-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SHcPInnD3sZF0tYK8NacJ9cIPt7vNGeJEPxxaNKWyN6N9RnlvrQLRxCus4OmKnsz kvkRu7yHfttNCbZUT317rg== 0000910195-99-000471.txt : 19990816 0000910195-99-000471.hdr.sgml : 19990816 ACCESSION NUMBER: 0000910195-99-000471 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILLER INDUSTRIES INC /TN/ CENTRAL INDEX KEY: 0000924822 STANDARD INDUSTRIAL CLASSIFICATION: TRUCK & BUS BODIES [3713] IRS NUMBER: 621566286 STATE OF INCORPORATION: TN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-14124 FILM NUMBER: 99686522 BUSINESS ADDRESS: STREET 1: 8503 HILLTOP DR STREET 2: STE 100 CITY: OOLTEWAH STATE: TN ZIP: 37363 BUSINESS PHONE: 4232384171 MAIL ADDRESS: STREET 1: 900 CIRCLE 75 PARKWAY STREET 2: SUITE 1250 CITY: ATLANTA STATE: GA ZIP: 30339 10-K/A 1 FORM 10-K AMENDMENT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended April 30, 1999 Commission File No. 0-24298 MILLER INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TENNESSEE ------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 62-1566286 ------------------------------------ (I.R.S. EMPLOYER IDENTIFICATION NO.) 8503 HILLTOP DRIVE, OOLTEWAH, TENNESSEE 37363 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (423) 238-4171 Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share. ---------------------------------------- Name of each exchange on which registered: New York Stock Exchange. ------------------------ Securities registered pursuant to Section 12(g) of the Act: None. ----- 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 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 10K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of July 27, 1999 was $133,550,000 based on the closing sale price of the Common Stock as reported by the New York Stock Exchange on such date. See Item 12. At July 27, 1999 there were 46,794,297 shares of Common Stock, par value $0.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III. TABLE OF CONTENTS FORM 10-K ANNUAL REPORT PART I ITEM 1. BUSINESS............................................................ 1 ITEM 2. PROPERTIES.......................................................... 17 ITEM 3. LEGAL PROCEEDINGS................................................... 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 18 ITEM 6. SELECTED FINANCIAL DATA............................................. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 28 -i- ITEM 11. EXECUTIVE COMPENSATION.............................................. 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................... 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 28 FINANCIAL STATEMENTS........................................................F-1 FINANCIAL STATEMENT SCHEDULE................................................S-1 SIGNATURES.................................................................II-1 -ii- PART I ITEM 1. BUSINESS GENERAL Miller Industries, Inc. (the "Company") is the world's leading integrated provider of vehicle towing and recovery equipment and services and has executive offices in Ooltewah, Tennessee and Atlanta, Georgia and manufacturing operations in Tennessee, Pennsylvania, France and England. The Company's business is divided into two segments: (i) towing and recovery equipment and (ii) towing services. The Company markets its towing and recovery equipment under several well-recognized brand names and markets its towing services under the national brand name of RoadOne(R). Since 1990 the Company has developed or acquired several of the most well-recognized brands in the fragmented towing and recovery equipment manufacturing industry. The Company's strategy has been to diversify its line of products and increase its market share in the industry through a combination of internal growth and development and acquisitions of complementary businesses. As a natural extension of its leading market position in manufacturing and strong brand name recognition, the Company has broadened its strategy to include vertical integration, with the goal of achieving operating efficiencies while becoming a leading worldwide manufacturer, distributor and financial services provider in the towing and recovery industry. The Company's owned distributors and its independent distributors form a North American distribution network for towing and recovery equipment as well as other specialty truck equipment and components. In February 1997, the Company formed its towing service division, RoadOne, to begin building a national towing service network. RoadOne offers a broad range of towing and transportation services, including towing, impounding and storing motor vehicles, conducting lien sales and auctions of abandoned vehicles, environmental clean-up services, and transporting new and used vehicles and heavy construction equipment. In fiscal 1999, the Company, through its RoadOne subsidiary, acquired 35 towing service companies with aggregate historical annual revenues of approximately $35.9 million. These acquisitions are part of the Company's plan to establish a national towing service network through owned companies in combination with an extensive group of affiliates. At July 23, 1999, the Company was operating over 200 facilities serving 49 markets in 27 states, and had relationships with over 2,184 RoadOne affiliates. The Company intends to continue its expansion into additional towing service markets. INCLUSION OF FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report, including but not limited to "Management's Discussion and Analysis of Financial Condition and Results of Operations" may be deemed to be forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are made based on management's belief as well as assumptions made by, and information currently available to, management pursuant to "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ materially from the results anticipated in these forward-looking statements due to, among other things, factors set forth below under the heading "Risk Factors," and in particular, the risks associated with acquisitions, including, without limitation, the risks that acquisitions do not close and the cost or difficulties related to the integration of the acquired businesses. The Company cautions that such factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, the Company. RISK FACTORS UNCERTAINTIES IN INTEGRATING OPERATIONS AND ACHIEVING COST SAVINGS. The companies that the Company has recently acquired and that the Company plans to acquire have operations in many different markets. The success of any business combination is in part dependent on management's ability following the transaction to integrate operations, systems and procedures and thereby obtain business efficiencies, economies of scale and related cost savings. The challenges posed to the Company's management may be particularly significant because integrating the recently acquired companies must be addressed contemporaneously. There can be no assurance that future consolidated results will improve as a result of cost savings and efficiencies from any such acquisitions or proposed acquisitions, or as to the timing or extent to which cost savings and efficiencies will be achieved. RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company has an aggressive acquisition strategy that has involved, and is expected to continue to involve, the acquisition of a significant number of additional companies. As a result, the Company's future success is dependent, in part, upon its ability to identify, finance and acquire attractive businesses and then to successfully integrate and/or manage such acquired businesses. In light of operational difficulties and certain restrictions contained in the Company's amended Credit Facility, it is likely that the frequency of acquisitions will be less than in the past, at least for the near term. Acquisitions involve special risks, including risks associated with unanticipated problems, liabilities and contingencies, diversion of management attention and possible adverse effects on earnings resulting from increased goodwill amortization, increased interest costs, the issuance of additional securities and difficulties related to the integration of the acquired business. Although the Company believes that it can identify and consummate the acquisitions of a sufficient number of businesses to successfully implement its growth strategies, there can be no assurance that such will be the case. Further, there can be no assurance that future acquisitions will not have an adverse effect upon the Company's operating results, particularly during periods in which the operations of acquired businesses are being integrated into the Company's operations. RISKS OF FOREIGN MARKETS. The Company's growth strategy includes the expansion of its operations in foreign markets. In January 1996 the Company acquired S.A. Jige International ("Jige"), a French manufacturer of wreckers and car carriers, and in April 1996 the Company acquired Boniface Engineering Limited ("Boniface"), a British manufacturer of towing and recovery equipment. Prior to these acquisitions, the Company had limited experience with sales and manufacturing operations outside North America. There is no assurance that the Company will be able to successfully integrate and expand its foreign operations. Furthermore, there is no assurance that the Company will be able to successfully expand sales outside of North America or compete in markets in which it is unfamiliar with cultural and business practices. The Company's foreign operations are subject to various political, economic and other uncertainties, including risks of restrictive taxation policies, foreign exchange restrictions and currency translations, changing political conditions and governmental regulations. RISKS OF ENTERING NEW LINES OF BUSINESS. The Company's growth strategy includes vertically integrating within the towing and recovery industry through a combination of acquisitions and internal growth. Implementation of its growth -2- strategy has resulted in the Company's entry into several new lines of business. Historically, the Company's expertise has been in the manufacture of towing and recovery equipment and the Company had no prior operating experience in the lines of business it recently entered. During fiscal 1997, the Company entered three new lines of business through the acquisition of towing and recovery equipment distributors and towing service companies, and the establishment of the Company's Financial Services Group. The Company's operation of these businesses will be subject to all of the risks inherent in the establishment of a new business enterprise. Such acquisitions present the additional risk that newly-acquired businesses could be viewed as being in competition with other customers of the Company. Although the new businesses are closely related to the Company's towing and recovery equipment manufacturing business, there can be no assurance that the Company will be able to successfully operate these new businesses. CYCLICAL NATURE OF INDUSTRY, GENERAL ECONOMIC CONDITIONS AND WEATHER. The towing and recovery industry is cyclical in nature and has been affected historically by high interest rates and economic conditions in general. Accordingly, a downturn in the economy could have a material adverse effect on the Company's operations. The industry is also influenced by consumer confidence and general credit availability, and by weather conditions. FLUCTUATIONS IN PRICE AND SUPPLY OF MATERIALS AND COMPONENT PARTS. The Company is dependent upon outside suppliers for its raw material needs and other purchased component parts and, therefore, is subject to price increases and delays in receiving supplies of such materials and component parts. There can be no assurance that the Company will be able to pass any price increase on to its customers. Although the Company believes that sources of its materials and component parts will continue to be adequate to meet its requirements and that alternative sources are available, events beyond the Company's control could have an adverse effect on the cost or availability of such materials and component parts. Additionally, demand for the Company's products could be negatively affected by the unavailability of truck chassis, which are manufactured by third parties and are typically purchased separately by the Company's distributors or by towing operators and are sometimes supplied by the Company. COMPETITION. The towing and recovery equipment manufacturing industry is highly competitive. Competition for sales exists at both the distributor and towing-operator levels and is based primarily on product quality and innovation, reputation, technology, customer service, product availability and price. In addition, sales of the Company's products are affected by the market for used towing and recovery equipment. Certain of the Company's competitors may have substantially greater financial and other resources and may provide more attractive dealer and retail customer financing alternatives than the Company. Historically, the towing service industry has been highly fragmented, with an estimated 30,000 professional towing operators in the United States, therefore the Company's towing service operations will face continued competition from many operators across the country. The Company also faces competition in its consolidation of professional towing operators. These operators could