and first engaged in its present business in 1974. Lund is a manufacturer,
marketer and distributor of aftermarket accessories for the automotive market.
In October 1987, Holdings acquired Lund as a wholly-owned operating subsidiary.
In July 1992, Lund FSC, Inc., formerly Lund International FSC, Inc. ("FSC"), was
incorporated as a wholly-owned foreign sales corporation of Holdings. In April
1996, Lund Acquisition Corp. ("Acquisition") was incorporated as a Minnesota
corporation. In June 1996, Acquisition acquired certain assets of Innovative
Accessories, Inc., an Oklahoma corporation.
In September 1997, Allan W. Lund, the founder of Lund and the Chairman of the
Board and principal stockholder of Holdings, together with the Lund Family
Limited Partnership, the Lois and Allan Lund Family Foundation and certain
members of Mr. Lund's family (collectively, the "Lund Interests") sold their
aggregate 38% interest in Holdings to LIH Holdings, LLC, a Delaware limited
liability company ("LIH"), a company affiliated with Harvest Partners, Inc., a
private investment firm ("Harvest Partners").
In a two-step transaction on December 30, 1997 and February 27, 1998, a
wholly-owned subsidiary of Holdings acquired all of the issued and outstanding
stock of Deflecta-Shield Corporation ("Deflecta-Shield"), a manufacturer and
distributor of appearance accessories for the automobile and heavy truck market,
for per share consideration of $16.00 or total consideration of $76,800,000.
Deflecta-Shield was founded in 1961 as a partnership and was reorganized as a
corporation in 1994. Deflecta-Shield conducts its business through wholly-owned
direct and indirect subsidiaries which it has acquired. The direct subsidiaries
are Belmor Autotron Corp. ("Belmor"), acquired in 1988, and DFM Corp. ("DFM"),
acquired in 1990. The indirect subsidiaries, wholly-owned by DFM, are BAC
Acquisition Co. ("Fibernetics"), acquired in 1993, and Trailmaster Products,
Inc. ("Trailmaster") and Delta III, Inc. ("Delta III"), both acquired in 1994.
Recent Corporate Developments
On December 23, 1998, a wholly-owned subsidiary of the Company acquired all of
the issued and outstanding capital stock of Ventshade Holdings, Inc.
("Ventshade") for an aggregate purchase price of $66,875,000, excluding direct
transaction costs and final adjustments. Ventshade is a holding company with one
subsidiary, Auto Ventshade Company ("AVS"), located in Lawrenceville, Georgia.
AVS was founded in 1935 as a manufacturer and supplier to the automotive
aftermarket of shades, visors, deflectors, and light covers used on pick-up
trucks, sport utility vehicles, minivans (collectively, "light trucks"), and
passenger cars.
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On January 28, 1999, the Company purchased all of the issued and outstanding
capital stock of Smittybilt, Inc. ("Smittybilt") for an aggregate purchase price
of $18,000,000 excluding direct transaction costs. Smittybilt is a leading
manufacturer of tubular accessory products, including tubular steps, brush
guards, bumpers and nerf bars, for light trucks.
The Company sold, in the aggregate, 1,047,412 shares of Common Stock and
323,830.3 shares of non-voting Series B Preferred Stock to LIH Holdings III, LLC
("LIH III"), an entity affiliated with Harvest Partners, Massachusetts Mutual
Life Insurance Company ("MMLIC"), MassMutual Corporate Investors ("MMCI"),
MassMutual Participation Investors ("MMPI"), MassMutual Corporate Value Partners
Limited ("MMCVPL"), Liberty Mutual Insurance Company ("Liberty"), and BancBoston
Capital Inc. ("BancBoston") (collectively, the "Investors"). The shares were
issued in two transactions. The first issuance was on December 22, 1998 and
provided part of the financing for the acquisition of Ventshade. The second
issuance was on January 27, 1999 and provided part of the financing for the
acquisition of Smittybilt. Upon stockholder approval, the non-voting Series B
Preferred Stock is convertible with certain limitations into shares of Common
Stock. The aggregate share price was $30,000,000.
In order to finance the acquisitions of Ventshade and Smittybilt, the Company
used several additional financing sources: $34,500,000 from its primary lender
and a subordinated note of $25,000,000 with warrants to purchase 704,839 of
Common Stock, or 70,483.9 shares of Series B Preferred Stock. The transaction
increased the combined ownership of the Harvest Partners' affiliates to 49.9% of
the Company's voting Common Stock.
Products
The Company currently has over 70 product lines which allow consumers the
ability to customize the appearance of vehicles with functional and stylish
accessories that are engineered and designed to give an original equipment look
and fit. The Company's products are designed to fit a wide range of makes,
models and years of light and heavy trucks and automobiles.
Major product categories offered by the Company consist of:
LIGHT TRUCK AND AUTOMOBILE ACCESSORIES, which include hood shields/ bug
deflectors, running boards and steps, window vent visors, external visors,
tonneau covers, aluminum storage boxes and other appearance accessories;
HEAVY TRUCK ACCESSORIES, which consist of bug deflectors, bug screens and rock
guards, vinyl grille coverings and interior trim parts for the heavy truck
market; and
SUSPENSION PRODUCTS, which are used as an appearance enhancing product to lift
or lower a vehicle.
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LIGHT TRUCK AND AUTOMOBILE ACCESSORIES
Products produced for the light truck and automobile accessory segment of the
market are generally manufactured from fiberglass or plastic sheets composed of
polyester, ABS plastic, acrylic polycarbonate, or aluminum material. Virtually
all of the Company's products are molded or formed for an exact fit to each
vehicle.
HOOD SHIELDS/ BUG DEFLECTORS . Deflecta-Shield entered the hood shield/ bug
deflector market in 1961. With the combination of Lund's hood/shield bug
deflector lines, and the acquisition of Ventshade, the Company significantly
increased its offering in this category. The Company currently offers more than
fifteen styles of hood shields, ranging from the standard upright hood shield to
the patented wrap-around shield.
RUNNING BOARDS AND STEPS. Lund entered the running board and step board market
in 1991 when it developed a line of fiberglass running boards. The Company
currently sells ten styles of running boards and step boards, manufactured from
fiberglass, ABS plastic, or aluminum material.
WINDOW VENT VISORS. Ventshade introduced its window vent shade in 1935. The
Company currently markets five styles of window vent visors, manufactured from
reinforced acrylic or stainless steel material.
EXTERNAL VISORS. Lund entered the light truck accessory market by introducing
the Lund SunVisor(R) in 1977. With the acquisition of Deflecta-Shield in 1997,
the Company increased this product line offering to seven styles of external
visors. The Company manufactures its visor line from fiberglass or ABS plastic
material and include lighted and non-lighted styles.
TONNEAU COVERS. The Company entered the tonneau cover market in 1994 with the
acquisition of certain assets of Innovative Accessories, Inc. It currently
markets five styles of tonneau covers, each designed to protect the bed of a
pickup truck. Three of the Company's tonneau cover lines are manufactured from
vinyl and two are manufactured from fiberglass.
ALUMINUM STORAGE BOXES. Deflecta-Shield entered the aluminum storage box market
when it acquired Delta III, Corp. in 1997. The Company currently markets three
lines of aluminum storage boxes, each of which is available in various box sizes
and configurations to fit primarily pickup boxes.
OTHER APPEARANCE ACCESSORIES. The Company, through it subsidiaries, also
manufactures and markets a variety of other appearance accessories, including
cab extenders, styling covers for taillights and headlights, tailgate
protectors, fender extensions, custom grille inserts, rear window air or sun
deflectors, door sill protectors, side window covers, wiper cowls, rear
valances, cargo trays, floor mats, bumper covers, pickup bed rail protectors,
side rails, mud flaps, splash guards, and tie downs.
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HEAVY TRUCK ACCESSORIES
The Company's heavy truck accessories are developed, manufactured and marketed
at its facility in Chicago, Illinois. The heavy truck market consists of
over-the-road trucks in the Class 8 weight category (trucks with a gross vehicle
weight over 33,000 pounds). Management believes Belmor is the largest supplier
of winterfronts, bug screens, bug deflectors and rock guards for heavy trucks in
the United States. Each of these product lines is (i) designed and developed in
cooperation with major heavy truck manufacturers; (ii) built to individual model
year specifications, and (iii) with few exceptions, the exclusive OEM-approved
accessory sold to the OEM in that product category. These products are sold for
substantially all makes and models of U.S.-made heavy trucks. Function is
emphasized to a great degree in the manufacturing of Belmor heavy truck
products.
HEAVY TRUCK BUG DEFLECTORS. The Company manufactures six styles of bug
deflectors for the heavy truck market. Each product line is manufactured from
either Lexan(R) or ABS plastic. Products include the Aeroshield(R) traditional
flat deflector, and the Aeroshield-Plus(R), an aerodynamically designed shield.
BUG SCREENS AND ROCK GUARDS. Bug screens are used primarily during the warmer
months of the year to keep bugs and road debris from reaching the radiator of a
truck. Bug screens are constructed of light weight aluminum or fiberglass screen
mesh and are often included in a new truck package. They are snapped on the
front of the truck and are generally replaced about every other year at a heavy
truck dealer.
Rock guards are heavy fabricated metal screens installed inside the truck engine
compartment in front of the radiator and designed to protect the radiator and
engine against damage from rocks and other road debris. Rock guards are
installed on many truck models as a standard part. Belmor is the largest
supplier of bug screens and rock guards in the United States.
WINTERFRONTS. Winterfronts are snap-on vinyl covers for the radiator grille on
the front of a truck and are used to regulate the air intake of the truck's
engine during cold weather. By installing a winterfront, a driver can maintain
proper engine operating temperature in cold weather and increase the amount of
heat available to warm the cab of the truck. Belmor is the largest supplier of
winterfronts in the United States.
Three basic styles of winterfronts are offered: fixed opening winterfronts,
adjustable opening winterfronts and "V" opening winterfronts. The style of
winterfront selected for a heavy truck depends on the manufacturer, model and
engine type of the truck. The Company has a United States patent on its center
opening winterfront, an innovative product developed to reduce engine wear.
Fixed center opening winterfronts were developed in response to technological
changes in heavy truck engines. In some cases, hardware to attach the
winterfronts to the truck is sold separately. Winterfronts are sold in standard
white vinyl or can be custom silk screened with company names, fleet logos or
with truck manufacturers' logos.
INTERIOR TRIM PARTS. Belmor also manufactures and sells interior panels and trim
items to certain manufacturers of heavy trucks, and replacement trim kits for
certain models to heavy truck
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dealers. Interior trim products sold to heavy truck manufacturers include door
panels, roof panels, side panels, sleeping curtains, door pockets, dash boards,
headliners, carpets and floor mats.
SUSPENSION PRODUCTS
The 1994 acquisition of Trailmaster Suspension Products by Deflecta-Shield
resulted in the addition of a full line of products for lifting or lowering
vehicles. Trailmaster is best known for its Matched Systems Technology approach,
under which each Streetmaster brand lift kit is engineered to include all the
system's components. In 1996, Trailmaster introduced the SSV(TM) self-adjusting
shock absorber that provides "on-the-fly" ride adjustability.
Marketing and Sales
Light Truck and Automobile Accessories
The Company sells its Light Truck and Automobile Accessories under the trade
names Lund, Deflecta-Shield, Autotron Products and Auto Ventshade. The Company
sells light truck and automotive accessories through its Light Truck Accessory
Division ("LTAD") and its newly acquired subsidiary, Auto Ventshade ("AVS").
The LTAD's products are sold through a national distribution system that
utilizes in-house sales staff and independent manufacturer's representatives.
The LTAD currently has seven factory employed regional sales managers who
oversee 13 independent manufacturer's representative organizations employing
approximately 90 sales representatives. The Company's staff and independent
manufacturer's representatives sell the LTAD's products to warehouse
distributors, dealer expeditors, automotive specialty chain stores, converters,
catalog companies and OEMs.
While the light truck accessory market is highly fragmented, the Company
believes there is a trend among distributors and retailers to prefer suppliers
who provide well-recognized brand names, strong customer service and a broad
product line that accommodates "one-stop shopping".
Currently, the majority of the LTAD's sales are generated from products sold in
the United States and Canada. The LTAD delivers a majority of its products to
warehouse distributors, retailers and OEMs by truck from its manufacturing and
warehouse facilities in Anoka, Minnesota, Howe, Indiana and Longmont, Colorado,
as well as from independent warehouses in Toronto, Ontario.
In the light truck accessory market, warehouse distributors and performance
warehouse distributors have traditionally been the primary channel of
distribution for aftermarket
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accessories. Warehouse distributors often stock a broad line of aftermarket
product in multiple warehouse locations, and sell to independent auto parts
stores, auto repair stores and service stations. Performance warehouse
distributors specialize in aftermarket product designed to improve the
performance of the vehicle and sell to similar retailers and installers.
Additionally, the LTAD sells its product to a variety of other customers,
including: (i) dealer expeditors, who provide aftermarket accessories and
installation services to automotive dealers; (ii) automotive specialty chain
stores, which are larger multi-location retail auto parts stores that frequently
purchase aftermarket product on a direct basis from manufacturers; (iii) catalog
companies, which purchase accessories directly from manufacturers and sell
through catalogs distributed to a variety of customers, including consumers and
automotive dealers; (iv) automobile and light truck OEMs, including customers
such as Ford, Chrysler and Toyota, which purchase aftermarket accessories
directly from manufacturers and sell these products through their parts
distribution divisions to their automotive and light truck dealer networks.
Consumers purchase light truck accessories through a variety of distribution
channels. The majority of the LTAD's products are purchased by consumers at
retail auto parts stores. These stores may be independent or part of an
automotive parts store chain. In most retail stores, the consumer has a choice
of one or two manufacturers' product lines in the categories in which the
Company competes. Some retailers offer installation services for accessories,
other retailers refer consumers to body shops or garages for installation, or
the consumer may install the products personally. Consumers also purchase light
truck accessories through mail-order catalogs, at automotive dealers' parts
departments or at automotive dealers as an add-on accessory installed at the
time of a new vehicle purchase.
The Company believes an increasing percentage of sales of light truck
accessories are being made by automotive parts stores, and that the Company
needs to intensify marketing efforts for the LTAD's products to such chains. The
Company intends to continue to focus marketing efforts in the LTAD to the
automotive chains, while maintaining its traditional strong relationships with
warehouse distributors. Historical sales of Lund branded products to retail and
OEMs have not been significant to date, however the acquisition of
Deflecta-Shield has strengthened the Company's presence with OEM's.
The LTAD's sales and marketing programs are focused on creating excitement
around its broad product offerings, expanding distribution for its product
offerings, developing new profitable products and building brand name loyalty.
The LTAD maintains an in-house marketing department, which is located at the
Anoka, Minnesota facility that manages all the division's light truck
aftermarket accessory marketing efforts. This department's responsibilities
include: (1) managing and supporting the factory and manufacturers' sales
managers and representatives; (2) creating and implementing marketing and
promotional campaigns; (3) developing and implementing sales programs and
promotions; (4) designing and creating product catalogs, price lists and other
marketing materials; (5) managing trade shows and other marketing materials; (6)
designing and coordinating retail packaging
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materials; and (7) providing market research and input on the design and
development of new product programs.
A variety of marketing tools are utilized to increase trade and consumer
awareness of the LTAD's products and brands. The LTAD designs and develops
catalogs, price and application guides, and other product literature and
materials which it distributes directly to its independent manufacturers'
representatives for use in promoting its products to trade customers. In
addition, point-of-purchase displays are developed and provided to retailers of
the division's products. The displays feature miniature versions of various
products and highlight product features and benefits. Consumer and trade
advertising campaigns are also conducted in light truck trade and enthusiast
magazines such as FOUR WHEELER, FOUR WHEEL AND OFFROAD and SPORT TRUCK.
Cooperative advertising programs are offered to retailers which feature
accessory products in their advertising.
Auto Ventshade
The Company's AVS division's product are sold to the automotive accessory
aftermarket in a manner similar to the LTAD's. The Company believes trends in
the industry have been, and continue to be, favorable for the sale of products
produced by AVS. In addition, approximately 80% of the division's products are
currently sold for applications for light trucks, the fastest growing segment of
the new automobile industry.
AVS has a broad distribution system for its products in the automotive
aftermarket and currently sells its products through all major distribution
channels for light truck and car accessories including mass merchants, auto
parts retailers (national and independent), three-step warehouse distributors,
mail order catalogs and custom installers. Due to its long history as a
supplier, AVS products are widely known throughout the aftermarket, and the
products are sold to the growing mass merchants and national automotive parts
chains as well as the more traditional specialty automotive retailers.
AVS manages its sales effort through a sales organization consisting of seven
factory sales managers, who manage a national network of approximately 150
independent manufactures' sales representatives. The Company believes the
division's focus on aggressive management of accounts and constant interaction
with its independent sales representatives have established a reputation for AVS
as an industry leader in customer service. In addition to ordering directly
though a customer service representative, customers can order through EDI.
AVS markets and promotes its products through several programs targeted at motor
sports enthusiasts and 17 to 55 year-old males, the division's most identifiable
customers and the largest group of potential customers for automotive products.
An aggressive advertising campaign was introduced in 1995, focused on building
awareness of the AVS brand and AVS products. The division's marketing programs
consist of consumer media programs including print and television advertising,
as well as sponsorship of the NASCAR(R) Craftsman Truck Racing Series and NHRA
Winston Cup Drag Racing Series. AVS also advertises in popular trade and
consumer magazines, including FOUR-WHEELER, TRUCKIN, SPORT TRUCK and 4-WHEEL AND
OFF ROAD. Cooperative advertising programs are also offered to retailers which
feature accessory products in their advertising.
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Heavy Truck Division
The Company's Heavy Truck Division (the "HTD"), sells its Belmor products
primarily in the U.S. and Canada to (i) OEMs on direct ship programs involving
approximately 2,800 heavy truck dealers; (ii) heavy truck manufacturers; and
(iii) heavy truck OEM parts distribution centers. The HTD's customers include
every major heavy truck manufacturer in the United States, including
Freightliner, Navistar, Paccar (including both Kenworth and Peterbilt), Volvo,
Sterling, Mack, Marmon and Western Star.
Participation in OEM direct ship programs allows telephone sales representatives
to speak directly to heavy truck dealers on a frequent basis. Heavy truck
dealers order accessories directly from the Belmor facility and the products are
shipped directly to the dealers. Invoices for the orders are sent to the
aftermarket parts divisions of the heavy truck OEMs which pay for their dealers'
orders and bill the dealers separately. An outbound telemarketing program and
inbound customer service staff located in the Chicago, Illinois facility
provides service to the heavy truck dealer customer base.