be consolidated by other companies, individuals or entities, or they could enter into affiliate relationships with other companies. In addition, the Company's presence in the towing service industry presents the risk that it could be viewed as being in competition with other customers of the Company. The Company may also face significant competition from large competitors as it enters other new lines of business, including equipment distribution and financial services. -3- DEPENDENCE ON PROPRIETARY TECHNOLOGY. Historically, the Company has been able to develop or acquire patented and other proprietary product innovations which have allowed it to produce what management believes to be technologically advanced products relative to most of its competition. Certain of the Company's patents expire in 2004 at which time the Company may not have a continuing competitive advantage through proprietary products and technology. The Company's historical market position has been a result, in part, of its continuous efforts to develop new products. The Company's future success and ability to maintain market share will depend, to an extent, on new product development. LABOR AVAILABILITY. The timely production of the Company's wreckers and car carriers requires an adequate supply of skilled labor. In addition, the operating costs of each manufacturing and towing service facility can be adversely affected by high turnover in skilled positions. Accordingly, the Company's ability to increase sales, productivity and net earnings will be limited to a degree by its ability to employ the skilled laborers necessary to meet the Company's requirements. There can be no assurance that the Company will be able to maintain an adequate skilled labor force necessary to efficiently operate its facilities. DEPENDENCE ON KEY MANAGEMENT. The success of the Company is highly dependent on the continued services of the Company's management team. The loss of services of one or more key members of the Company's senior management team could have a material adverse effect on the Company. Although the Company historically has been successful in retaining the services of its senior management, there can be no assurance that the Company will be able to retain such personnel in the future. PRODUCT LIABILITY AND INSURANCE. The Company is subject to various claims, including product liability claims arising in the ordinary course of business, and may at times be a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. The Company maintains reserves and liability insurance coverage at levels based upon commercial norms and the Company's historical claims experience. A successful product liability or other claim brought against the Company in excess of its insurance coverage or the inability of the Company to acquire insurance at commercially reasonable rates could have a material adverse effect upon the Company's business, operating results and financial condition. VOLATILITY OF MARKET PRICE. From time to time, there may be significant volatility in the market price for the Common Stock. Quarterly operating results of the Company, changes in earnings estimated by analysts, changes in general conditions in the Company's industry or the economy or the financial markets or other developments affecting the Company could cause the market price of the Common Stock to fluctuate substantially. In addition, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. POSSIBLE ADVERSE EFFECT OF FUTURE SALES OF COMMON STOCK. The Company has filed a shelf registration statement to register for sale, from time to time on a continuous basis, an aggregate of 5 million shares of Common Stock which the Company has issued and intends to issue in connection with certain of its acquisitions or in other transactions. Such securities may be subject to resale restrictions in accordance with the Securities Act and the regulations promulgated thereunder, as well as resale limitations imposed by tax laws and regulations or by contractual provisions negotiated by the Company. As such -4- restrictions lapse, such securities may be sold to the public. In the event of the issuance and subsequent resale of a substantial number of shares of Common Stock, or a perception that such sales could occur, there could be a material adverse effect on the prevailing market price of Common Stock. CONTROL BY PRINCIPAL SHAREHOLDER. William G. Miller, the Chairman of the Company, beneficially owns approximately 15% of the outstanding shares of Common Stock. Accordingly, Mr. Miller has the ability to exert significant influence over the business affairs of the Company, including the ability to influence the election of directors and the result of voting on all matters requiring shareholder approval. ANTI-TAKEOVER PROVISIONS OF CHARTER AND BYLAWS; PREFERRED STOCK. The Company's Charter and Bylaws contain restrictions that may discourage other persons from attempting to acquire control of the Company, including, without limitation, prohibitions on shareholder action by written consent and advance notice requirements respecting amendments to certain provisions of the Company's Charter and Bylaws. In addition, the Company's Charter authorizes the issuance of up to 5,000,000 shares of preferred stock. The rights and preferences for any series of preferred stock may be set by the Board of Directors, in its sole discretion and without shareholder approval, and the rights and preferences of any such preferred stock may be superior to those of Common Stock and thus may adversely affect the rights of holders of Common Stock. TOWING AND RECOVERY EQUIPMENT The Company offers a broad range of towing and recovery equipment products that meet most customer design, capacity and cost requirements. The Company manufactures the bodies of wreckers and car carriers, which are installed on truck chassis manufactured by third parties. Wreckers generally are used to recover and tow disabled vehicles and other equipment and range in type from the conventional tow truck to large recovery vehicles with rotating hydraulic booms and 60-ton lifting capacities. Car carriers are specialized flat bed vehicles with hydraulic tilt mechanisms that enable a towing operator to drive or winch a vehicle onto the bed for transport. Car carriers transport new or disabled vehicles and other equipment and are particularly effective over longer distances. The Company's products are sold primarily through independent distributors that serve all 50 states, Canada and Mexico, and other foreign markets including Europe, the Pacific Rim and the Middle East. As a result of its ownership of Jige in France and Boniface in the United Kingdom, the Company has substantial distribution capabilities in Europe. While most of the Company's distributor agreements do not contain exclusivity provisions, management believes that approximately 65% of the Company's independent distributors sell the Company's products on an exclusive basis. In addition to selling the Company's products to towing operators, the distributors provide parts and service. The Company also has independent sales representatives that exclusively market the Company's products and provide expertise and sales assistance to distributors. Management believes the strength of the Company's distribution network and the breadth of its product offerings are two key advantages over its competitors. -5- PRODUCT LINE The Company manufactures a broad line of wrecker and car carrier bodies to meet a full range of customer design, capacity and cost requirements. The products are marketed under the Century, Vulcan, Challenger, Holmes, Champion, Chevron, Eagle, Jige, and Boniface brand names. WRECKERS. Wreckers are generally used to recover and tow disabled vehicles and other equipment and range in type from the conventional tow truck to large recovery vehicles with 60-ton lifting capacities. Wreckers are available with specialized features, including underlifts, L-arms and scoops, which lift disabled vehicles by the tires or front axle to minimize front end damage to the towed vehicles. Certain heavy duty wrecker models offer rotating booms, which allow heavy duty wreckers to recover vehicles from any angle, and proprietary remote control devices for operating wreckers. In addition, certain light duty wreckers are equipped with the patented "Eagle Claw" automatic wheellift hookup device that allows operators to engage a disabled or unattended vehicle without leaving the cab of the wrecker. The Company's wreckers range in capacity from 8 to 60 tons, and are characterized as light duty and heavy duty, with wreckers of 16-ton or greater capacity being classified as heavy duty. Light duty wreckers are used to remove vehicles from accident scenes and vehicles illegally parked, abandoned or disabled, and for general recovery. Heavy duty wreckers are used in commercial towing and recovery applications including overturned tractor trailers, buses, motor homes and other vehicles. CAR CARRIERS. Car carriers are specialized flat-bed vehicles with hydraulic tilt mechanisms that enable a towing operator to drive or winch a vehicle onto the bed for transport. Car carriers are used to transport new or disabled vehicles and other equipment and are particularly effective for transporting vehicles or other equipment over longer distances. In addition to transporting vehicles, car carriers may also be used for other purposes, including transportation of industrial equipment. In recent years, professional towing operators have added car carriers to their fleets to complement their towing capabilities. BRAND NAMES The Company manufactures and markets its wreckers and car carriers under nine separate brand names. Although certain of the brands overlap in terms of features, prices and distributors, each brand has its own distinctive image and customer base. CENTURY(R). The Century brand is the Company's "top-of-the-line" brand and represents what management believes to be the broadest product line in the industry. The Century line was started in 1974 and produces wreckers ranging from the 8-ton light duty to the 60-ton heavy duty models and car carriers in lengths from 17 1/2 to 26 feet. Management believes that the Century brand has a reputation as the industry's leading product innovator. VULCAN(R). The Company's Vulcan product line includes a range of premium light and heavy duty wreckers, car carriers and other towing and recovery equipment. The Vulcan line is operated autonomously with its own independent distribution network. -6- CHALLENGER(R). The Company's Challenger products compete with the Century and Vulcan products and constitute a third premium product line. Challenger products consist of light to heavy duty wreckers with capacities ranging from 8 to 60 tons, and car carriers with lengths ranging from 17 1/2 to 26 feet. The Challenger line was started in 1975 and is known for high performance heavy duty wreckers and aesthetic design. HOLMES(R). The Company's Holmes product line includes mid-priced wreckers with 8 to 16 ton capacities and car carriers in 17 1/2 to 21 foot lengths. The Holmes wrecker was first produced in 1916. The Holmes name has been the most well-recognized and leading industry brand both domestically and internationally through most of this century. CHAMPION(R). The Champion brand, which was introduced in 1991, includes car carriers which range in length from 17 1/2 to 21 feet. The Champion product line, which is generally lower-priced, allows the Company to offer a full line of car carriers at various competitive price points. In 1993, the Champion line was expanded to include a line of economy tow trucks with integrated boom and underlift. CHEVRON(TM). The Company's Chevron product line is comprised primarily of premium car carriers. Chevron produces a range of premium single-car, multi-car and industrial carriers, light duty wreckers and other towing and recovery equipment. The Chevron line is operated autonomously with its own independent distribution network that focuses on the salvage industry. EAGLE(R). The Company's Eagle products consist of light duty wreckers with a patented "Eagle Claw" hook-up system that allows towing operators to engage a disabled or unattended vehicle without leaving the cab of the tow truck. The "Eagle Claw" hook-up system, which was patented in 1984, was originally developed for the repossession market. Since acquiring Eagle, the Company has upgraded the quality and features of the Eagle product line and expanded its recovery capability. The Eagle line is now gaining increased popularity in the broader towing and recovery vehicle market. JIGE(TM). The Company's Jige product line is comprised of a broad line of light and heavy duty wreckers and car carriers marketed primarily in Europe. Jige is a market leader best known for its innovative designs of car carriers and light wreckers necessary to operate within the narrow confines of European cities. BONIFACE(TM). The Company's Boniface product line is comprised primarily of heavy duty wreckers. Boniface produces a wide range of heavy duty wreckers specializing in the long underlift technology required to tow modern European tour buses. The Company's Holmes and Century brand names are associated with four of the major innovations in the industry: the rapid reverse winch, the tow sling, the hydraulic lifting mechanism, and the underlift with parallel linkage and L-arms. The Company's engineering staff, in consultation with manufacturing personnel, uses computer-aided design and stress analysis systems to test new product designs and to integrate various product improvements. In addition to offering product innovations, the Company focuses on developing or licensing new technology for its products. -7- MANUFACTURING PROCESS The Company manufactures wreckers and car carriers at six manufacturing facilities located in the United States, France and England. The manufacturing process for the Company's products consists primarily of cutting and bending sheet steel or aluminum into parts that are welded together to form the wrecker or car carrier body. Components such as hydraulic cylinders, winches, valves and pumps, which are purchased by the Company from third-party suppliers, are then attached to the frame to form the completed wrecker or car carrier body. The completed body is either installed by the Company or shipped by common carrier to a distributor where it is then installed on a truck chassis. Generally, the wrecker or car carrier bodies are painted by the Company with a primer coat only, so that towing operators can select customized colors to coordinate with chassis colors or fleet colors. To the extent final painting is required before delivery, the Company contracts with independent paint shops for such services. The Company purchases raw materials and component parts from a number of sources. Although the Company has no long-term supply contracts, management believes the Company has good relationships with its primary suppliers. The Company has experienced no significant problems in obtaining adequate supplies of raw materials and component parts to meet the requirements of its production schedules. Management believes that the materials used in the production of the Company's products are available at competitive prices from an adequate number of alternative suppliers. Accordingly, management does not believe that the loss of a single supplier would have a material adverse effect on the Company's business. TOWING AND RECOVERY EQUIPMENT SALES AND DISTRIBUTION Management categorizes the towing and recovery market into three general product types: light duty wreckers, heavy duty wreckers and car carriers. The light duty wrecker market consists primarily of professional wrecker operators, repossession towing services, municipal and federal governmental agencies, and repair shop or salvage company owners. The heavy duty market is dominated by professional wrecker operators serving the needs of commercial vehicle operators. The car carrier market, historically dominated by automobile salvage companies, has expanded to include equipment rental companies that offer delivery service and professional towing operators who desire to complement their existing towing capabilities. Management estimates that there are approximately 30,000 professional towing operators and 80,000 service station, repair shop and salvage operators comprising the overall towing and recovery market. The Company's sales force, which services the Company's distribution network, consists of 40 sales representatives, 34 of whom are Company employees whose responsibilities include providing administrative and sales support to the entire distributor base. The remaining 6 sales representatives are independent contractors who market the Company's products exclusively. Sales representatives receive commissions on direct sales based on product type and brand and generally are assigned specific territories in which to promote sales of the Company's products and to maintain customer relationships. The Company has developed a diverse customer base consisting of approximately 175 distributors in North America, who serve all 50 states, Canada and Mexico, and approximately 50 distributors that serve other foreign markets. During the fiscal year ended April 30, 1999, no single distributor accounted for more than 5% of the Company's sales. Management believes the Company's broad and -8- diverse customer base provides it with the flexibility to adapt to market changes, lessens its dependence on particular distributors and reduces the impact of regional economic factors. To support sales and marketing efforts, the Company produces demonstrator models that are used by the Company's sales representatives and distributors. To increase exposure to its products, the Company also has served as the official recovery team for many automobile racing events, including the Daytona, Talladega, Atlanta and Darlington NASCAR races, the Grand Prix in Miami, the Suzuka in Japan, the IMSA "24 Hours at Daytona" Molson Indy, the Brickyard, and the Indy 500 races, among others. The Company routinely responds to requests for proposals or bid invitations in consultation with its local distributors. The Company's products have selected by the United States General Services Administration as an approved source for certain federal and defense agencies. The Company intends to continue to pursue government contracting opportunities. The towing and recovery equipment industry places heavy marketing emphasis on product exhibitions at national and regional trade shows. In order to focus its marketing efforts and to control marketing costs, the Company has reduced its participation in regional trade shows and now concentrates its efforts on five of the major trade shows each year. The Company works with its distributor network to concentrate on various regional shows. TOWING AND RECOVERY EQUIPMENT DISTRIBUTOR ACQUISITIONS During fiscal years 1997 and 1998, the Company's distribution group acquired 10 towing and recovery equipment distributors. These distributors are located in California, Colorado, Florida, Georgia, Illinois, Missouri and Mississippi and in British Columbia and Ontario, Canada. The acquired distributors market the Company's products as well as other specialty transportation equipment, and the Company intends to expand the number and types of products distributed through its distributors. The Company-owned distributors generally do not compete in the same geographic markets as the Company's independent distributors. The Company may acquire additional towing and recovery equipment distributors from time to time and anticipates financing such acquisitions with issuances of Common Stock, cash and/or borrowings under lines of credit, but is not currently a party to any agreement to acquire any other distributors. The Company uses an internal acquisition team, supplemented as needed by outside advisors, and its extensive contacts in the towing service industry, to identify, evaluate, acquire and integrate towing and recovery equipment distributors. Acquisition candidates are evaluated based on stringent criteria in a comprehensive process which includes operational, legal and financial due diligence reviews. FINANCIAL SERVICES The Company's Financial Services Group commenced operations in September 1996 to provide financial services to towing and recovery equipment distributors and towing service companies. The Company initially offered floor plan financing to distributors and purchase and lease financing to towing service operators. In addition to financing services, the Financial Services Group now provides insurance coverage, extended warranties and related services to purchasers of the Company's products. -9- The Company has entered into business relationships with Associates Commercial Corporation, and others (the "Lenders") to jointly market financing of the Company's products. As part of these relationships, the Company, through its owned and independent distributors, originates lease and loan financing for its end-consumers, and the Lenders provide the financing and servicing of the leases and loans. In return for the Company's marketing activities, the Lenders pay a fee based on amounts financed. The Company expects to capitalize on its strong existing relationships with its distributors and their customers and its reputation for reliable service to develop the Financial Services Group. PRODUCT WARRANTIES AND INSURANCE The Company offers a 12-month limited manufacturer's product and service warranty on its wrecker and car carrier products. The Company's warranty generally provides for repair or replacement of failed parts or components. Warranty service is usually performed by the Company or an authorized distributor. Due to its emphasis on quality production, the Company's warranty expense in fiscal 1999 averaged less than 1% of net sales. Management believes that the Company maintains adequate general liability and product liability insurance. BACKLOG The Company produces virtually all of its products to order. The Company's backlog is based upon customer purchase orders that the Company believes are firm. The level of backlog at any particular time, however, is not an appropriate indicator of the future operating performance of the Company. Certain purchase orders are subject to cancellation by the customer upon notification. Given the Company's production and delivery schedules, as well as the recent plant expansions, management believes that the current backlog represents less than three months of production. COMPETITION The towing and recovery equipment manufacturing industry is highly competitive for sales to distributors and towing operators. Management believes that competition in the towing and recovery equipment industry is a function of product quality and innovation, reputation, technology, customer service, product availability and price. The Company competes on the basis of each of these criteria, with an emphasis on product quality and innovation and customer service. Management also believes that a manufacturer's relationship with distributors is a key component of success in the industry. Accordingly, the Company has invested substantial resources and management time in building and maintaining strong relationships with distributors. Management also believes that the Company's products are regarded as high quality within their particular price points. The Company's marketing strategy is to continue to compete primarily on the basis of quality and reputation rather than solely on the basis of price, and to continue to target the growing group of professional towing operators who as end-users recognize the quality of the Company's products. Traditionally, the capital requirements for entry into the towing and recovery manufacturing industry have been relatively low. Management believes a manufacturer's capital resources and access to technological improvements have become a more integral component of success in recent years. Accordingly, management believes that the Company's ownership of patents on certain of the -10- industry's leading technologies has given it a competitive advantage. Certain of the Company's competitors may have greater financial and other resources and may provide more attractive dealer and retail customer financing alternatives than the Company. EMPLOYEES At April 30, 1999, the Company employed approximately 1,287 people in its towing and recovery equipment manufacturing and distribution operations. None of the Company's employees is covered by a collective bargaining agreement, though its employees in France and England have certain similar rights provided by their respective government's employment regulations. The Company considers its employee relations to be good. TOWING SERVICES - ROADONE In February 1997, the Company formed its towing services division, RoadOne, to begin building a national towing service network. With the acquisition of 112 towing service companies as of July 23, 1999, RoadOne has become a leading towing service company with operations at over 200 locations in 27 states. RoadOne's corporate offices are located in Chattanooga, Tennessee. Historically, the towing services industry has been highly fragmented, with an estimated 30,000 professional towing operators in the United States, many that are undercapitalized local operators with no viable means of independently realizing the economic value they have created for their businesses. As the Company continues to pursue the acquisition of towing service companies, management believes that these owned companies, along with affiliations established with non-owned professional towing operations, will form an organization capable of offering commercial industries, as well as the general public, consistent, high quality service across the nation. The Company's strategy is to build brand loyalty among towing service customers by emphasizing consistently high quality and dependable service from multiple locations throughout a broad geographic area. The Company intends to market these services to organizations with widely dispersed fleets of vehicles that would benefit from a single source provider. SERVICES PROVIDED Services provided by RoadOne include towing and recovery and specialized transportation services. RoadOne's towing and recovery services primarily involve providing road-side assistance to disabled vehicles which allows such vehicles to proceed under their own power, or towing disabled or abandoned vehicles to a location designated by the customer. RoadOne derives revenue from towing and recovery services based on distance, time or fixed charges and from storage services based on daily fees. These services are primarily provided to commercial entities, such as fleet operators, automobile dealers, repair shops, automobile leasing companies, and automobile auction companies; public entities