The HTD ships its accessory products directly to heavy truck dealers who in turn
include the products in new truck accessory packages and sell the products as
replacement parts. Products are sold to heavy truck OEM parts distribution
centers which stock accessories and supply the OEM's dealers. The division also
sells and ships its heavy truck products directly to heavy truck OEMs which
install these products on or include them with new trucks. A manufacturer's
representative is engaged in connection with sales to certain of the HTD's
accounts.
Suspension Division
The Company's Suspension Division (the "SD"), consisting of the Trailmaster
promotes and sells Trailmaster products principally in the U.S. and Canada and
utilizes distribution similar to the LTAD.
Manufacturing Process
The LTAD manufacturing centers, or product supply facilities, are located in
Anoka, Minnesota; Longmont, Colorado; and Howe, Indiana. These facilites
manufacture, warehouse and distribute LTAD products for the LTAD's trade
channels.
The Company's LTAD products are generally manufactured from fiberglass or
plastic sheets composed of polyester, ABS plastic, acrylic, or polycarbonate.
Product lines representing a majority of the Lund's sales are manufactured from
laminated fiberglass and polyester resin, making these the predominant raw
materials currently used by the LTAD. It is also one of the largest purchasers
of General Electric Plastics Lexan(R) polycarbonate sheet plastic in the United
States and uses the Lexan brand name in its advertising and packaging. The raw
materials used by the LTAD are available from a number of suppliers, except for
Lexan, which is only available from General Electric Plastics. Management
believes that in the event of a shortage or significant delay in the delivery of
any raw materials used in its manufacturing processes, alternative
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vendors could be found to supply such materials or alternative materials
(including alternatives for Lexan plastic), and that the shortage or delay would
not be expected to have a significant impact on the Company's financial
condition or results of operations.
Fiberglass products are manufactured largely by hand using production molds to
form a 1/8" fiberglass laminate into product shapes. The edges are then machine
trimmed and hand sanded for a smooth finish.
Plastic products are manufactured from plastic sheets utilizing drape-forming
and vacuum-forming processes. In the drape-forming process, a plastic sheet is
cut into custom flat shapes, known as blanks. These blanks are heated in a
computerized conveyor oven and formed into products by draping the heated blanks
over molds. In the vacuum-forming process, a plastic sheet is heated and formed
over a mold using vacuum pressure in a thermo-forming machine.
Tonneau covers are manufactured from a reinforced vinyl material and aluminum
extrusion. The material is cut and sewn to fit each application and the aluminum
is cut to size to match.
The Anoka, Minnesota product supply facility possesses fiberglass,
vacuum-forming, drape-forming and several additional thermo-forming processes.
In addition, research, design, product testing, assembly, warehousing and
distribution for product manufactured at this facility occurs at Anoka. The
facility is in the process of re-engineering its manufacturing operations and
employs state-of-the-market warehousing technology with a goal to deliver
product accurately and on-time. The product supply facility produces running
boards, visors, hard tonneau covers, cab extenders, headlight and taillight
covers, custom hood shields in addition to other light truck accessories.
To supplement its internal manufacturing at its Anoka, Minnesota facility, the
Company relies on independent contract manufacturers. The Company qualifies each
manufacturer and works closely with it to assure the timely delivery of products
that meet the Company's specifications. The Company generally retains ownership
of the tooling used to produce a product line, with the understanding that it
will remove the tooling from the manufacturer's plant at the termination of the
manufacturing relationship.
The Longmont, Colorado product supply facility is the primary facility for the
manufacture of hood shields. The facility also houses research, product design,
product testing and distribution. Longmont is a thermo-former of Lexan, modified
acrylic and acrylics employing state-of-the-market CNC fabrication and oven
processes to provide high-quality products. The facility manufacturers all its
own molds. This product supply facility has been awarded the ISO 9000 and the
QS9000 certification and holds Ford Q1 certification from Ford and a Gold
Pentastar award from Chrysler.
The Howe, Indiana facility manufactures aluminum tool storage boxes, aluminum
running boards and extruded accessory products. The facility employs
state-of-the-market CNC manufacturing technology and precision, process
controlled welding capabilities. Howe has full product design and testing
capabilities on site and routinely brings out new ides for all channels of
distribution.
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AVS's manufacturing process, which involves thermo-forming, drape-forming and
injection molding of plastics, also includes the regrinding of all scrap
plastics for reuse in the production process. This internal recycling process
has resulted in significant cost savings and an environmentally friendly
product. AVS earned QS-9000/ISO 9001 certification, thereby making AVS one of
the few competitors to earn this certification.
Customer Service
The Company maintains separate customer service departments for each of its
divisions.
The LTAD has three customer service departments. The light truck accessory
customers are serviced by an inbound-outbound customer service department
located in the Anoka, Minnesota facility. The light truck accessory customer
service department manages inbound orders and order processing for both
customers and consumers of Lund and Deflecta-Shield branded accessory products.
Light truck accessory customers who purchase Deflecta-Shield aluminum products
are serviced by an inbound-outbound customer service department located in the
Howe, Indiana facility. A customer service department located at the Longmont,
Colorado facility services the OEMs which purchase products primarily produced
at the Longmont, Colorado facility.
The HTD, SD and AVS also maintain separate inbound-outbound customer service and
telemarketing department in their facilities located in Chicago, Illinois; Howe,
Indiana; and Lawrenceville, Georgia.
Product Development
Enhancement of its existing products and the development of new products are
essential for the Company's long-term growth and success in the light truck,
heavy truck and suspension product markets. New product ideas are generated by
senior management, the marketing and product development staffs, manufacturers'
representatives and through suggestions from customers and outside consultants.
Development of new products is managed by a team of engineers located at each
division. The product development team is responsible for designing, engineering
and developing new products, including assessing feasibility, manufacturing cost
parameters and lead times.
Moldmakers are employed at the manufacturing facilities in Anoka, Minnesota;
Longmont, Colorado; and Lawrenceville, Georgia. The moldmaking staff is
responsible for the manufacture, repair and maintenance of the tooling used in
the manufacture of the thermo-formed, vacuum-formed and fiberglass products. The
Company believes that the size and capabilities of its moldmaking staff
contribute significantly to the ability to quickly bring new product ideas to
market. The length of the new product development cycle for the Company's
products (from concept to initial production) varies, but is typically between
nine and 18 months. Product applications for new vehicles are introduced as they
are released from the OEMs.
The Company has invested in state-of-the-market computer aided design equipment
in order to reduce development time across all product categories.
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Returns and Warranty Claims
The Company has a return to stock policy which generally limits returns to three
percent of prior year's sales. For returns above this percentage, customers are
typically required to pay a restocking fee or place significant offsetting
orders. In 1998, 1997 and 1996, the Company had warranty expense of $1,824,742,
$1,110,440, and $778,239, respectively, which represented 1.6%, 2.6% and 1.7% of
net sales, respectively.
Seasonality and Backlog
The Company's sales pattern is slightly seasonal, with approximately 52.6% of
the sales for 1998 taking place during the second and third calendar quarters.
The Company does not consider its backlog as of any given date as a meaningful
measure of future business, because its customers generally require rapid
shipment of orders.
Competition
The Company believes the industry is highly competitive for products sold by all
the Company's divisions. The Company believes that competition in the industry
is based on brand name recognition, quality, design, breadth of product line,
price, service and packaging. Certain of the Company's competitors and potential
competitors, including manufacturers of light and heavy trucks, have greater
financial or other resources than the Company. There are no significant
technological or manufacturing barriers to entry into the Company's business.
While the Company has many competitors for most of its products lines, it
believes that in the U.S. it has one of the broadest offerings of appearance
accessories in the light and heavy truck markets along with the strongest brand
names and that it occupies a leading position in its major product categories.
Intellectual Property
The Company generally seeks to obtain patent protection, shape/design trademarks
and brand trademarks for its products. The Company owns numerous domestic and
foreign trademarks and trade names used in its business, including Lund(R),
Deflecta-Shield(R), Trailmaster(R), Auto Ventshade(R), and Smittybilt(R). The
Company also holds numerous patents which expire at various dates through 2017.
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The Company believes that the reputation attached to such patents, trademarks
and trade names as a whole is of material importance to the businesses in which
they are used. The Company has aggressively enforced its patents and trademarks
and intends to do so in the future. The Company believes that by aggressively
enforcing its patents and trademarks it deters other manufacturers from
attempting to copy its products or selling lesser quality products at lower
prices.
Government and Environmental Regulation
The Company, like all manufacturers of consumer products, is subject to federal,
state and local regulations concerning consumer products, the environment, and
occupational safety and health. The Company believes that its operations
currently comply in all material respects with these laws and regulations. In
general, the Company has not experienced any difficulty complying with such
regulations, and compliance has not had a material effect on the Company's
business.
The Company is subject to various federal, state and local environmental laws
and regulations. The Company believes that its operations currently comply in
all material respects with applicable laws and regulations. The Company believes
that the trend in environmental litigation and regulation is toward stricter
standards that may result in higher costs for the Company and its competitors.
Such changes in the law and regulations may require additional capital
expenditures which, while not presently estimable with certainty, are not
presently expected to be of material amounts. Costs for environmental compliance
and waste disposal have not been material to the Company in the past.
Employees
As of March 16, 1999, the Company employed 1,265 people, none of whom are
represented by a labor union. The Company believes its employee relations are
good and that its future success will depend in large part upon the continued
service of its key production, sales, marketing and management personnel, and
its ability to identify and hire additional appropriately skilled, highly
qualified technical, marketing and managerial personnel. The Company has not
suffered a work stoppage or slowdown in the last ten years.
Relationship with Harvest Partners, Inc.
The Company is party to a Second Amended and Restated Governance Agreement (the
"Amended Agreement") with LIH, LIH II and LIH III, affiliates of Harvest
Partners (the "LIH Entities") and is party to a Services Agreement with Harvest
Partners (the "Services Agreement").
The Amended Agreement provides that the LIH Entities will not, and will not
permit any of their Associates or Affiliates (as defined in the Amended
Agreement) to, beneficially own collectively more than 3,306,792 shares (the
"Permitted Shares") of the Company's voting Common Stock until the expiration of
the agreement in September 2000 or its earlier termination in accordance with
its terms; provided, however, that this restriction will not apply in the event
of a tender or exchange offer for 50% or more of the total outstanding voting
securities of the Company that is initiated by a party other than the Company,
the LIH Entities, any of their Affiliates or
<PAGE>
Associates, or any person acting in concert with the LIH Entities or any of
their Affiliates or Associates. The number of Permitted Shares will be increased
to include the number of shares of Common Stock into which the shares of Class
B-1 Common Stock and Series B Preferred Stock are ultimately converted, if and
when such shares of Class B-1 Common Stock and Series B Preferred Stock are
converted. The Amended Agreement also provides that the Company can issue
additional shares of its Common Stock directly to the LIH Entities or their
Affiliates or Associates with the approval of a majority of the Company's
Independent Directors. In addition, the Amended Agreement provides that, prior
to its termination, the LIH Entities, and each Affiliate or Associate thereof
which acquires shares of the Company's Common Stock pursuant to the terms of the
Amended Agreement, will not transfer beneficial ownership of such shares to any
other Affiliate or Associate unless it becomes a signatory to the Amended
Agreement.
The Amended Agreement provides that the number of directors comprising the
Company's Board of Directors will be seven, including one individual nominated
by LIH; one individual nominated by LIH II; the Company's Chief Executive
Officer; and four Independent Directors.
The Amended Agreement also provides that, during its term, the Company and the
LIH Entities will use their best efforts to cause the composition of the
Company's Board of Directors to continue to reflect the same proportion of
directors set forth above. In the event the aggregate number of shares of the
Company's Common Stock owned by the LIH Entities and any of their Affiliates or
Associates falls below 50% of the number of shares of such stock originally
acquired by LIH, LIH and LIH II's right to each nominate one individual to the
Company's Board of Directors terminates. If the holdings of the LIH Entities in
the Company fall below 5% of the number of shares of the Company's Common Stock,
LIH and LIH II's right to each nominate an individual to the Company's Board of
Directors terminates.
Finally, the Amended Agreement provides that approval by the Company's Board of
Directors of certain corporate transactions requires the affirmative vote of a
majority of directors, which majority includes the LIH II Director. Such matters
include, but are not limited to, the following: (i) any amendment to the
Certificate of Incorporation or Bylaws of the Company; (ii) any acquisition of
another business; (iii) any extraordinary sale, lease, transfer or other
disposition of the Company's assets, the book value of which exceeds 2% of the
consolidated assets of the Company; (iv) any reclassification, combination,
split or similar event involving any debt or equity securities of the Company;
(v) any declaration or payment of any dividend or distribution with respect to
shares of the Company's capital stock; and (vi) any incurrence of indebtedness
not in the ordinary course of the Company's business, if the aggregate amount of
such indebtedness, on a consolidated basis, exceeds $5,000,000.
The Amended Agreement terminates on September 9, 2000.
The Services Agreement provides that Harvest Partners will provide the Company
with services from time to time as requested by the Company's Board of
Directors. Such services shall include, but not be limited to, (i) generally
assisting the Company with respect to financial and business matters as the
Company's financial advisor; (ii) recommending and assisting the Company in
implementing a general strategy in connection with the Company's accomplishing
its business plan and anticipated growth; (iii) assisting the Company in its
efforts to structure and negotiate acquisitions and dispositions of assets or
business units; (iv) if necessary, locating
<PAGE>
equity partners and structuring the terms of any such equity investment; (v)
communicating with the Company's lenders and stockholders, including assisting
the Company in the coordination of its investor relations services; (vi)
structuring and negotiating refinancings and other lending or borrowing
transactions relating to the Company financial services as Harvest Partners and
the Company shall deem necessary and appropriate. In addition, the Services
Agreement provides that Harvest Partners will provide the Company with two
designees with financial or management expertise to serve on the Company's Board
of Directors. As full payment for all services provided by Harvest Partners
under the Services Agreement, the Company has agreed to pay Harvest Partners a
fee, subject to the Company achieving certain levels of quarterly earnings
before interest, taxes, depreciation and amortization.
<PAGE>
Executive Officers and Key Employees
The executive officers and key employees of the Company are as follows:
DENNIS W. VOLLMERSHAUSEN, 55, joined the Company in October 1998 as President
and Chief Executive Officer. From August 1996 to June 1997, Mr. Vollmershausen
was the Executive Vice President of Champion Road Machinery, Ltd., a
manufacturer of construction equipment and from June 1997 to August 1998 was
President and Chief Executive Officer. Since January 1990, Mr. Vollmershausen
has also served as Chairman of London Machinery, Inc., a manufacturer of transit
mixers.
JAMES P. CHICK, 43, joined the Company in April 1998, following the acquisition
of Deflecta-Shield Corporation, as the President of Trailmaster Products, Inc.
In October 1998, he was named Vice President and General Manager of the
Company's Suspension Division. From February 1996 until February 1998, he was
the President of Trailmaster Products, Inc. From July 1994 until February 1996,
he was the Marketing Manager of Mr. Gasket Co., a performance automotive parts
company.
JOHN A. DANIELS, 62, joined the Company in March 1998, following the acquisition
of Deflecta-Shield, as the President of Belmor Autotron, the Heavy Truck
Division of the Company. From June 1990 until January 1996, he was the Vice
President and General Manager of Belmor Autotron, a subsidiary of
Deflecta-Shield and in January 1996 he was named President.
RONALD C. FOX, 58, joined the Company in March 1998 and was named Chief
Financial Officer of the Company in May 1998. From October 1996 to March 1998,
he was Chief Financial Officer of Deflecta-Shield Corporation, a subsidiary of
the Company. From November 1994 to December 1996, Mr. Fox was the Chief
Financial Officer of SSDS, Inc., a systems integration firm. From August 1988 to
September 1994, Mr. Fox was the Chief Financial Officer of Bestop, Inc., a
manufacturer of automotive accessories.
KENNETH L. HOLBROOK, 43, joined the Company in March 1998 as Vice President of
Sales. From February 1992 until February 1998, Mr. Holbrook was the Vice
President of OEM and Aftermarket Sales for Bestop, Inc., a manufacturer of sport
utility vehicle soft and hard top systems, associated accessories and seating
systems.
JAMES T. JURINAK, 49, joined the Company in March 1998 as Vice President and
General Manager. From December 19, 1996 to March 1998, Mr. Jurinak was Vice
President and General Manager of Deflecta-Shield Corporation, a subsidiary of
the Company. From November 1994 to December 1996, Mr. Jurinak was Vice President
and General Manager of Menasha Corp., a manufacturer and distributor of polymer
plastics.
ASA R. PHILLIPS, 67, joined the Company in December 1998 as the President and
CEO of Auto Ventshade, following the acquisition of Auto Ventshade by the
Company. He has held the same position with Auto Ventshade since 1955.
<PAGE>
STEPHEN S. TREICHEL, 54, joined the Company in October 1995 as Vice President of
Information Systems. From 1993 to October 1995, Mr. Treichel was the President
of Process Management International, a management consulting firm.
J. TIMOTHY YUNGERS, 42, joined the Company in September 1998 as Director of
Human Resources and in March 1999 was named Vice President of Human Resources.
From November 1995 to September 1998, Mr. Yungers was the Director of Human
Resources for Century Circuits & Electronics, Inc., a manufacturer of flexible
circuit boards. From 1988 to 1990, Mr. Yungers was the Assistant Controller for
Anagram, International, Inc., a manufacturer of consumer products and industrial
packaging and, from 1990 to 1995, he was the Manager of Human Resources.
Item 2. PROPERTIES
The Company manufacturers its products in a mix of owned and leased facilities.
The Company believes that the existing facilities have more than sufficient
capacity to meet its needs and is investigating the feasibility of consolidating
certain facilities. In that regard, the Company has closed facilities in
Oklahoma City, Oklahoma; Sturgis, Michigan; and Chicago, Illinois. The Company
further expects to close the Indianola, Iowa facility in 1999 and consolidate
its operations in Minnesota. The following chart details the facilities of the
Company:
<TABLE>
<CAPTION>
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Size Leased/
Principal Use of Facility Location (Sq. Ft.) Owned Lease Expires
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
<S> <C> <C> <C> <C>
Manufacturing, Corporate Offices
and Warehouse Anoka, MN 331,000 Own N/A
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing (1) Oklahoma City, OK 32,000 Lease February 28, 2003
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Distribution and Offices(2) Indianola, IA 129,200 Own N/A
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing and Distribution Longmont, CO 42,900 Lease November 1, 2000
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing Longmont, CO 6,628 Lease May 1, 2001
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing Longmont, CO 12,600 Lease Monthly
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Offices and Engineering Longmont, CO 10,000 Lease Monthly
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing, Distribution and
Offices Chicago, IL 92,800 Own N/A
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing(2) Chicago, IL 48,000 Own N/A
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Assembly, Distribution and Offices Coldwater, MI 44,400 Lease Monthly
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing, Distribution and
Offices Howe, IN 95,100 Own N/A
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing, Distribution and
Offices(3) Compton, CA 77,200 Lease June 30, 2001
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Manufacturing, Distribution and
Offices Lawrenceville, GA 157,500 Lease February, 2000
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
Office Logan, UT 359 Lease Monthly
- ------------------------------------- -------------------------- -------------- ------------- ------------------------
</TABLE>
(1) The Company is in the process of subleasing this facility.
<PAGE>
(2) The Company is in the process of selling this facility.
(3) The Company sold the Compton operations in January 1999 and the new
owners have assumed the lease.
The Company anticipates no difficulty in retaining occupancy of any of its
leased facilities through lease renewals prior to expiration or through
month-to-month occupancy or in replacing them with equivalent facilities.
Item 3. LEGAL PROCEEDINGS
The Company is currently involved in two legal proceedings in which it is a
defendant.
Scott Ford v. Trailmaster et. al. is a drunk driving/roll over case pending in
Allegheny County, Pennsylvania. Plaintiff alleges that his Ford Ranger and
components furnished by the Company's Trailmaster subsidiary were defective.
The Company believes it has valid defenses and that insurance coverage is
adequate in the event of an adverse judgment.
Lund v. Emmons arises from a rear end collision in Helena, Montana. The Company
is one of several defendants in the case. Plaintiff alleges that his collision
injuries were caused or enhanced by a Company accessory installed on his truck.
The Company is cooperating with other defendants in preparing this case for
trial. The Company further believes that insurance coverage is adequate in the
event of an adverse judgment.
The Company is also subject to additional litigation in the ordinary course of
its business, but the Company believes that none of such matters are likely to
have a material impact on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Holdings' Common stock is traded on the national-over-the-counter market and
quoted on the Nasdaq Stock Market's National Market ("NASDAQ/NM") under the
symbol ("LUND"). The following table sets forth, for the periods indicated, the
range of closing prices per share for Holdings as reported on the NASDAQ/NM.
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Closing Prices Closing Prices Closing Prices
High Low High Low High Low
----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $14.000 $11.625 $13.500 $11.250 $14.000 $11.875
Second Quarter 13.875 11.250 12.875 9.750 15.750 11.750
Third Quarter 11.625 6.375 14.156 10.000 14.125 10.750
Fourth Quarter 8.500 4.750 14.000 11.500 13.000 10.750
</TABLE>
As of March 23, 1999, there were 138 Holdings stockholders of record. The
Company estimates that an additional 1,600 stockholders own stock held for their
account at brokerage firms and financial institutions.
Holdings has never paid cash dividends on its common stock. Payment of dividends
is within the discretion of the Company's Board of Directors.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Six months Fiscal years ended June 30,
Year ended ended ---------------------------------------------------------------
December 31, 1998 December 31, 1997 1997 1996 1995 1994
----------------- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales $112,593,558 $ 19,523,308 $ 43,304,927 $ 46,423,208 $ 47,383,663 $ 36,395,124
Income (loss) before
income taxes (5,685,479) (484,513) 3,129,520 7,054,916 10,656,750 8,120,822
Income tax
(benefit) expense (1,615,323) (120,928) 933,786 2,432,754 3,676,579 2,842,289
Net income (loss) (4,070,156) (363,585) 2,195,734 4,622,162 6,980,171 5,278,533
Basic and diluted net
income (loss) per
share (.64) (.08) .50 1.05 1.58 1.20
Total assets 221,356,704 144,027,462 41,444,706 40,319,605 36,706,198 21,127,377
Long-term liabilities 107,002,546 56,506,169 4,395,178 4,942,225 5,030,000 --
Total stockholders'
equity 85,887,035 62,513,640 32,852,922 30,507,269 25,504,025 18,068,750
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the year ended December 31, 1998, six-months ended December 31, 1997,
and for the years ended June 30, 1997, and 1996
(dollars in thousands, except per share amounts)
GENERAL OVERVIEW
Lund International Holdings, Inc. ("Holdings" or the "Company"), through its
wholly-owned subsidiaries, Lund Industries, Incorporated ("Lund"),
Deflecta-Shield Corporation ("Deflecta-Shield"), and Ventshade Holdings, Inc.
("Ventshade") designs, manufactures, markets and distributes appearance
automotive aftermarket accessories for light trucks, sport utility vehicles and
vans (collectively, "light trucks") and heavy trucks, and designs, markets and
distributes suspension systems and related accessories for light trucks.
On December 30, 1997, the Company, through a wholly-owned subsidiary, acquired
98.8% of the outstanding common stock of Deflecta-Shield and acquired the
remaining 1.2% of the outstanding common stock on February 27, 1998. With 1997
annual sales of over $70 million, Deflecta-Shield designs, manufactures, markets
and distributes (i) fiberglass, plastic and aluminum appearance accessories for
light trucks, and (ii) fiberglass and plastic appearance accessories for heavy
trucks. Deflecta-Shield also designs, markets and distributes suspension systems
and related accessories for light trucks. The Company paid $76.8 million for
100% of the outstanding shares of Deflecta-Shield at $16 per share,
approximately $2.1 million for direct transaction costs plus $9.4 million to
retire Deflecta-Shield's long-term debt outstanding on December 30, 1997. The
acquisition was accounted for under the purchase method of accounting. The
acquisition of Deflecta-Shield had no impact on the Company's results of
operations for the six-month period ended December 31, 1997 because the initial
closing of the transaction occurred on December 30, 1997.
On December 23, 1998, the Company, through a wholly-owned subsidiary, acquired
100% of the outstanding common stock of Ventshade for an aggregate purchase
price of $66.9 million, direct transaction costs of approximately $1.8 million,
and a working capital adjustment of $0.7 million. With 1998 sales of over $55
million, Ventshade designs, manufactures, markets and distributes appearance
automotive aftermarket accessories for light trucks and passenger cars. The
acquisition was accounted for under the purchase method of accounting. The
acquisition of Ventshade had minimal impact on the Company's results of
operations for the year ended December 31, 1998 because the closing of the
transaction occurred on December 23, 1998.
In September 1997, the Company's Board of Directors approved a change in its
fiscal year end from June 30 to December 31, with a six month transition period
ending on December 31, 1997.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net revenue of
certain items in the Company's consolidated statements of operations for the
periods indicated:
<TABLE>
<CAPTION>
Percentage of net sales
Six months Fiscal
Year ended Ended years ended June 30
December 31, December 31, ---------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 27.3 33.7 34.1 37.9
General and administrative expenses 10.4 10.7 9.8 8.5
Selling and marketing expenses 12.2 15.9 14.6 12.4
Research and development expenses 2.6 3.7 3.0 2.4
Non-recurring transaction
expenses - 6.0 - -
Amortization of intangibles 2.2 .3 .3 -
---- ---- ---- ----
(Loss) income from operations (.1) (2.9) 6.4 14.6
Other (expense) income, net (4.9) .4 .8 .6
Income tax (benefit) expense (1.4) (.6) 2.1 5.2
---- ---- ---- ----
Net (loss) income (3.6)% (1.9)% 5.1% 10.0%
==== ==== ==== ====
</TABLE>
The following table sets forth the consolidated statements of operations for the
year ended December 31, 1998 compared to the pro forma consolidated statements
of operations for the year ended December 31, 1997. The pro forma information
gives effect to the Company's acquisition of Deflecta-Shield and the financing
thereof as if such transaction occurred on January 1, 1997. In addition, the
1997 pro forma information excludes the non-recurring transaction costs of
$1,174 incurred by the Company in the third quarter of 1997 and the
restructuring costs of $1,099 incurred by Deflecta-Shield in the third quarter
of 1997. The pro forma information is for comparison purposes and is not
necessarily indicative of the results of operations that would have actually
been achieved.
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------
Pro Forma
December 31, 1998 December 31, 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales $112,594 100.0% $113,859 100.0%
Gross profit 30,769 27.3 36,709 32.2
General and administrative expenses 11,800 10.4 10,437 9.2
Selling and marketing expenses 13,736 12.2 14,277 12.5
Research and development expenses 2,970 2.6 2,739 2.4
Amortization of intangibles 2,424 2.2 2,421 2.1
------- ----- ----- -----
(Loss) income from operations (161) (.1) 6,835 6.0
Other (expense) income, net (5,524) (4.9) (5,372) (4.7)
Income tax (benefit) expense (1,615) (1.4) 719 .6
------- ----- ------- -----
Net (loss) income $ (4,070) (3.6%) $ 744 .7%
======== ====== ======= =====
</TABLE>
NET SALES: Net sales for the year ended December 31, 1998 were $112,594, an
increase of $93,071 over net sales for the six-months ended December 31, 1997
and an increase of $69,289 and $66,171 over net sales for the fiscal years ended
June 30, 1997 and 1996, respectively. The increased net sales reflect the
inclusion of Deflecta-Shield's operations in 1998 as well as comparing a twelve
month period to a six month period. Compared to 1997 pro forma, net sales for
the year ended December 31, 1998 decreased $1,265, or 1.1%. Net
<PAGE>
sales of heavy truck products were ahead of 1997 pro forma by $1,653, or 10.5%,
and net sales of suspension products in 1998 were level with the comparable
period of 1997. Net sales of light truck products declined by $2,924, or 3.4%.
While net sales of the light truck division's aluminum products and tonneau
covers enjoyed substantial growth, up 28% and 11%, respectively, over the 1997
pro forma period, net sales declined in fiberglass running boards, external
visors, and other appearance accessories. The plastic and fiberglass products
are marketed mainly through the warehouse distributor market channel, which is
realizing more competition from mass merchandisers, retail chains, and OEMs. In
addition, fiberglass running boards are facing more competition from the
interchangeable metal tubular products.
Net sales decreased 6.7% to $43,305 for the fiscal year ended June 30, 1997,
compared to $46,423 for the fiscal year ended June 30, 1996. The net sales
decrease resulted primarily from lower sales of visor lines, which decreased by
20.7% for the fiscal year ended June 30, 1997, compared to the previous fiscal
year. Management believes decreased sales in the visor category resulted
principally from the Company's customers delaying visor orders in anticipation
of new visor lines and design, production and shipping delays in these new
lines.
COST OF GOODS SOLD AND GROSS PROFIT: Gross profit for the year ended December
31, 1998 was 27.3%, compared to 33.7% for the six-month period ended December
31, 1997. The gross profit margin for the pro forma year ended December 31, 1997
was 32.2%. The drop in gross margin in 1998 compared to pro forma 1997 was
attributable to product promotions for aftermarket plastic and fiberglass
products, increased reserves established for product returns and obsolete
inventories resulting from rationalizing product lines between Lund and
Deflecta-Shield, added overhead costs of new facilities in Illinois and Indiana,
shift in sales mix to lower margin products, and reduced fixed overhead
absorption due to lower production levels in aftermarket plastic and fiberglass
products.
Gross profit for the fiscal years ended June 30, 1997 and 1996 were 34.1% and
37.9%, respectively. The decreasing gross profit from fiscal 1996 to fiscal 1997
primarily resulted from a shift in sales mix to lower margin products, higher
raw material plastic prices, warranty claims, principally on acrylic products,
higher facility and lease costs, and higher fixed costs as a percentage of net
sales due to lower production and shipping volumes. Gross profit during the
fiscal year ended June 30, 1997 was also impacted by production and material
inefficiencies caused by the introduction of a new quality program.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$11,800, or 10.4% of net sales, for the year ended December 31, 1998, compared
to $2,085, or 10.7% of net sales, for the six-month period ended December 31,
1997. On a pro forma basis for the year ended December 31, 1997, general and
administrative expenses were $10,437, or 9.2% of net sales. The increase of
$1,363 for the year ended December 31, 1998 over the 1997 comparable pro forma
period is primarily due to training and implementation of a new company-wide
information system, non-recurring personnel severance costs, recruiting and
relocations, relocation of the Oklahoma tonneau production to the heavy truck
division.
<PAGE>
General and administrative expenses were $4,264, or 9.8% of net sales, for the
fiscal year ended June 30, 1997, compared to $3,934, or 8.5% of net sales, for
the fiscal year ended June 30, 1996. The increase in general and administrative
expenses during the fiscal year ended June 30, 1997 was primarily caused by
administrative expenses for the Oklahoma tonneau cover facility and expenses
associated with evaluating the Company's strategic alternatives.
SELLING AND MARKETING EXPENSES: Selling and marketing expenses were $13,736, or
12.2% of net sales, for the year ended December 31, 1998 compared to $3,103, or
15.9% of net sales, for the six-month period ended December 31, 1997. Selling
and marketing expenses were $14,277, or 12.5% of net sales, for the pro forma
year ended December 31, 1997. The decease of $541 in 1998 from the 1997 pro
forma period was the result of synergistic reductions in spending and personnel
resulting from merging the sales and marketing groups of Lund and
Deflecta-Shield.
Selling and marketing expenses were $6,332, or 14.6% of net sales, for the
fiscal year ended June 30, 1997, compared to $5,750, or 12.4% of net sales, for
the fiscal year ended June 30, 1996. The increased sales and marketing costs
were due to higher customer advertising and display expenses, general
advertising and printing costs, new product support costs, promotional
sponsorship costs and salary expenses.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses were
$2,970, or 2.6% of net sales, for the year ended December 31, 1998, compared to
$722, or 3.7% of net sales, for the six-month period ended December 31, 1997. On
a pro forma basis, research and development expenses were $2,739, or 2.4% of net
sales, for the year ended December 31, 1997. The increase of $231 between the
year ended December 31, 1998 and the pro forma year ended December 31, 1997 was
due to increased personnel and development costs for new products and
applications of existing products.
Research and development expenses were $1,290, or 3.0% of net sales, for the
fiscal year ended June 30, 1997, compared to $1,109, or 2.4% of net sales, for
the fiscal year ended June 30, 1996. This increase was due to increased product
support and application development.
AMORTIZATION OF INTANGIBLES: Amortization expense was $2,424 for the year ended
December 31, 1998, compared to $61, $122, and $9 for the six-months ended
December 31, 1997 and the years ended June 30, 1997 and 1996, respectively. The
increase in amortization in 1998 reflects intangibles amortization associated
with the Deflecta-Shield acquisition.
NON-RECURRING TRANSACTION EXPENSES: On September 19, 1997, Harvest Partners
purchased 38% of the Company's outstanding shares of common stock from the
former Chairman of the Board and his family. In connection with the transaction,
the Company recorded a pre-tax non-recurring charge of $1,174. This charge
includes $600 paid to the former Chairman of the Board for a covenant not to
compete and severance and $574 for investment banking, legal, accounting and
other related expenses.
OTHER (EXPENSE) INCOME, NET: Other (expense) income, net, was $5,524 of expense,
primarily interest expense, for the year ended December 31, 1998, compared to
income of $84, $364, and $258 for the six-months ended December 31, 1997 and the
years ended June 30, 1997 and 1996, respectively. The
<PAGE>
acquisition of Deflecta-Shield resulted in the Company incurring substantial new
long-term debt and using its entire balance of unrestricted marketable
securities to finance the acquisition.
INCOME TAX EXPENSE (BENEFIT): The Company recorded a tax benefit of $1,615 for
the year ended December 31, 1998, or a tax benefit of 28.4%. For the six-months
ended December 31, 1997, the tax benefit was 25.0% and for the years ended June
30, 1997 and 1996, the Company recorded an effective tax rate of 29.8% and
34.5%, respectively. The effective tax benefit for the year ended December 31,
1998 and six-months ended December 31, 1997 was less than the statutory
effective tax benefit due to the non-deductibility for tax purposes of
acquisition-related goodwill in 1998 and the non-deductibility for tax purposes
in 1997 of certain of the costs incurred related to the non-recurring
transaction described previously.
NET INCOME PER SHARE: The Company's net loss for the twelve months ended
December 31, 1998 was $4,070, or $.64 per share, compared to a net loss per
share of $.08 for the six-months ended December 31, 1997 and net income per
share of $.50 and $1.05 for the years ended June 30, 1997 and 1996,
respectively.
OUTLOOK
The acquisitions of Deflecta-Shield in 1997 and Ventshade in 1998 brought to the
Company significant new product lines, outstanding customer service levels,
operational strengths to address new production methods, enhanced design and
engineering capabilities, and new market channels. Historically, the Company
distributed its products principally through warehouse distributors. With
increased sales of light trucks over the past few years, mass merchandisers,
national automotive retailers and original equipment manufacturers ("OEMs") are
participating more and more in the distribution of automotive appearance
accessories.
The impact of increased channel competition is shifting a portion of sales away
from warehouse distributors to national automotive retailers, mass
merchandisers, and OEM channels. This shift has resulted in increased
competition within the warehouse distributor channel and created pricing
pressures, especially as it relates to the plastic product lines. The Company
had a strong presence with the majority of the warehouse distributors. The
Deflecta-Shield acquisition brought an increased OEM presence in both the light
truck and heavy truck markets, especially in key product lines such as bug
shields/hood protectors and aluminum products. Ventshade strengthened the light
truck markets with its key product lines such as bugflectors, ventshades, and
ventvisors. In addition, Ventshade contributed an increased presence in the mass
merchandiser and retail specialty markets.
The automotive accessory market is currently going through significant
consolidation in both the manufacturing and distribution areas. The Company
expects to take advantage of this consolidation with both new product
development and acquisitions to become the market leader in all product
categories in which it competes. The long-term goal of the Company is to become
the low cost producer by increasing product line sales volume and customer
service levels through acquisition, product line rationalization and facility
consolidation to improve capacity utilization. This effort will be enhanced by
improved plant efficiencies, consolidation of purchasing and quality
improvements through improved engineering and QS9000 initiatives.
<PAGE>
However, during 1998, the Company incurred delays in maximizing the synergistic
benefits it hoped to obtain from the Deflecta-Shield acquisition by
consolidating and internalizing operations. Notwithstanding these delays, the
consolidation of Deflecta-Shield's operations led to (i) the closure of the
tonneau cover cut and sew operation in Oklahoma, with production transferred to
the heavy truck division, (ii) the merging of the sales and marketing functions,
(iii) the integration of information systems into a single platform, with
expected completion in mid-1999, (iv) the consolidation of Deflecta-Shield's
Iowa warehouse into Minnesota, with an expected completion date of April 1999,
and (v) the divestiture of an unprofitable custom fiberglass operation in
January 1999. Thus, the full potential of the Deflecta-Shield's acquisition
savings is not expected to be realized until the end of 1999.