such as municipalities, police, sheriff and highway patrol departments, colleges and universities, and toll-road departments; motor clubs; and individual motorists. RoadOne conducts lien and salvage sales of certain vehicles in conjunction with its towing and recovery services. RoadOne also provides limited environmental clean-up services in some areas. RoadOne's specialized transportation services primarily involve transporting new and used vehicles, construction equipment and industrial equipment. RoadOne derives revenue from transport services based on distance, -11- time or fixed charges. These services are primarily provided to automobile leasing companies, automobile auction companies, automobile dealers, fleet operators, construction companies, and industrial manufacturers. TOWING, RECOVERY AND ROAD SERVICES COMMERCIAL. RoadOne provides commercial road services to a broad range of commercial customers, including automobile dealers and repair shops. RoadOne typically charges a flat fee and a mileage premium for these towing services. Commercial road services also include towing and recovery of heavy-duty trucks, recreational vehicles, buses and other large vehicles, typically for commercial fleet operators. RoadOne charges an hourly rate based on the towing vehicle used for these specialized services. RoadOne also provides private impound towing services to commercial customers, such as shopping centers, retailers and hotels, which engage RoadOne to tow vehicles that are parked illegally on their property. MUNICIPAL. RoadOne also provides towing and recovery services to public entities such as municipalities and police, sheriff and highway patrol departments. In a limited number of markets, RoadOne provides municipal freeway towing service to local transit districts and other transportation agencies through patrolling a preset route on heavily-used freeways and towing or otherwise assisting disabled vehicles. These services are in some cases provided under contracts, typically for terms of five years or less, that are terminable for material breach and are typically subject to competitive bidding upon expiration. In other cases, RoadOne provides these services without a long-term contract. Whether pursuant to a contract or an ongoing relationship, these services are generally provided by RoadOne for a designated geographic area, or shared with one or more other companies on a rotation basis. MOTOR CLUB. RoadOne provides towing and recovery services under contract to national motor clubs for the disabled vehicles of their members. Roadside assistance is provided and, if necessary, vehicles are towed to repair facilities for a flat fee paid by either the individual motorist or the motor club. CONSUMER TOWING AND RECOVERY. RoadOne provides towing and recovery services to individual motorists for their disabled vehicles. Roadside assistance is provided and, if necessary, vehicles are towed to repair facilities for a flat fee paid by the individual motorist. LIEN AND SALVAGE SALES. In conjunction with providing towing and recovery services, vehicles may be towed to a Company facility where the vehicle is impounded and placed in storage. Such a vehicle will remain in storage until its owner pays the towing fee, which is typically based on an hourly charge, and any daily storage fees to the Company, as well as any fines due to law enforcement agencies. If the vehicle is not claimed within a period prescribed by law (typically between 30 and 90 days), RoadOne may complete lien proceedings and sell the vehicle at auction or to a scrap metal facility, depending on the value of the vehicle. ENVIRONMENTAL CLEANUP. RoadOne also provides environmental cleanup services to a range of commercial customers in some markets. These services are typically provided when there is a spill of a petroleum product in conjunction with a wrecked vehicle requiring towing and recovery services, but may also involve an isolated spill. RoadOne does not clean up spills of materials designated as Hazardous Materials by the Environmental Protection Agency. There -12- are fixed and variable components to the fees charged by RoadOne for its environmental cleanup services. SPECIALIZED TRANSPORTATION CONSTRUCTION EQUIPMENT. RoadOne provides construction equipment transport services to construction companies, contractors, municipalities and equipment leasing companies for mobile cargo such as cranes, bulldozers, forklifts and other heavy construction equipment. Service fees are based on the vehicle used and the distance traveled. INDUSTRIAL EQUIPMENT. RoadOne provides industrial equipment transport services to manufacturing companies, construction companies, contractors, municipalities and equipment leasing companies for immobile cargo such as engines, industrial generators and heavy construction materials. Service fees may be based on the vehicle used and the distance traveled or may be determined using an hourly rate based on the towing vehicle used for these specialized services. NEW AND USED AUTOMOBILE. RoadOne provides automobile transport services to leasing companies, automobile dealers, automobile auction companies, long-distance transporters, brokers and individuals. Services typically are provided as needed by particular customers and charged according to pre-set rates based on mileage. RoadOne provides transport services for dealers with used cars coming off lease and who transfer new cars from one region to another based on demand. The Company also provides local collection and delivery support to long-haul automobile transporters. DISPATCH SYSTEMS RoadOne currently dispatches its towing and recovery and specialized transportation services via existing local dispatch systems operated by its individual subsidiaries. Some of these subsidiaries utilize computerized positioning systems which identify and track vehicle location and status in a localized area. RoadOne intends to continue to use these existing dispatch systems, while developing and implementing a national computerized dispatch system that will more efficiently support its national, regional and local customers in allocating and utilizing assets on every level. TOWING SERVICE ACQUISITIONS The Company intends to continue to acquire additional towing service operations. The Company has targeted professional towers, and generally seeks operators who have good reputations in their markets and solid management willing to continue in the employment of the Company after the acquisition. The Company uses an internal acquisition team, supplemented as needed by outside advisors, and its extensive contacts in the towing service industry, to identify, evaluate, acquire and integrate towing operators. Acquisition candidates are evaluated based on criteria in a comprehensive process which includes operational, legal and financial due diligence reviews. The Company expects to utilize Common Stock, cash, or both as consideration for future acquisitions. During fiscal 1999, the Company acquired 35 towing service companies in separate transactions, none of which were individually material to the financial results of the Company. The Company issued an aggregate of approximately 1.2 million shares of Common Stock and paid approximately $21.3 million in cash and $0.9 million in notes in such transactions which have been accounted for under the purchase method of -13- accounting. Subsequent to April 30, 1999, the Company has acquired one additional towing service company as of July 23, 1999, paying approximately $1.3 million in cash. This transaction was accounted for under the purchase method of accounting. At July 23, 1999, the Company had entered into letters of intent to acquire six additional towing service companies in transactions expected to close over the following several weeks. These transactions are subject to customary conditions, including completion of due diligence investigations and execution of definitive acquisition agreements, among others. The Company intends to continue to aggressively pursue additional purchases of towing service companies, although operational difficulties and certain restrictions contained in the Company's amended Credit Facility make it likely that the frequency of acquisitions will be less than in the past, at least for the near term. AFFILIATE PROGRAM In order to offer a nationwide towing service, the Company has established an affiliate program under which independent professional towers who meet the Company's criteria provide towing services under the RoadOne name as "affiliates." RoadOne affiliated companies will be offered many of the benefits of owned companies, such as product rebates, lower costs for financing and insurance, quantity buying advantages, national marketing strength and driver training. The Company's intention is eventually to sign agreements with a large number of RoadOne affiliates across North America. As of July 23, 1999, the Company had signed 2,184 agreements with RoadOne affiliates in all 50 states, Puerto Rico and five provinces in Canada. COMPETITION Historically, the towing service industry has been highly fragmented, with an estimated 30,000 professional towing operators in the United States. The Company believes that its consolidation of a number of these companies will give it brand loyalty among towing service customers through an emphasis on consistently high quality and dependable service from multiple locations over a broad geographic area. The Company expects to market these services to organizations with widely dispersed fleets of vehicles that would benefit from a single source provider. However, the size of the towing service industry will mean that the Company's operations will face continued competition from many operators across the country. The Company also faces competition in its consolidation of professional towing operators. These operators could be consolidated by other companies, individuals or entities, or they could enter into affiliate relationships with other companies. In addition, the Company's presence in the towing service industry presents the risk that it could be viewed as being in competition with other customers of the Company. EMPLOYEES At April 30, 1999, the Company employed approximately 3,022 people at RoadOne. None of the Company's RoadOne employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. -14- PATENTS AND TRADEMARKS The development of the underlift parallel linkage and L-arms in 1982 is considered one of the most innovative developments in the wrecker industry in the last 25 years. This technology is significant primarily because it allows the damage-free towing of newer aerodynamic vehicles made of lighter weight materials. Patents for this technology were granted to an operating subsidiary of the Company in 1987 and 1989. These patents expire in mid-year 2004. This technology, particularly the L-arms, is used in a majority of the commercial wreckers today. Management believes that utilization of such devices without a license is an infringement of the Company's patents. The Company has successfully litigated infringement lawsuits in which the validity of the Company's patents on this technology was upheld, and successfully settled other lawsuits. The Company also holds a number of other utility and design patents covering other products, including the "Eagle-Claw" hook up system, the Vulcan "scoop" wheel-retainer and the car carrier anti-tilt device. The Company has also obtained the rights to use and develop certain technologies owned or patented by others. The Company's trademarks "Century," "Holmes," "Champion," "Challenger," "Formula I," "Eagle Claw Self-Loading Wheellift," "Pro Star," "Street Runner," "Vulcan," and "RoadOne," among others, are registered with the United States Patent and Trademark Office. Management believes that the Company's trademarks are well-recognized by dealers, distributors and end-users in their respective markets and are associated with a high level of quality and value. GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Management believes that the Company is in substantial compliance with all applicable federal, state and local provisions relating to the protection of the environment. The costs of complying with environmental protection laws and regulations has not had a material adverse impact on the Company's financial condition or results of operations in the past and is not expected to have a material adverse impact in the future. The Company is also subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act which regulates the description of warranties on products. The description and substance of the Company's warranties are also subject to a variety of federal and state laws and regulations applicable to the manufacturing of vehicle components. Management believes that continued compliance with various government regulations will not materially affect the operations of the Company. The Financial Services Group is subject to regulation under various federal, state and local laws which limit the interest rates, fees and other charges that may be charged by it or prescribe certain other terms of the financing documents that it enters into with its customers. Management believes that the additional administrative costs of complying with these regulations will not materially affect the operations of the Company. -15- EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- William G. Miller...................... 52 Chairman of the Board Jeffrey I. Badgley..................... 48 President, Chief Executive Officer and Director James A. McKinney...................... 54 Chief Executive Officer - RoadOne, Inc. and Director Frank Madonia.......................... 50 Executive Vice President, Secretary and General Counsel J. Vincent Mish........................ 48 Vice President, Chief Financial Officer and President of Financial Services Group