In October 1998, the Company received notice from The Nasdaq Stock Market that
its shares of common stock may no longer meet the maintenance standards and
requirements for continued listing on the Nasdaq National Market. In January
1999, the Company was notified that it was in full compliance of Nasdaq's
maintenance standards and requirements and, thus, the Company's securities will
continue to trade on the Nasdaq National Market.
On January 29, 1999, the Company completed the acquisition of 100% of the
capital stock of Smittybilt, Inc. for $18 million in cash. The acquisition of
Smittybilt continues to strengthen the Company's light truck markets with its
key product lines of stainless, chromed and painted steel tubular light truck
accessories.
While the Company remains committed to continued growth through acquisitions,
the Company currently is not actively engaged in negotiations regarding any
acquisitions.
EFFECTS OF INFLATION: Although increases in costs of certain materials and labor
could adversely affect operations, the Company generally has been able to
increase its selling prices to offset increased costs. Price competition,
however, particularly in the plastic and fiberglass product lines, could affect
the ability of the Company to increase its selling prices to reflect such
increased costs. In general, management believes that the relatively moderate
inflation over the last few years did not have a significant impact on the
Company's net sales, but that increasing raw material prices and labor costs had
an impact on gross profit.
<PAGE>
FINANCIAL CONDITION
The Company's consolidated balance sheet at December 31, 1998 reflects the
Company's acquisition of 100% of the outstanding common stock of Deflecta-Shield
and Ventshade, and at December 31, 1997, the initial acquisition of 98.8% of the
outstanding common stock of Deflecta-Shield.
<TABLE>
<CAPTION>
As of
------------------------------------------------------------
December 31, December 31, June 30,
1998 1997 1997
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Cash and marketable securities
(including restricted cash) $ 1,191 $ 7,913 $13,944
Total current assets 63,203 52,466 30,339
Total assets 221,357 144,027 41,445
Total current liabilities 28,467 25,008 4,197
Total long-term debt
(excluding current maturities) 99,796 52,927 4,130
Working capital 34,736 27,458 26,142
Current ratio 2.2 to 1 2.1 to 1 7.2 to 1
Stockholders' equity 85,887 62,514 32,853
Stockholders' equity to total liabilities .6 to 1 .8 to 1 3.8 to 1
</TABLE>
LIQUIDITY: Net cash used by operating activities was $7,122 for the year ended
December 31, 1998 and net cash provided by operating activities was $363,
$4,528, and $3,010 for the six-month period ended December 31, 1997 and for the
fiscal years ended June 30, 1997 and 1996, respectively.
Net cash used in investing activities during the year ended December 31, 1998
was $75,933, reflecting the acquisition of Ventshade, the remaining costs
related to the acquisition of Deflecta-Shield, and the construction of a new
104,000 square foot warehouse addition in Minnesota. Net cash used in investing
activities during the six months ended December 31, 1997 was $63,945, reflecting
the impact of the acquisition of Deflecta-Shield.
Net cash provided by financing activities for the year ended December 31, 1998
was $77,456 and includes $45,000 of proceeds from the Company's senior and
subordinated lenders and $25,000 of proceeds from the issuance of common and
preferred stock to finance the acquisition of Ventshade. Net cash provided by
financing activities for the six-month period ended December 31, 1997 was
$70,094 and reflects $40,879 proceeds from the Company's tender loan facility
with Heller financial and $30,000 of proceeds from the issuance of common and
preferred stock to finance the acquisition of Deflecta-Shield.
The Company's cash and temporary cash investments at December 31, 1997 were
reduced substantially by cash used to settle Deflecta-Shield's stock options
outstanding on December 30, 1997, and to pay direct acquisition costs accrued at
December 31, 1997.
On December 23, 1998, the Company amended its credit agreement with its senior
lender. The amended credit agreement, in addition to restructuring the Company's
debt, modified all financial
<PAGE>
covenants. Consequently, at December 31, 1998, the Company was fully compliant
with all financial covenants of its lenders.
CAPITAL
With respect to financing related to the acquisitions of Ventshade and
Deflecta-Shield, refer to Notes 2 and 4 to the Notes to the Consolidated
Financial Statements.
On December 29, 1998, the Company defeased the Industrial Development Revenue
Bonds (the"Bonds") by placing its restricted cash and marketable securities held
pursuant to the Bond agreement as of that date and an additional deposit of
$3,182 in escrow sufficient to meet the remaining principal and interest
payments of the Bonds. The funds held in escrow can be used only for the purpose
of satisfying the debt service requirements of the Bonds. Under the terms of the
Bond agreement, the Company has guaranteed the repayment of the Bonds through
January 2000. Accordingly, the Bonds and the related restricted cash and
marketable securities will continue to be presented as an asset and obligation
of the Company until such guarantee expires in January 2000.
Management believes that cash generated from operations and amounts available
under its revolving credit facilities will be sufficient to fund working capital
growth, anticipated capital expenditures not financed through operating leases
and required debt repayments for the foreseeable future. The amount available
for borrowing under the Revolver at December 31, 1998 was $13,042.
FINANCIAL INSTRUMENTS MARKET RISK
The Company's financial instruments include cash, accounts receivable, accounts
payable and long-term debt. The Company is exposed to interest rate risk arising
from transactions that are entered into during the normal course of business.
The Company's borrowings and its Revolving Line of Credit are dependent upon the
prime interest and LIBOR rates. The estimated fair value of long-term debt
approximates its carrying value at December 31, 1998. The Company does not enter
into hedging or derivative instruments.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130 REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is defined as
the change in equity during the period of a business enterprise resulting from
non-owner sources. The only adjustment to the Company's net (loss) income to
arrive at comprehensive income has been unrealized holding gains (losses) on
marketable securities for the six-months ended December 31, 1997 and the fiscal
years ended June 30, 1997 and 1996.
In 1998, the Company adopted SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
reporting operating segment
<PAGE>
information in both annual reports and interim financial reports issued to
shareholders. The adoption of SFAS No. 131 reflects the Company's realignment
into three operating segments for both internal and external reporting: (i) the
heavy truck division for design, manufacture, marketing and distribution of
accessories for heavy trucks (Class 8), (ii) the suspension division for design,
marketing and distribution of suspension modifications for light trucks, and
(iii) the light truck division for design, manufacture, marketing and
distribution of aftermarket accessories for light trucks.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
is reviewing the requirements of the SOP and does not expect it to significantly
change its current accounting for software costs. SOP 98-1 is required to be
adopted by the Company for its fiscal year 1999.
YEAR 2000 COMPLIANCE
Many financial information and operational systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could have adverse
consequences on the operations of an entity and the integrity of information
processing. This potential problem is referred to as the "Year 2000" or "Y2K"
issue.
State Of Readiness
As background, in April 1998, the Company upgraded its central processor in its
Minnesota headquarters to an AS/400, model 640/2237 running OS/400 v4r2, and by
June 1998, the Company had implemented a century-dated version of its new BPCS
software. Consequently, by June of 1998, the central processor and the business
operating system of the Company in its Minnesota headquarters were Y2K compliant
for its main information technology ("IT") system. Simultaneously, in the first
quarter of 1998, the Company embarked on Y2K planning dedicated to
systematically integrating the operations that were acquired with the
acquisition of Deflecta-Shield. At the time of the acquisition, each
Deflecta-Shield entity operated its own business system, none of which were Y2K
compliant. To date, three of the five Deflecta-Shield entities have been
converted to the Company's IT systems that are Y2K compliant. The remaining two
entities are scheduled for conversion to Y2K technology on May 1, 1999 and
August 1, 1999. At the same time, with each conversion to the Company's IT
system, network topology and desktop computing is upgraded. The central
processor is accessed through a wide-area network (WAN) accomplished through a
frame relay. All equipment purchased to effect the WAN is Y2K compliant. As each
operation is converted to BPCS, all prior business system's equipment is
replaced through the central processor and the WAN. PC compliance is
accomplished through BIOS upgrades or replacement of equipment. A local area
network is established at each site utilizing equipment purchased for that
specific purpose. All servers and software is Y2K compliant. Thus, with each
conversion and cut over to BPCS, the business operating system, the WAN/LAN
topology, and desktop computing of each operating entity will be Y2K compliant.
<PAGE>
Beyond the activities of conversion and cut over to BPCS, the Y2K plan consists
of a five-step process: inventory, assessment, planning, remediation, and
testing. The Company has virtually completed its inventory of IT and non-IT
systems and is currently assessing and documenting Y2K compliance. Letters to
primary business partners, such as customers, suppliers, and financial
institutions, will be mailed by the end of March 1999 which request certain Y2K
information.
The Company has also inventoried non-IT micro-controlled equipment, such as
production equipment and security systems, and is currently assessing any
potential vulnerability. At the present time, management believes there are no
significant issues relating to plant production equipment. Plant operations are,
in general, not computer controlled since manufacturing processes are discrete
and based on work center or cell. None of the Company's products include any
microcontrollers.
The two recent acquisitions, Ventshade and SmittyBilt, are Y2K compliant in
terms of business operating system and central processors. Both operations have
internally created business systems with eight character date fields. They both
use AS/400 platforms running current versions of OS/400. The Company is
currently inventorying their desktop hardware and software, although it expects
no material issues from any of the equipment.
The Company expects to complete assessment during April 1999, with any
remediation to IT and non-IT equipment to begin in June 1999. In terms of
trading partner readiness to process in the year 2000, the Company is beginning
to assess their capabilities through responses to questionnaires.
Cost
The Company anticipates a total cost of between $600 to $900 over 1998 and 1999,
of which a portion will be capitalized and the remainder charged to earnings in
the respective years. The Company does not expect these activities to materially
impact earnings.
Risks
Under a hypothetical scenario where unknown elements are not Y2K compliant, then
the Company may not be able to:
1. Transact at certain workstations through lack of desktop readiness.
2. Receive phone calls at certain outlying locations (the phone system at the
Company's Minnesota headquarters is Y2K compliant).
3. Conduct transactions where third party software is used to conduct
business, including, among others, the following transactions:
a. Bar code labeling
b. EDI communication
c. Payroll
d. Small package shipments
<PAGE>
The above are considered risks because they have not been completely assessed.
However, preliminary data indicates that no significant risks exist within any
of the environments. The Company's assessment is expected to be completed by
September 1999.
Contingency Plans
The Company's contingency plans assume that all unknowns are not Y2K compliant.
Issue Contingency plan
- ----- ----------------
Desktop not compliant Purchase new PC's/software or BIOS upgrades
Phone systems not compliant Purchase new system or change out certain elements
Bar Code labeling Purchase new software or upgrade existing
EDI communication Purchase new software or upgrade existing
Payroll Purchase new software or upgrade existing
Small package shipments Purchase new software or upgrade existing
In each of these cases, the Company prefers to upgrade existing software in
order to minimize additional programming work incurred through the
implementation of different software.
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-K and the Annual Report to Shareholders,
including the Chief Executive Officer's letter relating to future financial
results, the effects of the acquisitions, company operations, trends and market
analysis, among others, are forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties which could cause results to differ materially from those
anticipated. With respect to the Company's acquisitions, among the factors that
could cause anticipated results of operations to differ materially are the
following: inability to obtain expected efficiencies, or to obtain them in a
timely manner; inability to effectively manage a larger enterprise, to integrate
acquired companies or to control costs associated with such integration; and the
representations, warranties and covenants in the merger and purchase agreements
proving to be materially untrue. In addition, Lund's, Deflecta-Shield's,
Ventshade's and Smittybilt's business and operations (and anticipated results)
include the following risk factors: consumer preference changes; risk of
expansion into new distribution channels; delays in designing, developing,
testing or shipping of products; increased competition; general economic
developments and trends; developments and trends in the light truck and
automotive accessory market; sales of heavy trucks, which are cyclical; the
timely development and introduction of competitive new products by the Company
and acceptance of those products; and increased costs. This is not an exhaustive
list and the Company may supplement this list in future filings or releases or
in connection with the making of forward-looking statements.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
ASSETS 1998 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and temporary cash investments $ 1,191,029 $ 6,790,130 $ 277,740
Restricted cash - 1,123,354 1,393,146
Marketable securities - - 12,273,163
Accounts receivable, net 33,389,494 21,450,255 8,325,739
Inventories 21,770,696 17,993,562 6,611,761
Deferred income taxes 4,300,229 3,517,253 743,900
Other current assets 2,552,218 1,591,465 713,617
------------ ------------ -----------
Total current assets 63,203,666 52,466,019 30,339,066
Property and equipment, net 29,568,206 20,621,004 7,310,357
Intangibles, net 119,833,969 68,777,920 2,223,420
Restricted cash and marketable securities 3,911,047 594,902 580,242
Other assets 4,839,816 1,567,617 991,621
------------ ------------ -----------
Total assets $221,356,704 $144,027,462 $41,444,706
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 6,466,129 $ 7,521,318 $ 1,861,446
Accrued expenses 17,750,298 15,786,335 1,875,160
Long-term debt, current portion 4,250,696 1,700,000 460,000
------------ ------------ -----------
Total current liabilities 28,467,123 25,007,653 4,196,606
Long-term debt, less current portion 99,795,705 52,927,067 4,130,000
Deferred income taxes 6,599,715 2,352,239 -
Other liabilities 607,126 1,226,863 265,178
Commitments and Contingencies (Note 7)
Stockholders' equity:
Preferred stock-Series A, $.01 par value;
authorized 2,000,000 shares; none issued and
outstanding at December 31, 1998 and June 30, 1997,
1,493,398 issued and outstanding at December 31, 1997 - 14,934 -
Preferred stock-Series B, $.01 stated value;
authorized 362,709 shares; 252,401.8 issued and
outstanding at December 31, 1998, none issued and
outstanding at December 31, 1997 and June 30, 1997 2,524 - -
Common stock, $.10 par value;
authorized 25,000,000 shares; issued and outstanding
6,310,782 at December 31, 1998, 5,268,370 at
December 31, 1997, and 4,393,970 at June 30, 1997 631,078 526,837 439,397
Class B-1 common stock, $.01 par value;
authorized 3,000,000 shares; 1,493,398 issued and
outstanding at December 31, 1998, none issued and
outstanding at December 31, 1997 and June 30, 1997 14,934 - -
Additional paid-in capital 58,163,995 30,884,301 986,675
Unrealized holding gains on marketable securities - - 9,957
Unearned deferred compensation - (57,092) (91,352)
Retained earnings 27,074,504 31,144,660 31,508,245
------------ ------------ -----------
Total stockholders' equity 85,887,035 62,513,640 32,852,922
------------ ------------ -----------
Total liabilities and stockholders' equity $221,356,704 $144,027,462 $41,444,706
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED SIX MONTHS ENDED -----------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
Net sales $112,593,558 $ 19,523,308 $43,304,927 $46,423,208
Cost of goods sold 81,824,529 12,946,258 28,531,370 28,824,792
------------ ---------------- ----------- -----------
Gross profit 30,769,029 6,577,050 14,773,557 17,598,416
Operating expenses:
General and administrative 11,799,611 2,085,184 4,264,320 3,933,526
Selling and marketing 13,736,184 3,103,005 6,332,003 5,749,668
Research and development 2,970,007 722,234 1,289,655 1,108,750
Amortization of intangibles 2,424,186 60,636 121,984 9,329
Non-recurring transaction - 1,174,299 - -
------------ ---------------- ----------- -----------
Total operating expenses 30,929,988 7,145,358 12,007,962 10,801,273
------------ ---------------- ----------- -----------
(Loss) income from operations (160,959) (568,308) 2,765,595 6,797,143
Other (expense) income:
Interest expense (5,483,994) (159,511) (293,289) (324,792)
Interest income 105,851 306,433 694,857 601,362
Other, net (146,377) (63,127) (37,643) (18,797)
------------ ---------------- ----------- -----------
Other (expense) income, net (5,524,520) 83,795 363,925 257,773
------------ ---------------- ----------- -----------
(Loss) income before income taxes (5,685,479) (484,513) 3,129,520 7,054,916
Income tax (benefit) expense (1,615,323) (120,928) 933,786 2,432,754
------------ ---------------- ----------- -----------
Net (loss) income $ (4,070,156) $ (363,585) $ 2,195,734 $ 4,622,162
============ ================ =========== ===========
Basic and diluted (loss) earnings
per share $ (0.64) $ (0.08) $ 0.50 $ 1.05
============ ================ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended December 31, 1998, six months ended December 31, 1997,
and years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
PREFERRED STOCK-SERIES A PREFERRED STOCK-SERIES B
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance, June 30, 1995 - - - -
Restricted shares canceled - - - -
Options exercised - - - -
Net income - - - -
Change in unrealized holding gains
(losses) on marketable securities - - - -
Amortization of deferred
compensation - - - -
--------- ---------- ---------- ------------
Total comprehensive income
Balance, June 30, 1996 - - - -
Options exercised - - - -
Net income - - - -
Change in unrealized holding gains
(losses) on marketable securities - - - -
Amortization of deferred
compensation - - - -
--------- ---------- ---------- ------------
Total comprehensive income
Balance, June 30, 1997 - - - -
Issuance of preferred stock 1,493,398 $ 14,934 - -
Issuance of common stock - - - -
Net loss - - - -
Change in unrealized holding gains
(losses) on marketable securities - - - -
Amortization of deferred
compensation - - - -
--------- ---------- ---------- ------------
Total comprehensive income
Balance, December 31, 1997 1,493,398 $ 14,934 - -
Conversion of preferred stock (1,493,398) (14,934)
Issuance of preferred stock 252,401.8 $ 2,524
Issuance of common stock, net
of issuance costs
Net loss
Amortization of deferred
compensation
Cancellation of restricted stock
Issuance of warrants in connection
with senior subordinated notes
--------- ---------- ---------- ------------
Total comprehensive income
Balance, December 31, 1998 - $ - 252,401.8 $ 2,524
========= ========== ========== ============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK - CLASS B-1
------------ ------------------------ ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- -------- --------- ------- -----------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 4,387,902 $438,790 - $ - $ 767,417
Restricted shares canceled (15,000) (1,500) - - (10,423)
Options exercised 19,068 1,907 - - 218,881
Net income - - - - -
Change in unrealized holding gains
(losses) on marketable securities - - - - -
Amortization of deferred
compensation - - - - -
--------- -------- --------- ------- -----------
Total comprehensive income
Balance, June 30, 1996 4,391,970 439,197 - - 975,875
Options exercised 2,000 200 10,800
Net income - - - - -
Change in unrealized holding gains
(losses) on marketable securities - - - - -
Amortization of deferred
compensation - - - - -
--------- -------- --------- ------- -----------
Total comprehensive income
Balance, June 30, 1997 4,393,970 439,397 - - 986,675
Issuance of preferred stock - - - - 18,906,418
Issuance of common stock 874,400 87,440 - - 10,991,208
Net loss - - - - -
Change in unrealized holding gains
(losses) on marketable securities - - - - -
Amortization of deferred
compensation - - - - -
--------- -------- --------- ------- -----------
Total comprehensive income
Balance, December 31, 1997 5,268,370 526,837 - - 30,884,301
Conversion of preferred stock 1,493,398 14,934
Issuance of preferred stock 17,665,593
Issuance of common stock, net
of issuance costs 1,047,412 104,741 7,042,143
Net loss
Amortization of deferred
compensation (28,542)
Cancellation of restricted stock (5,000) (500) 500
Issuance of warrants in connection
with senior subordinated notes 2,600,000
--------- -------- --------- ------- -----------
Total comprehensive income
Balance, December 31, 1998 6,310,782 $631,078 1,493,398 $14,934 $58,163,995
========= ======== ========= ======= ===========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Unearned Other Total
Deferred Comprehensive Retained Comprehensive
Compensation Income (loss) Earnings Total Income (loss)
-------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$ (242,175) $ (150,356) $24,690,349 $25,504,025
11,923 - -
- - - 220,788
- - 4,622,162 4,622,162 $ 4,622,162
-
- 89,914 - 89,914 89,914
-
70,380 - - 70,380
-------------- ------------- ----------- ----------- -------------
$ 4,712,076
=============
(159,872) (60,442) 29,312,511 30,507,269
- - - 11,000
- - 2,195,734 2,195,734 $ 2,195,734
-
- 70,399 - 70,399 70,399
-
68,520 - - 68,520
-------------- ------------- ----------- ----------- -------------
$ 2,266,133
=============
(91,352) 9,957 31,508,245 32,852,922
- - - 18,921,352
- - - 11,078,648
- - (363,585) (363,585) (363,585)
-
- (9,957) - (9,957) (9,957)
-
34,260 - - 34,260
-------------- ------------- ----------- ----------- -------------
$ (373,542)
=============
(57,092) - 31,144,660 62,513,640
-
17,668,117
7,146,884
(4,070,156) (4,070,156) (4,070,156)
-
57,092 28,550
-
2,600,000
-------------- ------------- ----------- ----------- -------------
$ (4,070,156)
=============
$ - $ - $27,074,504 $85,887,035
============= ============= =========== ===========
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (4,070,156) $ (363,585)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 3,790,331 624,352
Amortization 2,842,112 122,120
Deferred income taxes (1,168,254) 77,850
Gain (loss) on disposal of property and equipment 29,702 (11,984)
Provision for (reduction in) doubtful accounts reserves 212,483 78,447
Provision for inventory reserves 1,542,222 190,479
Changes in operating assets and liabilities, net of impact of aquisitions in
the periods ended December 31, 1998 and 1997 and June 30, 1996:
Accounts receivable 1,271,277 (1,284,618)
Inventories (854,551) (382,708)
Other current and other assets 98,087 (645,970)
Accounts payable, trade (3,277,372) 925,424
Accrued expenses (7,537,650) 1,033,169
------------- -------------
Net cash (used) provided by operating activities (7,121,769) 362,976
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Deflecta-Shield common stock, net of cash acquired (3,155,683) (76,078,599)
Purchase of Ventshade common stock, net of cash acquired (65,095,878)
Purchase of marketable securities - (2,496,978)
Proceeds from sales of marketable securities - 13,761,900
Proceeds from redemptions of marketable securities - 998,284
Purchases of property and equipment (5,548,606) (866,888)
Proceeds from sales of property and equipment 76,725 11,984
Change in restricted cash and marketable securities (2,192,791) 255,132
Increase in note receivable to Innovative Accessories, Inc. - -
Innovative Accessories, Inc. acquisition costs - -
Other investing activities (17,253) 470,336
------------- -------------
Net cash used in investing activities (75,933,486) (63,944,829)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 110,030,124 40,878,576
Debt issuance costs (1,172,068) (300,000)
Proceeds from issuance of common and preferred stock 25,000,000 30,000,000
Payment of long-term debt (58,018,653) (460,000)
Checks issued in excess of cash balances 1,757,117 -
Payment of other liabilities (140,366) (24,333)
------------- -------------
Net cash provided by (used in) financing activities 77,456,154 70,094,243
------------- -------------
Net increase (decrease) in cash and temporary cash investments (5,599,101) 6,512,390
CASH AND TEMPORARY CASH INVESTMENTS:
Beginnng of period 6,790,130 277,740
------------- -------------
End of period $ 1,191,029 $ 6,790,130
============= =============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
JUNE 30, JUNE 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 2,195,734 $ 4,622,162
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 1,039,887 779,388
Amortization 284,164 128,813
Deferred income taxes 71,700 (136,800)
Gain (loss) on disposal of property and equipment (38,000) (17,065)
Provision for (reduction in) doubtful accounts reserves (43,248) 228,200
Provision for inventory reserves 150,077 52,895
Changes in operating assets and liabilities, net of impact of aquisitions in
the periods ended December 31, 1998 and 1997 and June 30, 1996:
Accounts receivable 1,650,875 (407,852)
Inventories (410,559) (1,123,971)
Other current and other assets 321,329 (158,391)
Accounts payable, trade (428,317) (836,466)
Accrued expenses (265,188) (120,714)
------------- -------------
Net cash (used) provided by operating activities 4,528,454 3,010,199
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Deflecta-Shield common stock, net of cash acquired - -
Purchase of Ventshade common stock, net of cash acquired
Purchase of marketable securities (12,365,349) (7,880,519)
Proceeds from sales of marketable securities 4,963,330 7,861,812
Proceeds from redemptions of marketable securities 3,829,904 2,504,006
Purchases of property and equipment (1,487,432) (814,959)
Proceeds from sales of property and equipment 81,634 76,822
Change in restricted cash and marketable securities (98,760) 245,729
Increase in note receivable to Innovative Accessories, Inc. - (2,230,089)
Innovative Accessories, Inc. acquisition costs - (114,341)
Other investing activities (301,410) (175,320)
------------- -------------
Net cash used in investing activities (5,378,083) (526,859)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt
Proceeds from issuance of common and preferred stock 11,000 220,788
Payment of long-term debt (440,000) (420,000)
Checks issued in excess of cash balances - (909,880)
Payment of other liabilities (87,047) -
Debt issuance costs - -
------------- -------------
Net cash provided by (used in) financing activities (516,047) (1,109,092)
------------- -------------
Net increase (decrease) in cash and temporary cash investments (1,365,676) 1,374,248
CASH AND TEMPORARY CASH INVESTMENTS:
Beginnng of period 1,643,416 269,168
------------- -------------
End of period $ 277,740 $ 1,643,416
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Lund International Holdings, Inc. ("Holdings"), through its wholly-owned
subsidiaries, Lund Industries, Incorporated ("Lund"), Deflecta-Shield
Corporation ("Deflecta-Shield"), and Ventshade Holdings, Inc. ("Ventshade"),
(collectively, the "Company"), designs, manufactures and distributes aftermarket
automotive accessories for light and heavy duty trucks, sport utility vehicles
and vans. The following is a summary of the significant accounting policies used
in the preparation of the Company's consolidated financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings and its
wholly-owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation.
TEMPORARY CASH INVESTMENTS
Temporary cash investments consist of money market funds and certificates of
deposit, which are stated at cost which approximates market. The Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be temporary cash investments.
RESTRICTED CASH AND MARKETABLE SECURITIES
Restricted cash consists of cash held by a trustee, to which access by the
Company is restricted in accordance with the Industrial Development Revenue
Bonds (the "Bonds") loan agreement (Note 4).
MARKETABLE SECURITIES
Marketable securities consist of debt securities. Marketable securities are
classified as available-for-sale securities and are recorded at fair value.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized. A decline in the market value of any available-for-sale
security below cost that is deemed other than temporary results in a charge to
earnings resulting in the establishment of a new cost basis for the security.
Cost is determined on a specific identification basis.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method. The Company has established a reserve to record
inventories at estimated net realized value. Inventory reserves are determined
based on the Company's continuing analysis of inventory levels in excess of
current requirements or considered to be obsolete.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product. The Company estimates and
records provisions for sales returns and allowances based on its historical
experience.
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line or accelerated methods over
their estimated useful lives. The useful lives of buildings, machinery and
equipment and furniture and fixtures are 25-32 years, 5-7 years and 3 years,
respectively. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in operations for the period. The cost of maintenance
and repairs is charged to operations as incurred. Significant renewals and
betterments are capitalized.
INTANGIBLES
Intangibles consist of goodwill, customer lists, patents, workforce-in-place,
and a non-compete agreement. Goodwill is amortized over twenty to forty years
and all other intangibles are amortized on a straight-line basis over their
estimated lives. Costs incurred in applications for new patents and purchases of
patents are capitalized and amortized over the life of the patent. Costs of
defending and protecting company patents are expensed when incurred.
LONG LIVED ASSETS
Long-lived assets are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the undiscounted expected future cash flows is less
than the carrying amount of the asset, an impairment loss is recognized.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Income tax expense
(benefit) is the tax payable (receivable) for the period and the change in
deferred income tax assets and liabilities during the period.
PRODUCT WARRANTY
The Company warrants its products with a limited lifetime warranty which covers
actual product failure. The Company accrues a liability for estimated warranty
claims associated with products sold.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, payables, and accrued expenses approximate
their fair value. The estimated fair value of long-term debt, which approximates
the carrying value, was determined using current rates offered to the Company of
issues with the same remaining maturity and approximate the carrying value.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
is reviewing the requirements of the SOP and does not expect it to significantly
change its current accounting for software costs. SOP 98-1 is required to be
adopted by the Company for its fiscal year 1999.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant areas which require the use of management's estimates relate to
allocation of purchase price of acquisitions to fair values of assets and
liabilities, provision for doubtful accounts reserves, reserves for inventory
obsolescence and accruals for warranty claims, customer rebates and advertising.
RECLASSIFICATIONS
Certain comparative prior year amounts in the consolidated financial statements
and notes have been reclassified to conform with the current year presentation.
These reclassifications had no effect on previously reported net income (loss)
or shareholders' equity.
2. ACQUISITIONS
- --------------------------------------------------------------------------------
VENTSHADE HOLDINGS, INC.
On December 23, 1998, the Company, through a wholly-owned subsidiary, acquired
all of the issued and outstanding capital stock of Ventshade for an aggregate
purchase price of $69,367,619 consisting of an initial purchase price of
$66,875,000, direct transaction costs of $1,758,361, and a working capital
adjustment of $734,258. The funds for the acquisition were obtained from (i)
issuance of common and preferred stock for aggregate gross proceeds of $25
million, (ii) proceeds from a new term loan to the Company of $25 million, (iii)
$20 million gross proceeds from the issuance of 12.5% senior subordinated notes,
and (iv) seller financing of $875,000.
Ventshade is a holding company with one subsidiary, Auto Ventshade Company
("AVS"). Headquartered in Lawrenceville, Georgia, AVS is a manufacturer and
supplier to the automotive aftermarket of shades, visors, deflectors, and light
covers used on pick-up trucks, sport utility vehicles, minivans (collectively
"light trucks"), and passenger cars. AVS is a supplier to all major channels of
distribution for automotive accessories, including automotive retailers, mass
merchandisers, leading warehouse distributors, and original equipment
manufacturers. The Company intends to utilize management expertise, assets, and
distribution channels obtained in connection with the acquisition for the
continued production and distribution of accessories for light trucks and
passenger cars.
The acquisition has been accounted for by the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired and
<PAGE>
the liabilities assumed and additional purchase obligations based on the
estimated fair values at the date of acquisition.
The estimated fair values of assets acquired and liabilities assumed are
summarized as follows (in thousands):
Cash $ 904
Accounts receivable 4,465
Inventories 13,423
Other current assets 3,069
Property and equipment 7,296
Goodwill 41,544
Customer list, non-compete agreement, and
work force-in-place 12,201
Other assets 87
Accounts payable (2,228)
Other current liabilities (5,435)
Other liabilities (5,958)
-------
$69,368
=======
Customer list, non-compete agreement, and work force-in-place valued at an
aggregate of $12,201,000 will be amortized over ten years, six years, and five
years, respectively. Goodwill, representing the excess of the purchase price
over the net identifiable tangible and other intangible assets of $41,544,000,
will be amortized over 40 years. The results of operations of Ventshade are
included in the accounts of the Company commencing as of December 23, 1998, the
date of acquisition.
DEFLECTA-SHIELD CORPORATION
Effective December 30, 1997, the Company, through a wholly-owned subsidiary,
acquired 98.8% of the outstanding shares of Deflecta-Shield. The remaining 1.2%
of outstanding shares were acquired on February 27, 1998. Deflecta-Shield
manufactures fiberglass, plastic and aluminum appearance accessories for light
and heavy trucks and also supplies suspension systems for light trucks.
The aggregate purchase price of $78,919,000 represents cash paid of $76,800,000
for 100% of the outstanding shares of Deflecta-Shield at $16 per share and
direct transaction costs of $2,119,000. The acquisition was financed using the
Company's available unrestricted cash and investments, borrowings under the
Company's tender loan facility and new consolidated loan facility and proceeds
from the issuance of common and preferred stock. The aggregate purchase price
excludes Deflecta-Shield's outstanding long-term debt on the date of acquisition
of $9,354,000 which was paid off on February 27, 1998 using proceeds from the
Company's new consolidated loan facility.
As of December 31, 1997, the Company had paid $75,879,000 in cash to acquire
98.8% of the outstanding shares of Deflecta-Shield and incurred direct
transaction costs of $2,119,000. On February 27, 1998, the Company acquired the
remaining 1.2% of outstanding shares for
<PAGE>
$921,000. The remaining amount of the payment of $921,000 for the outstanding
shares is included as a component of other liabilities at December 31, 1997.
The acquisition has been accounted for by the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed and additional purchase obligations based on the
estimated fair values at the date of acquisition. Additional purchase
obligations recorded include $2,489,000 for severance and other restructuring
costs associated with the shut down and consolidation of certain acquired
facilities. At December 31, 1998, aggregate remaining accruals relating to these
obligations were $1,536,000.
The estimated fair values of assets acquired and liabilities assumed which
reflects adjustments to estimated fair values recorded in 1998 are summarized as
follows (in thousands):
Cash $ 392
Accounts receivable and other current assets 16,863
Inventories 11,190
Property and equipment 12,966
Goodwill 61,295
Customer lists and patents 5,126
Accounts payable (6,109)
Accrued settlement of stock options (3,451)
Accrued severance and restructuring costs (2,489)
Long-term debt (9,354)
Other liabilities (7,510)
-------
$78,919
=======
Customer lists and patents valued at an aggregate amount of $5,126,000 will be
amortized over ten years for customer lists and six years for patents. Goodwill,
representing the excess of the purchase price over the net identifiable tangible
and other intangible assets of $61,295,000, will be amortized over 40 years.
The results of operations of Deflecta-Shield are included in the accounts of the
Company commencing as of December 30, 1997, the date of acquisition.
Deflecta-Shield's results of operations from the date of acquisition to December
31, 1997 were not material.
The following selected unaudited pro forma information is being provided to
present a summary of the combined results of the Company as if the acquisitions
of Deflecta-Shield and Ventshade had occurred as of July 1, 1997, giving effect
to purchase accounting adjustments. The pro forma data is for informational
purposes only and may not necessarily reflect the results of operations of the
Company had the acquired businesses operated as part of the Company for the
periods presented.
<PAGE>
(in thousands, except
per-share amounts) Twelve months ended Six months ended
December 31, 1998 December 31, 1997
------------------- -----------------
Net sales $167,036 $81,445
Net loss (3,499) (1,935)
Basic and diluted loss per share (.55) (.48)
INNOVATIVE ACCESSORIES, INC.
During November 1995, the Company entered into an agreement to provide working
capital funds and to market products for Innovative Accessories, Inc.
("Innovative"). In connection with this agreement, the Company provided a
working capital note of $2,230,089.
During June 1996, the Company acquired the assets and assumed certain
liabilities of Innovative for a purchase price equal to the outstanding working
capital note of $2,230,089, additional consideration and transaction costs, and
future royalty payments to the former Innovative shareholders based upon future
sales of Innovative.
The cost in excess of net tangible and identifiable intangible assets acquired,
which consists principally of goodwill, was approximately $2,238,975. Goodwill
is being amortized over 20 years. The acquisition has been recorded using the
purchase method of accounting. Innovative's operating results have been included
in the Company's consolidated operating results from the date of acquisition.
The acquisition is not significant to the Company's overall results.
SMITTYBILT, INC.
On January 29, 1999, the Company acquired 100% of the Common Stock of
Smittybilt, Inc. (See Note 13).
3. OTHER FINANCIAL STATEMENT DATA
- --------------------------------------------------------------------------------
ADVERTISING
The Company expenses the production and space costs of advertising the first
time the advertising takes place, except for costs of direct response
advertising, product catalogs and brochures, which are capitalized and amortized
over the expected period of future benefits, generally over periods not
exceeding one year.
At December 31, 1998 and 1997, and June 30, 1997, $265,500, $124,676, and
$159,659, respectively, of direct response advertising costs, product catalogs,
and brochures were reported as other current assets, net of accumulated
amortization. Advertising expense was $5,489,284, $1,518,260, $2,738,285, and
$2,577,981 for the year ended December 31, 1998, six-month period ended December
31, 1997 and the years ended June 30, 1997, and 1996, respectively.
SELECTED BALANCE SHEET INFORMATION
June 30, 1997
--------------------
MARKETABLE SECURITIES
Amortized cost $ 12,263,206
Gross unrealized holding gains 9,957
--------------------
Fair value $ 12,273,163
====================
<PAGE>
Net realized (losses) gains included in net (loss) income for the six-month
period ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996
were ($28,815), $11,125, and ($1,628), respectively.