WILLIAM G. MILLER has served as Chairman of the Board since April 1994. Mr. Miller served as Chief Executive Officer of the Company from April 1994 to June 1997, as Co-Chief Executive Officer of the Company from June 1997 to November 1997, and as President of the Company from April 1994 to June 1996. He served as Chairman of Miller Group, Inc., from August 1990 through May 1994, as its President from August 1990 to March 1993, and as its Chief Executive Officer from March 1993 until May 1994. Prior to 1987, Mr. Miller served in various management positions for Bendix Corporation, Neptune International Corporation, Wheelabrator-Frye Inc. and The Signal Companies, Inc. JEFFREY I. BADGLEY has served as Chief Executive Officer of the Company since November 1997, as President since June 1996, and as a director since January 1996. Mr. Badgley served as Co-Chief Executive Officer of the Company from June 1997 to November 1997, as Chief Operating Officer of the Company from June 1996 to June 1997 and as Vice-President of the Company from April 1994 to June 1996. In addition, Mr. Badgley serves as President of Miller Industries Towing Equipment Inc. Mr. Badgley served as Vice President - Sales of Miller Industries Towing Equipment Inc. from 1988 to 1996. Mr. Badgley served as Vice President - Sales and Marketing of Challenger Wrecker Manufacturing, Inc., from 1982 until joining Miller Industries Towing Equipment Inc. JAMES A. MCKINNEY has served as Chief Executive Officer of RoadOne, Inc. since June 1999, and as a director of the Company since June 1999. From August 1998 through June 1999, Mr. McKinney served as Executive Vice President of Rollins, Inc.. From January 1997 through May 1998, Mr. McKinney served as the Chief Executive Officer of Skywire. From 1993 to 1997 he served as Senior Vice President for Federal Express. FRANK MADONIA has served as Executive Vice President, General Counsel and Secretary of the Company since September 1998. From April 1994 to September 1998 Mr. Madonia served as Vice President, General Counsel and Secretary of the Company. Mr. Madonia served as Secretary and General Counsel to Miller Industries Towing Equipment Inc. since its acquisition by Miller Group in 1990. From July 1987 through April 1994, Mr. Madonia served as Vice President, General Counsel and Secretary of Flow Measurement. Prior to 1987, Mr. Madonia served in various legal and management positions for United States Steel Corporation, Neptune International Corporation, Wheelabrator-Frye Inc., The Signal Companies, Inc. and Allied-Signal Inc. In addition, Mr. Madonia is registered to practice before the United States Patent and Trademark Office. J. VINCENT MISH is a certified public accountant and has served as President of the Financial Services Group since September 1996 and as a Vice President of the Company since April 1994. From April 1994 through September 1996, Mr. Mish served as Chief Financial Officer and Treasurer of the Company, a -16- position he reassumed in June, 1999. Mr. Mish served as Vice President and Treasurer of Miller Industries Towing Equipment Inc. since its acquisition by Miller Group in 1990. From February 1987 through April 1994, Mr. Mish served as Vice President and Treasurer of Flow Measurement. Mr. Mish worked with Touche Ross & Company (now Deloitte and Touche) for over ten years before serving as Treasurer and Chief Financial Officer of DNE Corporation from 1982 to 1987. Mr. Mish is a member of the American Institute of Certified Public Accountants and the Tennessee, Georgia and Michigan Certified Public Accountant societies. ITEM 2. PROPERTIES The Company operates four manufacturing facilities in the United States. The facilities are located in (i) Ooltewah, Tennessee, (ii) Hermitage, Pennsylvania, (iii) Mercer, Pennsylvania, and (iv) Greeneville, Tennessee. The Ooltewah plant, containing approximately 208,000 square feet, produces light and heavy duty wreckers; the Hermitage plant, containing approximately 95,000 square feet, produces car carriers; the Mercer plant, which was acquired in December 1997, contains approximately 100,000 square feet, produces car carriers and light duty wreckers; and the Greeneville plant, containing approximately 100,000 square feet, primarily produces car carriers. The Company operates two foreign manufacturing facilities located in the Lorraine region of France, which contain, in the aggregate, approximately 100,000 square feet, and one in Norfolk, England, which contains approximately 22,500 square feet. Management believes that its existing manufacturing facilities will allow the Company to meet anticipated demand for its products. In connection with its acquisition of over 112 towing service companies, the Company has acquired or entered into leases for property at over 200 locations in 27 states. These facilities are utilized as offices for administrative and dispatch operations, garages for repair and upkeep of towing vehicles, and lots for storage and impounding of towed cars. RoadOne's corporate offices are housed in 10,000 square feet of leased space in Chattanooga, Tennessee. ITEM 3. LEGAL PROCEEDINGS In January 1998, the Company received a letter from the Antitrust Division of the Department of Justice (the "Division") stating that it was conducting a civil investigation covering "competition in the tow truck industry." The letter asked that the Company preserve its records related to the tow truck industry, particularly documents related to sales and prices of products and parts, acquisition of other companies in the industry, distributor relations, patent matters, competition in the industry generally, and activities of other companies in the industry. In March 1998, the Company received a Civil Investigation Demand ("CID") issued by the Division as part of its continuing investigation of whether there are, have been or may be violations of the -17- federal antitrust statutes in the tow truck industry. Under this CID, the Company has produced information and documents to assist in the investigation, has corresponded and met with the Division concerning the investigation, and is continuing to cooperate with the Division. It is unknown at this time what the eventual outcome of the investigation will be. During September, October and November 1997, five lawsuits were filed by certain persons who seek to represent a class of shareholders who purchased shares of the Company's common stock during the period from either October 15 or November 6, 1996 to September 11, 1997. Four of the suits were filed in the United States District Court for the Northern District of Georgia. The remaining suit was filed in the Chancery Court of Hamilton County, Tennessee. In general, the individual plaintiffs in all of the cases allege that they were induced to purchase the Company's common stock on the basis of allegedly actionable misrepresentations or omissions about the Company and its business and, as a result were thereby damaged. Four of the complaints assert claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934. The complaints name as the defendants the Company and various of its present and former directors and officers. The plaintiffs in the four actions which involved claims in Federal Court under the Securities Exchange Act of 1934 have consolidated those actions. The Company filed a motion to dismiss in the consolidated case which was granted in part and denied in part. The proposed class was certified by order dated May 27, 1999. The Company filed a motion to dismiss in the Tennessee case which was granted in its entirety. The plaintiffs in that case, with permission from the Court, amended and refiled their complaint, which was dismissed with prejudice by order of the Court dated March 11, 1999. On April 4, 1999 counsel for plaintiffs filed a notice of appeal. In both these actions, the Company has denied liability and will continue to vigorously defend itself. In addition to the shareholder litigation described above, the Company is, from time to time, a party to litigation arising in the normal course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial position or results of operations of the Company. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Registrant during the fourth quarter of the fiscal year covered by this Report. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Registrant's Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "MLR." The following table sets forth the quarterly range of high and low sales prices for the Common Stock for the period from May 1, 1997 through April 30, 1999. -18-
HIGH LOW ---- ---- FISCAL YEAR ENDED APRIL 30, 1998 First Quarter $17.63 $11.88 Second Quarter $18.25 $ 9.00 Third Quarter $12.00 $ 9.06 Fourth Quarter $11.44 $ 6.19 FISCAL YEAR ENDED APRIL 30, 1999 First Quarter $ 8.88 $ 6.19 Second Quarter $ 7.44 $ 3.75 Third Quarter $ 7.00 $ 4.00 Fourth Quarter $ 6.31 $ 4.19
The approximate number of holders of record and beneficial owners of Common Stock as of July 27, 1999 was 1,874 and 10,000, respectively. The Company has never declared cash dividends on the Common Stock. The Company intends to retain its earnings to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, the Company's financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors. The payment of dividends by the Company is restricted by its revolving credit facility. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth the selected consolidated financial data of the Company, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's Consolidated Financial Statements and Notes thereto. The selected consolidated financial data for the years ended April 30, 1995, 1996, 1997, 1998 and 1999 have been derived from the consolidated financial statements of the Company audited by Arthur Andersen LLP, independent public accountants. -19-
MILLER INDUSTRIES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA Years Ended April 30, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In thousands, except per share data) Statements of Income Data: Net sales ............................................... $525,932 $397,213 $292,394 $180,463 $139,779 Costs and expenses: Costs of operations .................................. 435,691 319,453 238,625 148,490 113,439 Selling, general, and administrative ................. 75,368 49,420 30,192 17,629 14,750 expenses Restructuring costs .................................. -- 4,100 -- -- -- Interest expense, net ................................ 10,395 3,389 620 209 370 -------- -------- -------- -------- -------- Total costs and expenses ................................ 521,454 376,362 269,437 166,328 128,559 Income before income taxes and extraordinary gain ................................................. 4,478 20,851 22,957 14,135 11,220 Income taxes ............................................ 2,272 8,186 8,436 5,108 3,736 -------- -------- -------- -------- -------- Income before extraordinary gain ........................ 2,206 12,665 14,521 9,027 7,484 Extraordinary gain on debt retirement (less applicable income taxes of $175 in 1995) ............ -- -- -- -- 288 ======== ======== ======== ======== ======== Net income .............................................. $ 2,206 $ 12,665 $ 14,521 $ 9,027 $ 7,772 ======== ======== ======== ======== ======== Basic net income per common share: Before extraordinary gain ............................ $ 0.05 $ 0.28 $ 0.37 $ 0.27 $ 0.26 Extraordinary gain on debt retirement ................ -- -- -- -- 0.01 -------- -------- -------- -------- -------- $ 0.05 $ 0.28 $ 0.37 $ 0.27 $ 0.27 ======== ======== ======== ======== ======== Weighted average common shares outstanding .............. 46,338 44,559 39,565 33,172 28,797 ======== ======== ======== ======== ======== Diluted net income per common share: Before extraordinary gain ............................ $ 0.05 $ 0.27 $ 0.35 $ 0.26 $ 0.25 Extraordinary gain on debt retirement ................ -- -- -- -- 0.01 -------- -------- -------- -------- -------- $ 0.05 $ 0.27 $ 0.35 $ 0.26 $ 0.26 ======== ======== ======== ======== ======== Weighted average common & potential dilutive shares outstanding ................................... 47,266 46,201 41,454 34,102 29,428 ======== ======== ======== ======== ======== Balance Sheet Data (at period end): Working capital ...................................... $121,449 $104,774 $ 61,980 $ 52,438 $ 19,011 Total assets ......................................... 392,480 329,730 215,297 123,978 66,018 Long-term obligations, less current portion .......... 133,850 95,778 11,282 9,335 5,171 Shareholders' equity ................................. 187,303 180,236 138,783 71,913 32,320 -------------------------------------------------------------- Basic and diluted net income per common share and the weighted average number of common and potential dilutive common shares outstanding are computed after giving retroactive effect to the 3-for-2 stock split effected April 12, 1996, the 2-for-1 stock split effected on September 30, 1996, the 3-for-2 stock split effected on December 30, 1996.