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1997
------------------ ------------------- -----------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE
Trade accounts receivable $ 35,623,839 $ 22,989,229 $ 8,914,739
Less allowance for doubtful accounts (2,234,345) (1,538,974) (589,000)
------------------ ----------------- ------------------
$ 33,389,494 $ 21,450,255 $ 8,325,739
================== ================= ==================
INVENTORIES
Raw materials 11,083,980 9,948,940 3,309,440
Work-in-process 1,350,946 2,893,072 230,573
Finished goods 9,335,770 5,151,550 3,071,748
------------------- ----------------- ------------------
$ 21,770,696 $ 17,993,562 $ 6,611,761
=================== ================= ==================
PROPERTY AND EQUIPMENT
Land 197,493 119,683 1,983
Buildings 15,794,838 12,511,782 5,468,517
Machinery and equipment 17,387,045 10,312,066 3,941,882
Furniture and fixtures 3,599,109 1,478,585 1,107,231
------------------ ----------------- ------------------
36,978,485 24,422,116 10,519,613
Less accumulated depreciation (7,410,279) (3,801,112) (3,209,256)
------------------ ----------------- ------------------
$ 29,568,206 $ 20,621,004 $ 7,310,357
================== ================= ==================
INTANGIBLES
Goodwill 104,741,672 63,377,200 1,903,866
Customer lists, patents and other 17,966,831 5,800,736 639,556
------------------ ----------------- ------------------
122,708,503 69,177,936 2,543,422
Less accumulated amortization (2,874,534) (400,016) (320,002)
------------------ ----------------- ------------------
$119,833,969 $ 68,777,920 $ 2,223,420
================== ================= ==================
December 31, December 31, June 30,
1998 1997 1997
------------------ ------------------- -----------------
ACCRUED EXPENSES
Settlement of Deflecta-Shield stock
Options 3,463,243
Acquisition transaction costs 3,375,258 3,509,736
Severance and other restructuring costs 1,563,011 1,916,507
Payroll and payroll related costs 3,683,968 2,120,131 360,323
Customer rebates 1,290,469 1,044,400 397,016
Warranty 3,236,683 1,344,732 324,189
Advertising 1,338,539 612,085 245,792
Checks issued in excess of cash balances 1,757,117
Other, principally property taxes and
accrued interest 1,505,253 1,775,501 547,840
------------------ ----------------- ------------------
$ 17,750,298 $15,786,335 $ 1,875,160
================== ================= ==================
</TABLE>
<PAGE>
The following provides supplemental disclosures of cash flow activity:
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended June 30,
December 31, December 31, --------------------------------------
1998 1997 1997 1996
-------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash paid during the period for:
Income taxes $ 572,500 $ 19,515 $1,102,187 $2,544,234
Interest 5,134,616 143,471 301,209 333,843
</TABLE>
Significant non-cash investing and financing activities include the following:
Year ended December 31, 1998:
o In connection with the financing of the 12.5% senior subordinated notes,
warrants were issued to purchase either 52,074.9 shares of series B
preferred stock or 520,749 shares of common stock (Note 4). The warrants
were valued at $2,600,000 and charged to additional paid-in capital.
o In connection with the equity investment (Note 11) on December 23, 1998,
transaction costs of $185,000 were charged to additional paid-in capital.
o In connection with the acquisition of Ventshade (Note 2), the Company
assumed liabilities of $13,621,000 and obtained seller financing of
$875,000.
o Accrued acquisition transaction costs of the Company included in the
purchase price of Ventshade were $1,758,361.
Six months ended December 31, 1997:
o In connection with the acquisition of Deflecta-Shield (Note 2), the Company
assumed liabilities of $28,288,000.
o Accrued acquisition transaction costs of the Company included in the
purchase price of Deflecta-Shield were $1,526,233.
o The change in unrealized holding gains on marketable securities was $9,957.
Year ended June 30, 1997:
o The change in unrealized holding gains on marketable securities was
$70,399.
Year ended June 30, 1996:
o In connection with the acquisition of Innovative (Note 2), a note
receivable of $2,230,089 was converted to consideration for the purchase.
o The change in unrealized holding gains on marketable securities was
$89,914.
<PAGE>
4. FINANCING ARRANGEMENTS
- --------------------------------------------------------------------------------
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Revolving credit facility $ 16,957,842
Term loan A 18,875,000
Term loan B 21,925,000
Term loan C 25,000,000
12.5% senior subordinate notes, net of
unamortized discount of $2,592,137 17,407,863
Tender loan facility $ 40,878,576
Deflecta-Shield revolving credit loan 9,353,818
Industrial Development Revenue Bonds 3,630,000 4,130,000 $ 4,590,000
Other 250,696 264,673
------------------- ------------------- ------------------
104,046,401 54,627,067 4,590,000
Less current maturities (4,250,696) (1,700,000) (460,000)
------------------- ------------------- ------------------
Long-term debt $ 99,795,705 $ 52,927,067 $ 4,130,000
=================== =================== ==================
</TABLE>
Long-term debt maturities, which reflect the terms of the new consolidated loan
facility described below, excluding the unamortized discount of $2,592,137, are
as follows:
1999 $ 4,250,696
2000 8,830,000
2001 7,350,000
2002 26,232,842
2003 13,250,000
Thereafter 46,725,000
--------------------------
$106,638,538
==========================
REVOLVING CREDIT LOAN AND TERM LOANS
In connection with the Company's December 23, 1998 acquisition of Ventshade, the
Company amended its existing consolidated $87,000,000 loan facility that was
previously closed on February 27, 1998. The amended credit agreement keeps in
place two long-term notes ("Term A" and " Term B"), with original balances
aggregating $42,000,000, and a revolving credit facility of $30,000,000 (the
"Revolver"). All other terms and conditions regarding repayment remain
unchanged. The amended credit agreement eliminates the $15,000,000 acquisition
facility but adds a new long-term note ("Term C") up to a maximum of $34,500,000
based on the occurrence of two events, (i) acquisition of Ventshade that
occurred on December 23, 1998, and (ii) the acquisition of Smittybilt, Inc. that
occurred on January 28, 1999 (Note 15). As a result of the Ventshade acquisition
on December 23, 1998, the Company drew down $25,000,000 against the Term C note.
<PAGE>
Interest rates in the amended credit agreement float between the prime rate plus
1.5% to 2.0% for Term A and the Revolver, the prime rate plus 2.0% to 2.5% for
Term B, and the prime rate plus 2.5% to 3.0% for Term C, with the actual
interest rates based on a grid determined by the ratio of total indebtedness to
pro forma earnings before interest, taxes, depreciation and amortization
("EBITDA"), as defined by the amended credit agreement. The amended credit
agreement also allows for borrowings bearing interest at London Inter-Bank
Offering Rates ("LIBOR") plus 2.75% to 3.25% for Term A and the Revolver , LIBOR
plus 3.25% to 3.75% for Term B, and LIBOR plus 3.75% to 4.25% for Term C, with
the actual pricing based on the ratio of total indebtedness to pro forma EBITDA
as defined by the amended credit agreement. The Revolver also requires an unused
commitment fee at the annual rate of .5% payable quarterly. At December 31,
1998, the prime rate was 7.75% and LIBOR rates ranged from 5.313% to 5.625%.
Interest rates under the credit agreement prior to amendment floated between the
prime rate plus .5% to 1.5% for Term A and the Revolver, and the prime rate plus
1% to 1.75% for Term B with actual pricing based on the ratio of total
indebtedness to pro forma EBITDA. The credit agreement also allowed for
borrowings bearing interest at LIBOR plus 1.75% to 2.75% for Term A and the
Revolver and LIBOR plus 2.25% to 3.25% for Term B with actual pricing based on
the ratio of total indebtedness to pro forma EBITDA.
Term A and Term B require principal payments in installments through 2004.
Borrowings on Term C are due on December 31, 2005. The Company may voluntarily
prepay any of the term loans without penalty. The Company must prepay borrowings
in an amount equal to 75% of excess cash flow, as defined by the amended credit
agreement, within one hundred days of each fiscal year end.
The amended credit agreement contains certain restrictive financial covenants,
including limitations on incurring debt, capital expenditures, operating leases,
merger or consolidation, acquisitions and transactions with affiliates. In
addition, the Company must maintain minimum EBITDA levels and meet certain fixed
charge, interest and indebtedness to EBITDA ratios. The loan facility also
requires an affiliate of Harvest Partners to contribute $5,000,000 in additional
equity in the event the fixed charge coverage, as defined, drops below a minimum
level for the year ending December 31, 1999 or for any fiscal quarter
thereafter. Prior to amendment of the credit agreement, the Company was in
violation of certain financial covenants. The amended credit agreement revised
the financial covenants and cured past violations.
The amended credit agreement is collateralized by all of the consolidated assets
of the Company, excluding those assets which collateralize the Bonds.
Additionally, the amended credit agreement is collateralized by all of the
capital stock of the subsidiaries of the Company.
Borrowings under the Revolver are subject to limitations based on the lesser of
$30,000,000 less any issued letters of credit or a percentage of eligible
receivables and inventories also adjusted for any issued letters of credit. The
amount available for borrowing under the Revolver at December 31, 1998 was
$13,042,158. The Revolver terminates on December 31, 2002.
12.5% SENIOR SUBORDINATED NOTES
On December 23, 1998, the Company entered into a Securities Purchase Agreement
under which it issued a 12.5% Senior Subordinated Notes (the "Notes") due
December 31, 2006 in the
<PAGE>
aggregate amount of $25,000,000. Under terms of the Securities Purchase
Agreement, the Company received $20,000,000 upon the acquisition of Ventshade on
December 23, 1998 (Note 2), and drew the remaining $5,000,000 upon the
acquisition of Smittybilt, Inc. on January 29, 1999 (Note 15). Interest on the
Notes is payable semi-annually. Prior to January 1, 2004, the Company may prepay
all or any part of the Note upon the concurrent payment of a premium ranging
from 1% to 3% of the principal amount prepaid. On January 1, 2004 and
thereafter, the Company may prepay all or any part of the Note without incurring
a prepayment premium. The Securities Purchase Agreement contains certain
restrictive financial covenants, including limitations on incurring debt,
capital expenditures, operating leases, merger or consolidation, acquisitions
and transactions with affiliates. In addition, the Company must maintain minimum
EBITDA levels and meet certain interest coverage ratios.
In connection with the issuance of the Notes on December 23, 1998, the Company
issued a warrant to the subordinated lenders for the purchase of 520,749 shares
of the Company's Common Stock at $.11 per share, or 52,074.9 shares of Series B
Preferred Stock under certain circumstances. Upon the funding of $5,000,000 in
connection with purchase of Smittybilt, Inc. in January 1999, the warrant gave
the subordinated lenders the right to purchase an additional 184,090 shares of
the Company's Common Stock at $.11 per share, or 18,409 shares of Series B
Preferred Stock under certain circumstances. This warrant, in connection with
the funding of the $20,000,000 loan in December 1998, was valued at $2,600,000
at the date of issuance and is reflected as a component of additional paid-in
capital. The amount is also presented as a discount on the Note and is being
amortized to interest expense through December 31, 2006 using the straight-line
method, which approximates the effective interest method.
TENDER LOAN FACILITY
In connection with the Company's December 30, 1997 acquisition of
Deflecta-Shield, the Company obtained $42,000,000 in bridge financing in the
form of a tender loan facility to acquire the majority of the outstanding shares
of Deflecta-Shield. The Company drew down $40,878,576 against this facility on
December 30, 1997 to acquire 98.8% of the total outstanding shares of
Deflecta-Shield. The tender loan facility was refinanced on February 27, 1998
with the credit agreement described above.
DEFLECTA-SHIELD REVOLVING CREDIT LOAN
The Deflecta-Shield revolving credit loan was outstanding at December 31, 1997
under a former facility that was repaid on February 27, 1998, as part of new
borrowings under the consolidated loan facility, discussed above.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The Bonds were issued to provide the Company with funding to finance the
constructing and equipping of its manufacturing facility, completed in 1995. The
loan agreement contains certain minimum and maximum compliance covenant ratios,
limitations related to mergers or
<PAGE>
acquisitions, and restricts certain cash and marketable securities in accordance
with the terms of the agreement.
On December 29, 1998, the Company defeased the Bonds by placing its restricted
cash and marketable securities held pursuant to the Bond agreement as of that
date and an additional deposit of $3,181,560 in escrow sufficient to meet the
remaining principal and interest payments of the Bonds. The funds held in escrow
can be used only for the purpose of satisfying the debt service requirements of
the Bonds. Under the terms of the Bond agreement, the Company has guaranteed the
repayment of the Bonds through January 2000. Accordingly, the Bonds and the
related restricted cash and marketable securities will continue to be presented
as assets and obligations of the Company until such guarantee expires in
January 2000.
Total restricted cash and marketable securities held pursuant to the Bond
agreement at December 31, 1998 and 1997, and June 30, 1997, were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, June 30,
1997 1997
-------------------- ------------------ -----------------
<S> <C> <C> <C>
Restricted cash - current $ 1,123,354 $ 1,393,146
Restricted cash and marketable
securities, non-current $ 3,911,047 594,902 580,242
-------------------- ------------------ -----------------
Total restricted cash and
marketable securities $ 3,911,047 $ 1,718,256 $ 1,973,388
==================== ================== =================
</TABLE>
5. BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
In 1998, the Company adopted SFAS 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION". The Company's business activities are
organized around three (3) primary business units: light truck, suspension, and
heavy truck. Internal reporting conforms to this organizational structure with
no significant differences in accounting policies applied. The Company allocates
resources to each business unit based on net sales and net employed capital
which is defined as current assets; property, plant and equipment, net; other
assets excluding deferred taxes and goodwill and other intangibles; less current
liabilities and other liabilities excluding deferred taxes and debt. The
Company's business is the design, manufacture, marketing, and distribution of
automotive accessories. In so doing, the Company's business units are divided
into automotive appearance accessories for light trucks, sport utility vehicles
and vans; appearance accessories for heavy trucks; and suspension systems for
light trucks and sport utility vehicles. Prior to December 31, 1997 and the
acquisition of Deflecta-Shield (Note 2), the Company's line of business was
solely appearance accessories for light trucks, sport utility vehicles and vans.
Heavy truck accessories and suspension systems were introduced with the
acquisition of Deflecta-Shield.
A summary of the Company's business activities reported by its three business
segments follows:
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED
YEAR ENDED SIX MONTHS ENDED ----------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES:
Light truck $85,018,286 $19,523,308 $43,304,927 $46,423,208
Heavy truck 16,853,704 - - -
Suspension 10,721,568 - - -
-------------------------------------------------------------------------
Total $112,593,558 $19,523,308 $43,304,927 $46,423,208
-------------------------------------------------------------------------
(LOSS) INCOME FROM OPERATIONS:
Light truck (4,952,933) (568,308) 2,765,595 6,797,143
Heavy truck 3,873,692 - - -
Suspension 918,282 - - -
-------------------------------------------------------------------------
Total (160,959) (568,308) 2,765,595 6,797,143
Interest expense (5,483,994) (159,511) (293,289) (324,792)
Interest income 105,851 306,433 694,857 601,362
Other, net (146,377) (63,127) (37,643) (18,797)
-------------------------------------------------------------------------
(LOSS) INCOME BEFORE TAXES $(5,685,479) $(484,513) $3,129,520 $7,054,916
-------------------------------------------------------------------------
IDENTIFIABLE ASSETS EMPLOYED:
Light truck 75,286,399 69,009,425 36,391,544 35,088,274
Heavy truck 9,257,280 - - -
Suspension 4,913,058 - - -
Corporate (a) 131,899,967 75,018,037 5,053,162 5,231,331
-------------------------------------------------------------------------
Total $221,356,704 $144,027,462 $41,444,706 $40,319,605
-------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION:
Light truck 5,320,771 738,626 1,308,360 884,664
Heavy truck 796,190 - - -
Suspension 153,380 - - -
Corporate (b) 362,103 7,846 15,691 23,537
-------------------------------------------------------------------------
Total $6,632,443 $746,472 $1,324,051 $908,201
-------------------------------------------------------------------------
PURCHASE OF PROPERTY
AND EQUIPMENT:
Light truck 4,964,945 866,888 1,487,432 814,959
Heavy truck 521,272 - - -
Suspension 62,389 - - -
-------------------------------------------------------------------------
Total $5,548,606 $866,888 $1,487,432 $814,959
=========================================================================
</TABLE>
(a) Corporate assets not allocated to the Company's business segments are
restricted cash and marketable securities, goodwill and intangibles,
deferred income taxes, and certain other assets.
(b) Corporate depreciation and amortization consists of amortization of
deferred financing costs and discount on the 12.5% senior subordinated
notes which are included in interest expense.
<PAGE>
6. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Company is a party to a Second Amended and Restated Governance Agreement
(the "Governance Agreement") with LIH Holdings, LLC, LIH Holdings II, LLC, and
LIH Holdings III, LLC, affiliates of Harvest Partners, Inc. ("Harvest
Partners"), and is party to a Services Agreement with Harvest Partners. Harvest
Partners owns 49.9% of the Company's voting Common Stock and 62% of the
Company's equity. Under the Services Agreement, the Company paid Harvest
Partners $175,000 and $37,500 for the year ended December 31, 1998 and the six
months ended December 31, 1997, respectively. In addition, the Company paid
Harvest Partners $1,525,949 in fees and out-of-pocket expenses for assisting the
Company in negotiating the acquisition of Ventshade, locating equity partners,
structuring and negotiating debt refinancings, and locating and negotiating with
subordinated lenders. Under the Services Agreement, Harvest Partners is entitled
to service advisory fees of $287,500 and $300,000 in 1999 and 2000,
respectively.
Former members of the Company's Board of Directors had an ownership interest in
another entity from which the Company purchased products in the amounts of
$1,030,768, $1,460,998, and $1,667,982 during the six-month period ended
December 31, 1997, and the fiscal years ended June 30, 1997 and 1996,
respectively.
7. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
OPERATING LEASE COMMITMENTS
The Company has various noncancelable operating leases for certain facilities
and certain equipment related to the Company's manufacturing facilities and
computer system. Total lease expense for the year ended December 31, 1998, the
six-month period ended December 31, 1997, and for the years ended June 30, 1997
and 1996 was $1,599,367, $404,903, $886,919, and $422,639, respectively.
At December 31, 1998, future minimum lease payments required under noncancelable
operating leases are as follows:
1999 $1,504,020
2000 725,428
2001 177,503
2002 76,800
2003 12,800
--------------------
$ 2,496,551
====================
LITIGATION
Certain legal claims, suits and complaints have been filed or are pending
against the Company arising out of the normal course of business. These claims
are in various stages of discovery and the ultimate outcome cannot be
determined; however, the maximum amount of the claims are
<PAGE>
generally considered to be within the Company's insurance limits. While the
results of litigation cannot be predicted with certainty, management believes
the final outcome of such litigation will not have a material adverse effect on
the Company's consolidated financial position.
8. SIGNIFICANT CUSTOMERS
- --------------------------------------------------------------------------------
During the six-month period ended December 31, 1997 and fiscal year ended June
30, 1997, one of the Company's customers represented approximately 13.4% and
15.1%, respectively, of net sales. During the year ended December 31, 1998 and
the fiscal year ended June 30, 1996, none of the Company's customers represented
over 10% of net sales.
At December 31, 1998 and 1997 and at June 30, 1997, one of the Company's
customers represented approximately 19.7%, 11.3%, and 35.6%, respectively, of
the Company's accounts receivable.
9. INCOME TAXES
- --------------------------------------------------------------------------------
Income tax (benefit) expense is summarized as follows:
<TABLE>
<CAPTION>
Six months
Year ended Ended Years ended June 30,
December 31, December 31, --------------------------------------
1998 1997 1997 1996
--------------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Current:
Federal $(453,669) $ (183,778) $ 734,186 $2,326,754
Foreign -- -- 26,900 21,800
State 6,600 (15,000) 101,000 221,000
--------------------- ------------------ ----------------- ----------------
(447,069) (198,778) 862,086 2,569,554
Deferred:
Federal (1,050,734) 70,550 65,300 (125,900)
State (117,520) 7,300 6,400 (10,900)
--------------------- ------------------ ----------------- ----------------
(1,168,254) 77,850 71,700 (136,800)
--------------------- ------------------ ----------------- ----------------
$(1,615,323) $ (120,928) $ 933,786 $ 2,432,754
===================== ================== ================= ================
</TABLE>
<PAGE>
The effective tax rate differs from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, -------------------------------
1998 1997 1997 1996
------------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C>
Statutory federal income
tax rate (34.0)% (34.0)% 34.0% 34.0%
State income taxes,
net of federal tax effect (2.6) (1.2) 2.3 2.1
Foreign Sales Corporation -- -- (1.7) (.6)
Tax exempt interest (0.5) 15.8 (6.3) (2.1)
Non-recurring transaction
Expenses -- (15.7) -- --
Other, net 8.7 10.1 1.5 1.1
------------------- ------------------ ------------- --------------
(28.4)% (25.0)% 29.8% 34.5%
=================== ================== ============= ==============
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to current and
noncurrent deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1997
------------------- ------------------- -----------------
<S> <C> <C> <C>
Allowance for doubtful
Accounts $ 654,900 $ 578,295 $ 220,900
Inventory capitalization 328,674 247,854 --
Accruals not currently
deductible for tax purposes 2,868,714 2,561,788 492,500
Other, net 447,941 129,316 30,500
------------------- ------------------- -----------------
Current deferred income
tax asset $ 4,300,229 $ 3,517,253 $ 743,900
=================== =================== =================
Depreciation $ (1,597,515) $ (466,293)
Amortization of intangibles (5,515,409) (2,707,383)
Other, net 513,209 821,437
------------------- -------------------
Non-current deferred income
tax liability $ (6,599,715) $ (2,352,239)
=================== ===================
</TABLE>
There is no valuation allowance related to the deferred tax asset as of December
31, 1998, December 31, 1997, or June 30, 1997.
10. STOCK OPTIONS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OPTIONS
The Company adopted Incentive Stock Option Plans (the "Plans") during 1998,
1994, and 1989. The Plans authorize grants of options to purchase up to 500,000,
400,000 and 250,000 shares of the Company's common stock, respectively. The
option prices may not be less than the fair market value of the common stock at
the time the option is granted. Options expire ten years after the date granted
or on a prior date as fixed by the Board of Directors or appropriate committee.
Under the Plans, the option may become exercisable at the date of grant or as
determined by the Board of Directors or appropriate committee.
On October 15, 1997, the Company's Board of Directors approved the repricing to
the then current fair market value of $13.875 of 396,000 of the total 436,000
employee incentive stock options outstanding as of that date. Such repriced
options had original exercise prices ranging from $16.00 to $21.25.
<PAGE>
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price Per Share
of Shares
-------------------------- --------------------------
<S> <C> <C>
Balance, June 30, 1995 390,168 $17.290
Granted 120,000 15.670
Canceled (45,600) 16.125
Exercised (19,068) 11.580
-------------------------- --------------------------
Balance, June 30, 1996 445,500 17.220
Canceled (9,500) 16.125
-------------------------- --------------------------
Balance, June 30, 1997 436,000 17.240
Granted 32,500 12.625
Canceled (7,500) 13.875
-------------------------- --------------------------
Balance, December 31, 1997 461,000 13.750
Granted 490,000 9.619
Canceled (318,000) 13.804
-------------------------- --------------------------
Balance, December 31, 1998 633,000 $10.528
========================== ==========================
</TABLE>
At December 31, 1998, the weighted average exercise price and remaining life of
the stock options are as follows:
<TABLE>
<S> <C> <C>
Range of exercise price $ 6.125 $12.000 - $13.875
- --------------------------------------------- ------------------- -----------------------
Total options outstanding 250,000 383,000
Weighted average exercise price $ 6.125 $13.402
Weighted average remaining life
in years 9.77 7.75
Options exercisable - 120,100
Weighted average price of -
exercisable options $13.757
</TABLE>
NON-EMPLOYEE DIRECTOR STOCK OPTIONS
The Company has a Non-Employee Director Stock Option Plan, as amended, which
authorizes grants of options to purchase up to 100,000 shares of the Company's
common stock.
The option price must be 100% of the fair market value of the common stock at
the time the option is granted. Options expire five years from the date of
grant. Options become exercisable at the date of grant or as determined by the
Board of Directors or appropriate committee. During the year ended December 31,
1998, 22,000 options were issued, 4,000 were canceled, and no options were
exercised. Options outstanding at December 31, 1998 were 54,000 shares at $11.25
to $14.00 per share. Total shares exercisable at December 31, 1998 were 54,000
shares, which have a weighted average exercise price of $12.54 and a weighted
average remaining life of 3.4 years.
<PAGE>
On October 15, 1997, the Company's Board of Directors approved the repricing to
the then current fair market value of $13.875 of 12,000 of the total 34,000
non-employee director stock options outstanding as of that date.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
In October 1994, the FASB issued SFAS No. 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION, a standard of accounting and reporting for stock-based
compensation plans. The Company adopted the standard in the year ended June 30,
1997. The Company has continued to measure compensation cost for its stock
option plans using the intrinsic value method of accounting it has historically
used and, therefore, the standard has no effect on the Company's operating
results.
Had the Company used the fair-value-based method of accounting for its stock
option plans beginning in the year ended June 30, 1996 and charged compensation
cost against income over the vesting period, net (loss) income and basic and
diluted net (loss) income per share for the year ended December 31, 1998, the
six-month period ended December 31, 1997 and the years ended June 30, 1997 and
1996 would have been the following pro-forma amounts:
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, ------------------------------------
1998 1997 1997 1996
------------------ ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Net (loss) income:
As reported $(4,070,156) $ (363,585) $ 2,195,734 $ 4,622,162
Pro forma (4,623,010) (965,447) 2,072,488 4,540,583
Basic and diluted (loss)
earnings per share:
As reported (.64) (.08) .50 1.05
Pro forma (.73) (.22) .47 1.03
</TABLE>
The weighted-average grant-date fair value of options granted during the year
ended December 31, 1998, the six-month period ended December 31, 1997 and the
years ended June 30, 1997 and 1996 was $4.48, $6.31, $5.02 and $6.84,
respectively. The weighted-average grant-date fair value of options was
determined by using the fair value of each option grant on the date of grant,
utilizing the Black-Scholes option-pricing model and the following key
assumptions:
<TABLE>
<CAPTION>
Six months
Year ended ended Years ended June 30,
December 31, December 31, --------------------------------------------
1998 1997 1997 1996
---------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Risk-free interest rates 4.11% - 5.68% 5.81% - 6.21% 6.21% - 6.29% 5.84% - 6.42%
Expected life 5 years 5 years 4 years 4 years
Expected volatility 45.54% 47.76% 47.47% 47.47%
Expected dividends None None None None
</TABLE>
<PAGE>
11. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Capital Structure and Preferred Stock
The authorized stock of the Company consists of 25,000,000 shares of Common
Stock, par value $0.10 (the "Common Stock"), 3,000,000 shares of Class B-1
Common Stock, par value $0.01 (the "Class B Common Stock"), 2,000,000 shares of
Series A Preferred Stock, par value $0.01 (the "Series A Preferred Stock") and
362,709 shares of Series B Preferred Stock, par value $.01 (the "Series B
Preferred Stock").
Prior to the equity investment on December 23, 1998, there were 5,268,370 shares
of Common Stock and 1,493,398 shares of Class B Common Stock issued and
outstanding. In connection with the $25,000,000 equity investment on December
23, 1998, 1,047,412 shares of Common Stock were issued and 362,709 shares of
non-voting Series B Preferred Stock were authorized with 252,401.8 shares
issued. The Common Stock was issued at a price of $7.00 per share and the Series
B Preferred Stock was issued at a price of $70.00 per share.
In connection with the issuance of the Notes (Note 4) on December 23, 1998, the
Company issued a warrant to the subordinated lenders for the purchase of 520,749
shares of the Company's Common Stock at $.11 per share, or 52,074.9 shares of
Series B Preferred Stock under certain circumstances. The warrant is exercisable
in whole, or in part, through December 31, 2006.
The Series B Preferred Stock becomes convertible on a ten-to-one basis to Common
Stock subject to the approval of the Company's stockholders at the April 27,
1999 meeting. In the event that shareholder approval is not obtained by April
30, 1999, quarterly dividends at an annual rate of 15% begin to accrue with the
first payment due on July 31, 1999. Under the terms of the Series B Preferred
Stock, even if stockholder approval for convertibility has been approved,
Harvest Partners may not convert shares of Series B Preferred Stock into shares
of Common Stock if the conversion results in Harvest exceeding a Common Stock
ownership percentage of 49.9%. Any outstanding Series B Preferred Stock may be
redeemed by the Company at any time on or after December 29, 2007. The Class B
Common Stock automatically converts to Common Stock on September 9, 2000, or
earlier if approved by the non-management members of the Company's Board of
Directors or as a result of a change in the ownership structure.
RESTRICTED STOCK
Prior to June 30, 1995, the Company granted shares of restricted stock to key
employees pursuant to a restricted stock plan. Deferred compensation was charged
to stockholders' equity and amortized to compensation expense over the vesting
period. As of December 31, 1998, all shares granted under the plan had been
canceled.
Amortization of the restricted stock's value (at the date of award) over the
vesting period resulted in compensation expense of approximately $28,550,
$34,260, $68,520, and $70,380 in
<PAGE>
the year ended December 31, 1998, six-month period ended December 31, 1997, and
the years ended June 30, 1997 and 1996, respectively.
NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128 EARNINGS PER SHARE during the six-month period
ended December 31, 1997. SFAS No. 128 requires disclosure of basic and diluted
EPS. Basic EPS is calculated as net (loss) income divided by weighted average
common shares outstanding. The Company's dilutive securities are primarily
issuable under the Incentive Stock Option Plans, the Non-Employee Director Stock
Option Plan, stock warrants, preferred stock, and restricted stock. Diluted EPS
is calculated as net income divided by weighted average common shares
outstanding, increased to include the assumed conversion of dilutive securities.
Dilutive securities are excluded from the calculation of weighted average common
and common equivalent shares outstanding in all loss periods, as their inclusion
would be anti-dilutive.
The following provides information related to the calculation of the Company's
basic and diluted EPS:
<TABLE>
<CAPTION>
Six months
Year ended Ended Years ended June 30,
December 31, December 31, -------------------------------------
1998 1997 1997 1996
----------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 6,325,568 4,390,923 4,382,584 4,373,461
Common equivalent shares
assuming conversion
of dilutive securities - - 982 3,420
----------------- ------------------ ---------------- ----------------
Weighted average common and common
equivalent shares outstanding 6,325,568 4,390,923 4,383,566 4,376,881
================= ================== ================ ================
</TABLE>
12. RETIREMENT SAVINGS PLAN AND 401(k) PLAN
- --------------------------------------------------------------------------------
During 1998, the Company had two 401(k) Retirement Savings Plans covering
substantially all of its employees. The Lund plan provides for employer matching
contributions and the Deflecta-Shield plan provides for matching and profit
sharing contributions determined on a discretionary basis by the compensation
committee of the Board of Directors. The Company's contributions to the plans
for the year ended December 31, 1998, the six-month period ended December 31,
1997 and the years ended June 30, 1997 and 1996 were $549,156, $75,761, $93,227,
and $80,377, respectively.
Ventshade sponsors a qualified 401(k) plan available to substantially all
full-time employees. Ventshade's contributions to the 401(k) plan are determined
on a discretionary basis by management.
<PAGE>
13. TRANSITION PERIOD COMPARATIVE DATA
- --------------------------------------------------------------------------------
The following table presents certain financial information for the six-month
period ended December 31, 1997 and 1996, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Six months ended Six months ended
December 31, 1997 December 31, 1996
(unaudited)
-------------------------- ---------------------------
<S> <C> <C>
Net sales $ 19,523 $ 20,752
Gross profit 6,577 7,030
(Loss) income before income taxes (485) 1,412
Income tax (benefit) expense (121) 487
Net (loss) income (364) 925
Basic and diluted (loss) earnings
per share (.08) .21
Weighted average common and
common equivalent shares
outstanding 4,390,923 4,377,671
</TABLE>
14. SALE OF LUND FAMILY INTERESTS
- --------------------------------------------------------------------------------
On September 9, 1997, Harvest Partners purchased 38% of the Company's
outstanding shares of Common Stock from the Company's former Chairman of the
Board and his family. In connection with this transaction, the Company recorded
a non-recurring charge of $1,174,299 which is not tax deductible. This charge
included $600,000 paid to the former Chairman of the Board for a covenant not to
compete and severance and $574,299 for investment banking, legal, accounting,
and other related expenses.
15. SUBSEQUENT EVENT (UNAUDITED)
- --------------------------------------------------------------------------------
On January 29, 1999, the Company completed the acquisition of 100% of the common
stock of Smittybilt, Inc. for $18,000,000 in cash. Smittybilt, Inc. is a leading
manufacturer of tubular accessory products for light trucks, including tubular
steps, brush guards, bumpers and nerf bars. The acquisition was financed by an
equity investment of $5,000,000 and debt financing of $9,500,000 and $5,000,000
from the Company's senior lender and senior subordinated notes holder,
respectively. In conjunction with the additional debt financing from the senior
subordinated lenders, the Company issued additional warrants for purchase of
184,090 shares of the Company's Common Stock at $.11 per share, or 18,409 shares
of Series B Preferred Stock under certain circumstances.
<PAGE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Year ended
- ----------
December 31, 1998
- -----------------
Net Sales $27,185 $29,897 $29,342 $26,170
Gross Profit 7,964 9,294 8,016 5,495
Net income (loss) (261) 163 (1,229) (2,743)
Basic (loss) earnings per
share (.05) .03 (.18) (.40)
Diluted (loss) earnings per
share (.05) .02 (.18) (.40)
Six months ended
- -----------------
December 31, 1997
- -----------------
Net sales $10,028 $ 9,495
Gross profit 3,404 3,173
Net (loss) income (519) 155
Basic and diluted
earnings (loss) per
share (.12) .04
Sept. 30 Dec. 31 March 31 June 30
------------- ------------ -------------- ------------
Year ended
- -----------------
June 30, 1997
- -------------
Net sales $ 10,406 $ 10,346 $ 10,441 $ 12,112
Gross profit 3,346 3,684 3,530 4,214
Net income 462 463 467 804
Basic and diluted
earnings per
share .11 .11 .11 .18
</TABLE>
The summation of quarterly net income per share may not equate to the
calculation for the full fiscal year as quarterly calculations are performed on
a discrete basis.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Lund International Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the consolidated financial
position of Lund International Holdings, Inc. (the "Company") at December 31,
1998 and 1997, and June 30, 1997 and the results of its operations and its cash
flows for the year ended December 31, 1998, the six month period ended December
31, 1997 and for the years ended June 30, 1997 and 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 19, 1999
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
Item 10. EXECUTIVE OFFICERS AND DIRECTORS
The information required by Item 10 concerning the executive officers and
directors of the Company is incorporated herein by reference to the Company's
Proxy Statement for its 1998 Annual Meeting of Stockholders ("Proxy") which will
be filed with the Securities and Exchange Commission (the "Commission") pursuant
to Regulation 14A within 120 days after the close of the fiscal year for which
this report is filed.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
Company's Proxy which will be filed with the Commission pursuant to Regulation
14A within 120 days after the close of the fiscal year for which this report is
filed.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
Company's Proxy which will be filed with the Commission pursuant to Regulation
14A within 120 days after the close of the fiscal year for which this report is
filed.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
Company's Proxy which will be filed with the Commission pursuant to Regulation
14A within 120 days after the close of the fiscal year for which this report is
filed.
<PAGE>
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Consolidated Financial Statements.
<TABLE>
<CAPTION>
Pages in this
Form 10-K
---------
<S> <C>
Report of Independent Accountants.................................................................58
Consolidated Balance Sheets as of December 31, 1998 and 1997, and June 30, 1997...................31
Consolidated Statements of Operations for the year ended December 31, 1998,
the six months ended December 31, 1997, and for the years ended
June 30, 1997 and 1996...................................................................32
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1998, the six months ended December 31,
1997 and the years ended June 30, 1997and 1996...........................................33
Consolidated Statements of Cash Flows for the year ended December 31, 1998, the
six months ended December 31, 1997, and for the fiscal years ended June
30, 1997 and 1996........................................................................34
Notes to Consolidated Financial Statements.....................................................35-57
(2) Financial Statement Schedules.
Pages in this
Form 10-K
---------
Report of Independent Accountants on Financial Statement Schedule...............................71
Schedule II: Valuation and Qualifying Accounts
for the year ended December 31, 1998, the six months ended December 31,
1997 and for the fiscal years ended June 30, 1997 and 1996.............................72
</TABLE>
All other schedules are omitted because they are not required or not applicable
or the information is otherwise shown in the Consolidated Financial Statements
or notes thereto.
(3) Exhibits. See "Exhibit Index" on the pages following
the signatures.
(b) Reports on Form 8-K.
On January 14, 1998, the Company filed a Report on Form 8-K to report on the
acquisition of 4,742,411 shares of common stock of Deflecta-Shield Corporation
for $16.00 net cash per share pursuant to a tender offer made by the Company and
the execution of a Credit Agreement with Heller Financial, Inc. for
approximately $41,000,000.