-20- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto. GENERAL Under the Company's accounting policies, sales are recorded when equipment is shipped to independent distributors or other customers. While the Company manufactures only the bodies of wreckers, which are installed on truck chassis manufactured by third parties, the Company sometimes purchases the truck chassis for resale to its customers. Sales of Company-purchased truck chassis are included in net sales. Margins are substantially lower on completed recovery vehicles containing Company-purchased chassis because the markup over the cost of the chassis is nominal. Revenue from Company owned distributors is recorded at the time equipment is shipped to customers or services are rendered. The towing services division recognizes revenue at the time services are performed. The Company's net sales have historically been lower in its first quarter when compared to the prior quarter due in part to decisions by purchasers of light duty wreckers to defer wrecker purchases near the end of the chassis model year. The Company's net sales have historically been relatively stronger in its fourth quarter due in part to sales made at the largest towing and recovery equipment trade show. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the components of the consolidated statements of income expressed as a percentage of net sales.
Years Ended April 30, ------------------------------------------------ 1999 1998 1997 ------------- ------------- ------------- Towing and Recovery Equipment Segment - ------------------------------------- Net Sales................................................... 100.0% 100.0% 100.0% Costs and expenses: Costs of operations...................................... 86.6% 84.1% 83.0% Selling, general and administrative...................... 9.1% 7.7% 8.7% Restructuring costs...................................... 0.0% 1.5% 0.0% Interest expense (income), net............................ 1.4% 0.3% (0.1%) ------------- ------------- ------------- Total costs and expenses.................................... 97.2% 93.6% 91.6% ------------- ------------- ------------- Income before income taxes.................................. 2.8% 6.4% 8.4% ============= ============= ============= Towing Services Segment - ----------------------- Net sales................................................... 100.0% 100.0% 100.0% Costs and expenses: Costs of operations...................................... 75.7% 71.3% 71.9% Selling, general and administrative...................... 24.0% 24.2% 21.7% Interest expense, net.................................... 3.0% 2.1% 2.4% ------------- ------------- ------------- Total costs and expenses.................................... 102.8% 97.6% 96.0% ------------- ------------- ------------- Income before income taxes.................................. (2.8%) 2.4% 4.0% ============= ============= =============
-21- YEAR ENDED APRIL 30, 1999 COMPARED TO YEAR ENDED APRIL 30, 1998 Net sales for the year ended April 30, 1999 increased 32.4% to $525.9 million from $397.2 million for the comparable period in 1998. Net sales in the towing and recovery equipment segment increased 21.3% to $342.3 million from $282.2 million for the comparable period in 1998. The increase in net sales was primarily the result of higher unit sales and the inclusion for a full year of sales for the Chevron manufacturing operation acquired during fiscal 1998. Net sales in the towing services segment increased 59.6% to $183.5 million from $115.0 million for the comparable period in 1998. The increase in net sales was primarily the result of (i) the inclusion for a full year of sales of towing service companies acquired in fiscal 1998, (ii) the inclusion since the acquisition dates in fiscal 1999 of sales from towing service companies acquired via purchase transactions, and (iii) same store sales growth in fiscal 1999 over fiscal 1998. Costs of operations for the Company as a percentage of net sales increased to 82.8% for the year ended April 30, 1999 from 80.4% for the comparable prior year period. In the towing and recovery equipment segment, costs of operations as a percentage of net sales increased to 86.6% for the 1999 fiscal year as compared to 84.1% in the prior year. This increase was primarily the result of charges incurred in the consolidation and integration of production, which were mostly related to inventory. In addition, the implementation of a new information and production system in the segment's largest plant resulted in higher than anticipated operating costs and inefficiencies during the fourth quarter, including higher direct and indirect labor costs. The segment also experienced higher material costs as outside fabricators and suppliers were more heavily relied upon to meet production schedules during this period. In the towing services segment, costs of operations as a percentage of net sales increased to 75.7% for the year ended April 30, 1999 from 71.3% for the comparable prior period. This increase was primarily the result of increased labor costs of the towing service operations along with the associated employee benefits and worker's compensation costs, increased depreciation on additions to the fleet and increased insurance costs due to the loss experience. Selling, general and administrative expenses for the Company for fiscal 1999 increased 52.5% to $75.3 million from $49.4 million for the comparable period of fiscal 1998. In the towing and recovery equipment segment, selling, general and administrative expenses for fiscal 1999 increased 44.9% to $31.3 million from $21.6 million for the comparable period of fiscal 1998. This increase was primarily due to the inclusion for a full year of expense for the Chevron manufacturing operation acquired during fiscal 1998, increased costs related to the new information systems and increased professional fees during the year. As a percentage of net sales, selling, general and administrative expenses in the segment were 9.1% and 7.7% for fiscal 1999 and fiscal 1998, respectively. In the towing services segment, selling, general and administrative expenses for fiscal 1999 increased 58.4% to $44.1 million from $27.8 million for the comparable period of fiscal 1998. The increase was due primarily to the impact of the significant expansion of RoadOne's business referred to above and to incremental resources added to support RoadOne's growth. As a percentage of net sales, selling, general, and administrative expenses were 24.0% and 24.2% for fiscal 1999 and fiscal 1998, respectively. Net interest expense for the Company for fiscal 1999 increased $7.0 million to $10.4 million from $3.4 million for fiscal 1998 primarily due to increased borrowing under the Company's line of credit to fund working capital and equipment needs and acquisitions of businesses. -22- Income taxes are accounted for on a consolidated basis and are not allocated by segment. The effective rate of the provision for income taxes was 50.7% for fiscal 1999 and 39.3% for fiscal 1998. The difference is primarily due to the impact of a higher level of non-deductible goodwill amortization relative to income before income taxes in fiscal 1999 as compared to 1998. RESULTS OF QUARTER ENDED APRIL 30, 1999 The Company reported a net loss of $4.5 million for the three months ended April 30, 1999 compared to net income of $3.2 million for the comparable prior year period. Operating results for the fiscal 1999 fourth quarter were adversely affected by costs resulting from the consolidation and integration of some of the Company's product lines. Other factors adversely affecting profitability in the quarter include costs and inefficiencies resulting from the implementation of a new information and production management system in the Company's largest manufacturing facility. Operating income of the towing services segment was negatively affected by mild weather conditions which reduced the volume of towing activity in the quarter, and higher than normal operating expenses. YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997 Net sales of the Company for the year ended April 30, 1998 increased 35.8% to $397.2 million from $292.4 million for the comparable period in 1997. Net sales in the towing and recovery equipment segment increased 10.7% to $282.2 million from $255.0 million for the comparable period in 1997. The increase in net sales in the segment was primarily the result of (i) higher unit sales, (ii) the inclusion since the acquisition date in fiscal 1998 of sales from the Chevron manufacturing operation, (iii) an increase in sales of truck chassis sold by the domestic manufacturing operations to third parties and (iv) the inclusion of sales of the acquired distributors. Net sales in the towing service segment increased 207.3% to $115.0 million from $37.4 million for the comparable period in 1997. The increase in net sales was primarily the result of (i) the inclusion for a full year of sales of the towing service companies acquired during fiscal 1997, and (ii) the inclusion since the acquisition dates in fiscal 1998 of sales from towing service companies. Costs of operations as a percentage of net sales decreased slightly to 80.4% for the from 81.6% for the comparable prior year period. Costs of operations of the towing and recovery equipment segment as a percentage of net sales increased from 83.0% in fiscal 1997 to 84.1% due primarily to normal increases in labor and plant overhead costs and costs of re-aligning plant production in the segment's Ooltewah facility to accommodate the transfer of the Vulcan production line to the Ooltewah plant. Costs of operations of the towing services segment as a percentage of net sales decreased to 71.3% for the year ended April 30, 1998 from 71.9% for the comparable prior period. The decrease is primarily the result of the towing services segment acquisitions during fiscal 1998 and 1997 as referred to above. Selling, general and administrative expenses of the Company for fiscal 1998 increased 63.7% to $49.4 million from $30.2 million for the comparable period of fiscal 1997. Selling, general, and administrative expenses of the towing and recovery equipment segment as a percentage of net sales decreased from 8.7% in fiscal 1997 to 7.7% in fiscal 1998 primarily as a result of achieving a higher level of sales without incurring a proportionate increase in selling, general, and administrative expenses. Selling, general, and administrative expenses of the towing services segment as a percentage of net sales increased to 24.2% in fiscal 1998 from 21.7% in fiscal 1997 primarily as a result of the incremental resources added to support the significant growth of the segment. During the second quarter of fiscal 1998, the towing and recovery equipment segment recorded a one-time pretax charge of $4.1 million for the Olive Branch, Mississippi facility closure and consolidation of manufacturing operations. Net interest expense for fiscal 1998 increased $2.8 million to $3.4 million from $0.6 million for fiscal 1997 primarily due to increased borrowings under the Company's line of credit to fund