<PAGE>
On March 16, 1998, the Company filed, on Form 8-K/A, the financial statements
required to be filed pursuant to Item 7. of the Report on Form 8-K filed on
January 14, 1998 with respect to the acquisition of Deflecta-Shield Corporation.
On March 18, 1998, the Company filed a Report on Form 8-K to report the
execution of a Credit Agreement with certain lenders and Heller Financial, Inc.,
as agent for the lenders. The Credit Agreement provided for a maximum possible
loan of $87,000,000.
On January 6, 1999, the Company filed a Report on Form 8-K to report the
acquisition of 100% of the outstanding capital stock of Ventshade Holdings, Inc.
for an aggregate purchase price of $66,875,000.
On February 12, 1999, the Company filed a Report on Form 8-K to report the
acquisition of 100% of outstanding capital stock Smittybilt, Inc. for an
aggregate purchase price of $18,000,000.
On March 8, 1999, the Company filed, on Form 8-K/A the financial statements
required to be filed pursuant to Item 7. of the Report on Form 8-K filed on
January 6, 1999 with respect to the acquisition of Ventshade Holdings, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LUND INTERNATIONAL HOLDINGS, INC.
By /s/ Dennis W. Vollmershausen
-----------------------------------------
Dennis W. Vollmershausen
Chief Executive Officer and President
March 29, 1999
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.
<TABLE>
<S> <C> <C>
/s/Dennis W. Vollmershausen Chief Executive Officer March 29, 1999
- ------------------------------------ President (Principal Executive
Dennis W. Vollmershausen Officer)
/s/ Ronald C. Fox Chief Financial Officer March 29, 1999
- ------------------------------------- (Principal Financial Officer)
Ronald C. Fox
/s/ Lawrence C. Day Director March 29, 1999
- ----------------------------------
Lawrence C. Day
/s/ David E. Dovenberg Director March 29, 1999
- ---------------------------------
David E. Dovenberg
/s/ Ira D. Kleinman Director March 29, 1999
- -------------------------------------
Ira D. Kleinman
/s/ Robert R. Schoeberl Director March 29, 1999
- ------------------------------------
Robert R. Schoeberl
/s/ Harvey J. Wertheim Director March 29, 1999
- -------------------------------------
Harvey J. Wertheim
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Lund International Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999 appearing in this Annual Report on Form 10-K for Lund
International Holdings, Inc. also included an audit of the financial statement
schedule listed in item 14(a)2 of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 19, 1999
<PAGE>
LUND INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998, SIX MONTHS ENDED
DECEMBER 31, 1997 AND FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning of cost and Charged to end of
Description year expenses other accounts Deductions year
----------- ---- -------- -------------- ---------- ----
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1998:
Allowance for
doubtful accounts $1,539,000 $212,000 $ 575,000(2) $ (92,000)(1) $2,234,000
Six months ended
December 31, 1997:
Allowance for
doubtful accounts $ 589,000 $ 78,000 $ 896,000(3) $ (24,000)(1) $1,539,000
Year ended
June 30, 1997:
Allowance for
doubtful accounts $ 720,000 $ - $ - $(131,000)(1) $ 589,000
Year ended
June 30, 1996:
Allowance for
doubtful accounts $ 532,000 $215,000 $ - $ (27,000)(1) $ 720,000
</TABLE>
(1) Represents accounts written off against the allowance, net of recoveries.
(2) Represents the acquisition of Ventshade Holdings' allowance for
uncollectible accounts.
(3) Represents the acquisition of Deflecta-Shield's allowance for uncollectible
accounts.
<PAGE>
EXHIBIT INDEX TO FORM 10-K
<TABLE>
<CAPTION>
For the year ended December 31, 1998 Commission File No: 0-16319
Exhibit Page Number or Incorporation by
Number Description Reference to
- ---------------- --------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
10.18 1992 Non-Employee Director Stock Option Plan Exhibit 10.18 of the Registrant's Form 10-K for
the fiscal year ended June 30, 1992
10.29 1994 Incentive Stock Option Plan Exhibit 10.29 of the Registrant's Form 10-Q for
the quarter ended December 31, 1994
10.33 Master Lease Agreement between LMI Funding Exhibit 10.33 of the Registrant's Form 10-Q for
Corporation and Lund Industries, Incorporated, the quarter ended September 30, 1995
dated August 1, 1995
10.44 Asset Purchase Agreement by and between Lund Exhibit 10.44 of the Registrant's Form 10-K for
Acquisition Corp., Innovative Accessories, the fiscal year ended June 30, 1996
Incorporated, Lund International Holdings, Inc.,
James A. Nett and Ramona C. Friar, dated March
29, 1996
10.46 Assignment of Intellectual Property Rights from Exhibit 10.46 of the Registrant's Form 10-K for
Innovative Accessories, Incorporated and James A. the fiscal year ended June 30, 1996
Nett to Lund Acquisition Corp., dated June 3, 1996
10.47 Stock Purchase Agreement, dated September 9, Exhibit 10.1 of the Registrant's Form 8-K dated
1997, by and between LIH Holdings, LLC, Allan W. September 9, 1997
Lund, the Lund Family Limited Partnership, Lois
and Allan Lund Family Foundation and Certain Lund
Family Members
10.49 Services Agreement, dated September 9, 1997, by Exhibit 10.3 of the Registrant's Form 8-K dated
and between Harvest Partners, Inc. and Lund September 9, 1997
International Holdings, Inc.
10.50 Severance and Noncompetition Agreement, dated Exhibit 10.4 of the Registrant's Form 8-K dated
September 9, 1997, by and between Lund September 9, 1997
International Holdings, Inc. and Allan W. Lund
<PAGE>
10.51 Employment Agreement with Ken Holbrook, dated Exhibit 10.51 of the Registrant's Form 10-K dated
March 1, 1998 March 20, 1998
10.52 Investment Agreement, dated November 25, 1997, by Exhibit 10.1 of the Registrant's Form 8-K dated
and between LIH Holdings II, LLC and Lund November 26, 1997
International Holdings, Inc.
10.54 Agreement and Plan of Merger, dated as of Exhibit (c)(1) of the Registrant's Schedule 14D-1,
November 25, 1997, by and between Lund dated November 28, 1997
International Holdings, Inc. Zephyros Acquisition
Corporation and Deflecta-Shield Corporation
10.55 Stockholders Agreement, dated as of November 25, Exhibit (c)(2) of the Registrant's Schedule 14D-1,
1997, by and between Lund International Holdings, dated November 28, 1997
Inc. and Mark C. Mamolen
10.56 Stockholders Agreement, dated as of November 25, Exhibit (c)(3) of the Registrant's Schedule 14D-1,
1997, by and between Lund International Holdings, dated November 28, 1997
Inc. and Charles S. Meyer
10.57 Tender Offer Loan Agreement, dated as of December Exhibit (c)(4) of the Registrant's Form 8-K, dated
30, 1997, by and between Lund International December 30, 1997
Holdings, Inc., Zephyros Acquisition Corp. and
Heller, as agent and as lender
10.58 Guaranty of Payment, dated as of December 30, Exhibit (c)(5) of the Registrant's Form 8-K, dated
1997, by Lund International Holdings, Inc., in December 30, 1997
favor of Heller, as agent for the benefit of the
lender
10.59 Pledge Agreement, dated as of December 30, 1997, Exhibit (c)(6) of the Registrant's Form 8-K, dated
by Lund International Holdings, Inc., in favor of December 30, 1997
Heller, as agent for the benefit of the lenders
10.60 Borrower Pledge Agreement, dated as of December Exhibit (c)(7) of the Registrant's Form 8-K, dated
30, 1997, by Zephyros Acquisition Corp., in favor December 30, 1997
of Heller, as agent for the benefit of the lenders
<PAGE>
10.61 Warrant to Purchase Common Stock of Lund Exhibit (c)(8) of the Registrant's Form 8-K, dated
International Holdings, Inc., dated December 30, December 30, 1997
1997
10.62 Tender Offer Note, dated as of December 30, 1997, Exhibit (c)(9) of the Registrant's Form 8-K, dated
by Zephyros Acquisition Corp., for the maximum December 30, 1997
amount of $41 million
10.63 1998 Employee Incentive Stock Option Plan Exhibit 10.63 of the Registrant's Form S-8 filed
on February 13, 1998
10.64 Credit Agreement Exhibit 1. of the Registrant's Form 8-K filed on
March 18, 1998
10.65 Term A Note made by each of Industries, Deflecta, Exhibit 2. of the Registrant's Form 8-K filed on
Belmor and DFM in favor of Heller March 18, 1998
10.66 Term B Note made be each of Industries, Deflecta, Exhibit 3. of the Registrant's Form 8-K filed on
Belmor and DFM in favor of Heller March 18, 1998
10.67 Revolving Note made by each of Industries, Exhibit 4. of the Registrant's Form 8-K filed on
Deflecta, Belmor and DFM in favor of Heller March 18, 1998
10.68 Acquisition Note made by each of Industries, Exhibit 5. of the Registrant's Form 8-K filed on
Deflecta, Belmor and DFM in favor of Heller March 18, 1998
10.69 Term A Note made be each of Industries, Deflecta, Exhibit 6. of the Registrant's Form 8-K filed on
Belmor and DFM in favor of Dresdner March 18, 1998
10.70 Term B Note made by each of Industries, Deflecta, Exhibit 7. of the Registrant's Form 8-K filed on
Belmor and DFM in favor of Dresdner March 18, 1998
10.71 Revolving Note made by each of Industries, Exhibit 8. of the Registrant's Form 8-K filed on
Deflecta, Belmor and DFM in favor of Dresdner March 18, 1998
10.72 Acquisition Note made by each of Industries, Exhibit 9. of the Registrant's Form 8-K filed on
Deflecta, Belmor and DFM in favor of Dresdner March 18, 1998
<PAGE>
10.73 Corporate Guaranty by Holdings, Borrowers and Exhibit 10. of the Registrant's Form 8-K filed on
Active Subsidiaries March 18, 1998
10.74 Pledge Agreement by Holdings, Deflecta and DFM Exhibit 11. of the Registrant's Form 8-K filed on
March 18, 1998
10.75 Security Agreement by Holdings, Borrowers and Exhibit 12. of the Registrant's Form 8-K filed on
Active Subsidiaries March 18, 1998
10.76 Assignment for Security of Trademark, Patent and Exhibit 13. of the Registrant's Form 8-K filed on
Copyright March 18, 1998
10.77 Environmental Indemnity Agreement Exhibit 14. of the Registrant's Form 8-K filed on
March 18, 1998
10.79 Employment Agreement between the Company and Exhibit 10.64 of the Registrant's Form 10-Q filed
Ronald C. Fox on August 14, 1998
10.80 Complete and permanent waiver agreement and Exhibit 10.65 of the Registrant's Form 10-Q filed
general release of claims between the Company and on November 16, 1998
Richard D. Minehart, Jr.
10.81 Complete and permanent waiver agreement and Exhibit 10.66 of the Registrant's Form 10-Q filed
general release of claims between the Company and on November 16, 1998
Jay M. Allsup
10.82 Resignation and severance agreement between the Exhibit 10.67 of the Registrant's Form 10-Q filed
Company and William J. McMahon on November 16, 1998
10.83 Employment agreement between the Company and Exhibit 10.68 of the Registrant's Form 10-Q filed
Dennis W. Vollmershausen on November 16, 1998
10.84 Stock Purchase Agreement dated December 11, 1998, Exhibit 10.1 of the Registrant's Form 8-K filed on
by and among Ventshade Holdings, Inc., the January 6, 1999
Persons listed on Schedule A to the Agreement,
Lund International Holdings, Inc. and New
Holdings, Inc.
<PAGE>
10.85 Investment Agreement, dated December 22, 1998, Exhibit 10.2 of the Registrant's Form 8-K filed on
among LIH Holdings, III, LLC, Massachusetts January 6, 1999
Mutual Life Insurance Company, MassMutual
Corporate Investors, MassMutual Participation
Investors, MassMutual Corporate Value Partners
Limited, Liberty Mutual Insurance Company,
BancBoston Capital Inc. and Lund International
Holdings, Inc.
10.86 Amendment No. 2 to Credit Agreement, dated Exhibit 10.3 of the Registrant's Form 8-K filed on
December 23, 1998, among Lund International January 6, 1999
Holdings, Inc., Deflecta-Shield Corporation, Lund
Industries, Incorporated, Belmor Autotron Corp.,
DFM Corp., Lund Acquisition Corp., BAC
Acquisition Co., Trailmaster Products, Inc.,
Delta III, Inc., Auto Ventshade Company, New
Holdings, Inc., Ventshade Holdings, Inc. and
Heller Financial, Inc.
10.87 Securities Purchase Agreement, dated December 23, Exhibit 10.4 of the Registrant's Form 8-K filed on
1998, among Deflecta-Shield Corporation, Lund January 6, 1999
Industries, Incorporated, Belmor Autotron Corp.,
DFM Corp. and Auto Ventshade Company
10.88 Rights Agreement, dated December 22, 1998, with Exhibit 10.5 of the Registrant's Form 8-K filed on
LIH Holdings, LLC, LIH Holdings, II, LLC, LIH January 6, 1999
Holdings III, LLC, BancBoston Capital Inc.,
Liberty Mutual Insurance Company, Massachusetts
Mutual Life Insurance Company, MassMutual
Corporate Value Partners Limited, MassMutual
Corporate Investors, MassMutual Participation
Investors and National City Venture Corporation
<PAGE>
10.89 Second Amended and restated Governance Agreement, Exhibit 10.6 of the Registrant's Form 8-K filed on
dated December 22, 1997 among Lund International January 6, 1999
Holdings, Inc., LIH Holdings, LLC, LIH Holdings
II, LLC and LIH Holdings III, LLC
10.90 Escrow Agreement, dated December 29, 1998, by and Exhibit 10.7 of the Registrant's Form 8-K filed on
between Bank Trust National Association and Lund January 6, 1999
Industries, Incorporated
10.91 Cancellation and Discharge of Indenture and Exhibit 10.8 of the Registrant's Form 8-K filed on
Termination of Loan Agreement, dated December 29, January 6, 1999
1998, executed and issued by U.S. Bank Trust
National Association
10.92 Form of Promissory Note issued pursuant to the Exhibit 10.9 of the Registrant's Form 8-K filed on
Securities Purchase Agreement January 6, 1999
10.93 Form of Warrant issued pursuant to the Securities Exhibit 10.10 of the Registrant's Form 8-K filed
Purchase Agreement on January 6, 1999
10.94 Stock Purchase Agreement, dated January 7, 1999, Exhibit 10.1 of the Registrant's Form 8-K filed on
among Smittybilt, Inc., Tom G. Smith, Debbie February 12, 1999
Smith, Tom Smith and Debbie Smith as Trustees of
The Tom and Debbie Smith Family Trust Dated
February 7, 1991, Tom Smith and Debbie Smith as
Trustees of The Tom and Debbie Smith Charitable
Remainder Unitrust Dated July 8, 1998 and Lund
International Holdings, Inc.
<PAGE>
10.95 Investment Agreement, dated December 22, 1998, Exhibit 10.2 of the Registrant's Form 8-K filed on
among LIH Holdings III, LLC, Massachusetts Mutual February 12, 1999
Life Insurance Company, MassMutual Corporate
Investors, MassMutual Participation Investors,
MassMutual Corporate Value Partners Limited,
Liberty Mutual Insurance Company, BancBoston
Capital Inc. and Lund International Holdings, Inc.
10.96 First Amendment to Investment Agreement, dated Exhibit 10.3 of the Registrant's Form 8-K filed on
January 27, 1999, among LIH Holdings III, LLC, February 12, 1999
Massachusetts Mutual Life Insurance Company,
MassMutual Corporate Investors, MassMutual
Participation Investors, MassMutual Corporate
Value Partners Limited, Liberty Mutual Insurance
Company, BancBoston Capital Inc. and Lund
International Holdings, Inc.
10.97 First Amendment to Rights Agreement, dated Exhibit 10.4 of the Registrant's Form 8-K filed on
January 27, 1999, among LIH Holdings, LLC, LIH February 12, 1999
Holdings II, LLC, LIH Holdings III, LLC,
BancBoston Capital Inc., Liberty Mutual Insurance
Company, Massachusetts Mutual Life Insurance
Company, MassMutual Corporate Value Partners
Limited, MassMutual Corporate Investors,
MassMutual Participation Investors, national City
Venture Corporate and Lund International
Holdings, Inc.
10.98 Supplement to Credit Agreement, dated January 28, Exhibit 10.5 of the Registrant's Form 8-K filed on
1999, by Smittybilt, Inc. and Heller Financial, February 12, 1999
Inc. and Agent for the benefit of all Lenders.
</TABLE>
<PAGE>
21 Subsidiaries of the registrant:
<TABLE>
<CAPTION>
Name State or Jurisdiction of Incorporation
---- --------------------------------------
<S> <C>
Lund Industries, Incorporated Minnesota
Lund FSC, Inc. Barbados
Lund Acquisition Corp. Minnesota
Deflecta-Shield Corporation Delaware
Belmor Corp. Delaware
DFM Corporation Iowa
Delta III, Inc. Delaware
Trailmaster Products, Inc. Delaware
BAC Acquisition Company Delaware
Ventshade Holdings, Inc. Delaware
Auto Ventshade Company Delaware
Smittybilt, Inc. Delaware
</TABLE>
23.1 Consent of Independent Accountants
27 Financial Data Schedule
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Lund International Holdings, Inc. on Form S-8 (File Nos. 33-78140, 333-46263,
33-64083 and 33-37160) of our report dated February 19, 1999 on our audits of
the consolidated financial statements of Lund International Holdings, Inc. as of
December 31, 1998 and 1997, and June 30, 1997 and for the year ended December
31, 1998, the six month period ended December 31, 1997 and for the years ended
June 30, 1997 and 1996 included in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule which is included in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,191
<SECURITIES> 0
<RECEIVABLES> 35,624
<ALLOWANCES> 2,234
<INVENTORY> 21,771
<CURRENT-ASSETS> 63,204
<PP&E> 29,568
<DEPRECIATION> 7,410
<TOTAL-ASSETS> 221,357
<CURRENT-LIABILITIES> 28,467
<BONDS> 99,796
0
3
<COMMON> 646
<OTHER-SE> 85,238
<TOTAL-LIABILITY-AND-EQUITY> 221,357
<SALES> 112,594
<TOTAL-REVENUES> 112,594
<CGS> 81,825
<TOTAL-COSTS> 112,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 212
<INTEREST-EXPENSE> 5,484
<INCOME-PRETAX> (5,685)
<INCOME-TAX> (1,615)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,070)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