working capital needs and acquisitions of businesses. -23- Income taxes are accounted for on a consolidated basis and are not allocated by segment. The effective rate of the provision for income taxes was 39.3% for fiscal 1998 and 36.7% for fiscal 1997. The increase was due primarily to the impact of a higher level of nondeductible goodwill amortization in fiscal 1998 than in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements are for working capital, debt service, and capital expenditures. The Company has financed its operations and growth from internally generated funds and debt financing and, since August 1994, in part from the proceeds from its initial public offering and its subsequent public offerings completed in January 1996 and November 1996. The net proceeds of the public offerings were used to repay long-term debt, including that of acquired companies, redeem cumulative preferred stock of a wholly owned subsidiary, increase working capital, provide funds for capital expenditures, acquisition of businesses, and other general corporate purposes. Cash provided by operating activities was $3.5 million for the year ended April 30, 1999 as compared to $20.3 million used in operations for the comparable period of 1998. The cash provided by operating activities in fiscal 1999 was primarily the result of an increase in accounts payable due to more favorable terms obtained from certain vendors. Cash used in investing activities was $32 million for the year ended April 30, 1999 compared to $46.3 million for the year ended April 30, 1998. The cash used in investing activities was primarily for the acquisition of companies and for capital expenditures. Cash provided by financing activities was $30.6 million for the year ended April 30, 1999 compared to $65.5 million for the comparable period in 1998. The cash was provided primarily by borrowing under the Company's credit facilities of $40 million reduced by payments on debt obligations of $7.6 million and the repurchase of its common stock of $2.3 million. The net proceeds were used to repay debt, including that of acquired companies, for other capital expenditures, for working capital, for the acquisition of companies, and for other general corporate purposes. At April 30, 1999, the Company had a $175 million unsecured revolving credit facility with a group of banks (the "Credit Facility"). Borrowings under the Credit Facility at April 30, 1999 bore interest at a rate equal to the London Interbank Offered Rate ("LIBOR") plus a margin ranging from 0.75% to 2.00% based on a specified ratio of funded indebtedness to earnings, or the prime rate. At April 30, 1999, $125 million was outstanding under the Credit Facility. The Credit Facility imposes restrictions on the Company with respect to the maintenance of certain financial ratios, the incurrence of indebtedness, the sale of assets, capital expenditures, mergers and acquisitions. The Credit Facility was amended in July 1999 to waive the Company's failure to comply with certain of those financial ratios at April 30, 1999. In connection with the amendment, the applicable interest rate for borrowings under the Credit Facility was increased to LIBOR plus a margin of 2.5%, for LIBOR-based borrowings, and to the prime rate plus a margin of 1.25% for prime rate-based borrowings, through January 31, 2000. In addition, as a result of the amendment, the Credit Agreement is collateralized by substantially all of the assets and properties of the Company and its domestic subsidiaries. On May 1, 1998, the Company entered into an interest rate swap agreement covering $50 million of variable-rate debt. The agreement fixes the interest rate at 5.68% plus the applicable margin for a period of three years unless canceled by the bank at the end of two years. The amendment also places certain restrictions on the ability of the Company to continue to acquire businesses. -24- The Company's board of directors approved a share repurchase plan during fiscal 1998 under which the Company may repurchase up to 2,000,000 shares of its common stock from time to time until September 30, 1999. It is expected that such repurchased shares would be issued as consideration in business acquisitions currently being negotiated pursuant to the Company's ongoing acquisition strategy. All shares purchased under the plan during fiscal 1998 and 1999 (500,000 shares at a cost of $2.3 million for the year ended April 30, 1999 and 547,900 shares at a cost of $4.2 million for the year ended April 30, 1998) were reissued as consideration for towing services companies acquired prior to April 30, 1999. STRATEGIC AND FINANCIAL ALTERNATIVES STUDY The Company announced in May 1999 that its Board of Directors had concluded its study of potential strategic and financial alternatives for the Company and had ratified its Special Committee's recommendation to investigate and pursue the possibility of separating the Company's RoadOne towing services segment from its towing and recovery equipment segment through a tax-free spinoff which would result in the formation of two public companies. The Company engaged J.C. Bradford & Co. as its financial advisor with respect to these matters. Completing any such separation of the two businesses through a tax-free spinoff transaction would entail the satisfaction of numerous significant conditions which at this time are uncertain. These conditions include, but are not limited to, securing an IRS private letter ruling, an SEC no-action letter, satisfactory banking arrangements, the approval of the Company's shareholders and a final decision to proceed by the Board of Directors. The Company can give no assurance that any such transaction will occur. The Company currently expects that the spinoff transaction, if completed, would not occur any sooner than during the fourth quarter of the fiscal year ending April 30, 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, which delayed the effective date of SFAS No. 133 until June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. -25- YEAR 2000 The "Year 2000" issue refers to the possibility that some date-sensitive computer software was written with two digits rather than four to define the applicable year. This software will not interpret the "00" year correctly, and may experience problems. In addition, any equipment that has time sensitive embedded chips may have similar date-related problems. If not corrected, these computer programs or embedded chips could possibly cause systems to fail or other errors, leading to possible disruptions in operations or creation of erroneous results. The Company, in an enterprise-wide effort, is taking steps to ensure that its systems are secure from such failures. Our Year 2000 plan addresses the anticipated impacts of the Year 2000 problem on our information technology (IT) systems and on non-IT systems involving embedded chip technologies. We are also surveying key third parties to determine the status of their Year 2000 compliance programs. In addition, we are developing contingency plans specifying what the Company will do if it or important third parties experience disruptions as a result of the Year 2000 problem. Our Year 2000 plan is subject to modification, and is revised periodically as additional information is developed. The Company currently believes that its Year 2000 plan will be completed for all key aspects prior to the anticipated Year 2000 failure dates. With respect to IT systems, our Year 2000 plan includes programs relating to (i) computer applications, including those for servers, client server systems, and personal computers and (ii) IT infrastructure, including hardware, software, network technology, and voice and data communications. In the case of non-IT systems, our Year 2000 plan includes programs related to equipment and processes required to produce our products in our manufacturing plants. With respect to its applications programs, the Company's manufacturing plants began implementing a Year 2000 compliant ERP system in 1997. Although this project included initiatives outside of the scope of the Year 2000, the new system replaced an older non-compliant system. The Company's largest manufacturing facility has completed its implementation. The remaining plants are scheduled to complete the implementation of their computerized functions prior to the anticipated Year 2000 failure dates. The new ERP system also contains the Company's financial applications, with implementation completed in Fiscal 1999. These implementations were not accelerated due to Year 2000 issues and, therefore, their costs are not included in the discussion of Year 2000 costs below. The Company's towing services segment began development in 1998 of a new dispatch system which will assist in resolving its Year 2000 issues. Approximately $1.5 million of the cost of this system is being accelerated to assist in resolving Year 2000 issues and is included in the discussion of Year 2000 costs below. This segment has also initiated a remediation plan for some of the existing dispatch applications. In addition, it is developing a contingency plan which will address locations not remediated prior to January 1, 2000. This segment completed its implementation of financial systems on a Year 2000 compliant ERP system in Fiscal 1999. With respect to its infrastructure program, the inventory and assessment phase is substantially complete. The implementation phase is on-going, with many components being replaced as part of the Company's support -26- for the implementation of a new ERP system for manufacturing and financial applications. The new dispatch system that the towing services segment is implementing will centralize all processing to one location. This new processing infrastructure to support the dispatch application is constructed. RoadOne will continue to assess and replace client infrastructure at each of its field locations as the dispatch application is rolled out. With respect to its non-IT program, the Company is identifying embedded chip technology at all manufacturing locations. A limited amount of operating equipment is date sensitive. Manufacturers of the affected equipment are being contacted. The Company is evaluating the suggested modifications and replacements. The plan is to complete remediation of these systems by the end of the year. The Company has initiated inquiries of major business partners to assess their state of readiness regarding Year 2000 issues that could materially and adversely impact the Company. These major business partners include, but are not limited to suppliers, financial institutions, benefit providers, payroll services, and customers, as well as potential failures in public and private infrastructure services, including electricity, water, transportation, and communications. The Company has requested those third parties respond in writing that they will be Year 2000 compliant by the end of 1999. The Company is reviewing the responses as received and is assessing the third parties' efforts in addressing Year 2000 issues. Further, the Company is in the process of determining its vulnerability if these third parties fail to remediate their Year 2000 problems. Contingency plans are being developed and include, but are not limited to, using alternate vendors, manual interfaces, and hard copies. There can be no guarantee that the systems of third parties will be remediated on a timely basis, or that such parties' failure to remediate Year 2000 issues would not have a material adverse effect on the Company. The total cost of the Company's Year 2000 project includes costs for installing certain new hardware and software upgrades in both of its business segments of approximately $0.5 million and the cost of acceleration of a portion of its new dispatch software in its towing services segment of $1.5 million. The total cost of our Year 2000 efforts is expected to be about $2.0 million, which is being expensed as incurred except for hardware or software replacement costs that have been or will be capitalized. About $0.1 million of the total amount was incurred through the end of fiscal 1999, and approximately an additional $1.9 million will be incurred in the remainder of calendar 1999. The timing and amount of these future expenditures are forward-looking and subject to uncertainties relating to the Company's ongoing assessment of the Year 2000 issue, and appropriate remediation efforts, contingency plans and responses to any problems that may arise. The Company's Year 2000 expenses are paid out of its annual budget for information services. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is included in Part IV, Item 14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -27- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the headings "PROPOSAL 1: ELECTION OF DIRECTORS" AND COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Registrant's Annual Meeting of Shareholders to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Registrant is included in Item 1 of this Report. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading "EXECUTIVE COMPENSATION" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Registrant's Annual Meeting of Shareholders to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Registrant is included in Item 1 of this Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Registrant's Annual Meeting of Shareholders to be filed with the Commission, is hereby incorporated herein by reference. For purposes of determining the aggregate market value of the Registrant's voting stock held by nonaffiliates, shares held by all current directors and executive officers of the Registrant have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Registrant as defined by the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) The following documents are filed as part of this Report: -28-
1. FINANCIAL STATEMENTS Page Number Description in Report - ----------- ----------- Report of Independent Public Accountants......................................... F-1 Consolidated Balance Sheets as of April 30, 1999 and 1998........................ F-2 Consolidated Statements of Income for the years ended April 30, 1999, 1998 and 1997............................................................................. F-3 Consolidated Statements of Stockholders' Equity for the years ended April 30, 1999, 1998 and 1997.............................................................. F-4 Consolidated Statements of Cash Flows for the years ended April 30, 1999, 1998, and 1997......................................................................... F-5 Notes to Consolidated Financial Statements....................................... F-6 2. FINANCIAL STATEMENT SCHEDULES Page Number Description in Report - ----------- ----------- Report of Independent Public Accountants........................................ S-1 Schedule II - Valuation and Qualifying Accountants.............................. S-2
All schedules, except those set forth above, have been omitted since the information required is included in the financial statements or notes or have been omitted as not applicable or not required. 3) EXHIBITS The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:
INCORPORATED BY REFERENCE TO EXHIBIT REGISTRATION OR FILE FORM OR REPORT DATE OF REPORT NUMBER IN DESCRIPTION NUMBER REPORT - ------------ ----------------------------------------- ------------------------ ------------------- -------------------------------- 3.1 Charter of the Registrant (composite - 10-K April 30, 1998 3.1 conformed copy) 3.2 Bylaws of the Registrant 33-79430 S-1 August 1994 3.2 10.1 Settlement Letter dated April 27, 1994 33-79430 S-1 August 1994 10.7 between Miller Group, Inc. and the Management Group -29- 10.5 Participants Agreement dated as of 33-79430 S-1 August 1994 10.11 April 30, 1994 between the Registrant, Century Holdings, Inc., Century Wrecker Corporation, William G. Miller and certain former shareholders of Miller Group, Inc. 10.20 Technology Transfer Agreement dated 33-79430 S-1 August 1994 10.26 March 21, 1991 between Miller Group, Inc., Verducci, Inc. and Jack Verducci 10.21 Form of Noncompetition Agreement 33-79430 S-1 August 1994 10.28 between the Registrant and certain officers of the Registrant 10.22 Form of Nonexclusive Distributor 33-79430 S-1 August 1994 10.31 Agreement 10.23 Miller Industries, Inc. Stock Option 33-79430 S-1 August 1994 10.1 and Incentive Plan** 10.24 Form of Incentive Stock Option 33-79430 S-1 August 1994 10.2 Agreement** 10.25 Miller Industries, Inc. Cash Bonus 33-79430 S-1 August 1994 10.3 Plan** 10.26 Miller Industries, Inc. Non-Employee 33-79430 S-1 August 1994 10.4 Director Stock Option Plan** 10.27 Form of Director Stock Option 33-79430 S-1 August 1994 10.5 Agreement** 10.28 Employment Agreement dated October 14, 33-79430 S-1 August 1994 10.29 1993 between Century Wrecker Corporation and Jeffrey I. Badgley** 10.29 First Amendment to Employment Agreement 33-79430 S-1 August 1994 10.33 between Century Wrecker Corporation and Jeffrey I. Badgley** 10.30 Form of Employment Agreement between - Form 10-K April 30, 1995 10.37 Registrant and each of Messrs. Madonia and Mish**
-30-
INCORPORATED BY REFERENCE TO EXHIBIT REGISTRATION OR FILE FORM OR REPORT DATE OF REPORT NUMBER IN DESCRIPTION NUMBER REPORT - ------------ ----------------------------------------- ------------------------ ------------------- -------------------------------- 10.31 First Amendment to Miller Industries, - Form 10-K April 30, 1995 10.38 Inc. Non-Employee Director Stock Option Plan** 10.32 Second Amendment to Miller Industries, - Form 10-K April 30, 1996 10.39 Inc. Non-Employee Director Stock Option Plan** 10.33 Second Amendment to Miller Industries, - Form 10-K April 30, 1996 10.40 Inc. Stock Option and Incentive Plan** 10.34 Employment Agreement dated July 8, 1997 0-24298 Form 10-Q/A July 31, 1997 10 between the Registrant and William G. Miller** 10.35 Credit Agreement Among NationsBank of - Form 10-K April 30, 1998 10.35 Tennessee, N.A., the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.36 Negative Pledge Agreement Among - Form 10-K April 30, 1998 10.36 NationsBank of Tennessee, N.A., the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.37 Guaranty Agreement Among NationsBank of - Form 10-K April 30, 1998 10.37 Tennessee, N.A. and certain subsidiaries of Registrant dated January 30, 1998. 10.38 Stock Pledge Agreement Between - Form 10-K April 30, 1998 10.38 NationsBank of Tennessee, N.A. and the Registrant dated January 30, 1998. 10.39 Stock Pledge Agreement Between - Form 10-K April 30, 1998 10.39 NationsBank of Tennessee, N.A. and the certain subsidiaries of the Registrant dated January 30, 1998. 10.40 Revolving Note Among NationsBank of - Form 10-K April 30, 1998 10.40 Tennessee, N.A., the Registrant and certain subsidiaries of Registrant dated January 30, 1998.
-31-
INCORPORATED BY REFERENCE TO EXHIBIT REGISTRATION OR FILE FORM OR REPORT DATE OF REPORT NUMBER IN DESCRIPTION NUMBER REPORT - ------------ ----------------------------------------- ------------------------ ------------------- -------------------------------- 10.41 Revolving Note Among Bank of America, - Form 10-K April 30, 1998 10.41 FSB, the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.42 Revolving Note Among Wachovia Bank, - Form 10-K April 30, 1998 10.42 N.A., the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.43 Revolving Note Among First American - Form 10-K April 30, 1998 10.43 National Bank, the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.44 Swing Line Note Among NationsBank of - Form 10-K April 30, 1998 10.44 Tennessee, N.A., the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.45 LC Account Agreement Among NationsBank - Form 10-K April 30, 1998 10.45 of Tennessee, N.A., the Registrant and certain subsidiaries of Registrant dated January 30, 1998. 10.46 Amendment No. 1 to the Credit Agreement - Form 10-K April 30, 1998 10.46 Among NationsBank of Tennessee, N.A., the Registrant and certain subsidiaries of Registrant dated January 31, 1998. 10.47 Form of Indemnification Agreement dated - Form 10-Q September 14, 1998 10 June 8, 1998 by and between the Registrant and each of William G. Miller, Jeffrey I. Badgley, A. Russell Chandler, Paul E. Drack, Adam L. Dunayer, Stephen Furbacher, Frank Madonia, J. Vincent Mish, Richard H. Roberts, and Daniel N. Sebastian** 10.48 Employment Agreement between the - Form 10-Q December 15, 1998 10.1 Registrant and Jeffrey I. Badgley, dated September 11, 1998** -32- 10.49 Employment Agreement between the - Form 10-Q December 15, 1998 10.2 Registrant and Adam L. Dunayer, dated September 11, 1998** 10.50 Employment Agreement between the - Form 10-Q December 15, 1998 10.3 Registrant and Frank Madonia, dated September 11, 1998** 10.51 Agreement between the Registrant and - Form 10-Q December 15, 1998 10.4 Jeffrey I. Badgley, dated September 11, 1998** 10.52 Agreement between the Registrant and - Form 10-Q December 15, 1998 10.5 Adam L. Dunayer, dated September 11, 1998** 10.53 Agreement between the Registrant and - Form 10-Q December 15, 1998 10.6 Frank Madonia, dated September 11, 1998** 10.54 Employment Agreement between the * Registrant and James A McKinney, dated May 12, 1999** 10.55 Agreement between the Registrant and * James A. McKinney, dated May 12, 1999** 10.56 Amendment No. 3 to the Credit Agreement * Among Bank of America, N.A. d/b/a NationsBank, N.A. successor to NationsBank, N.A., the Registrant, and Certain Subsidiaries of Registrant dated July 27, 1999. 21 Subsidiaries of the Registrant * 23 Consent of Arthur Andersen LLP *** 24 Power of Attorney (see signature page) * 27 Financial Data Schedule ***
- ----------------------------------------------------- -33-
INCORPORATED BY REFERENCE TO EXHIBIT REGISTRATION OR FILE FORM OR REPORT DATE OF REPORT NUMBER IN DESCRIPTION NUMBER REPORT - ------------ ----------------------------------------- ------------------------ ------------------- --------------------------------
* Filed with initial filing of this Form 10-K. ** Management contract or compensatory plan or arrangement *** Filed herewith. (B) None. (C) The Registrant hereby files as exhibits to this Report the exhibits set forth in Item 14(a)3 hereof. (D) The Registrant hereby files as financial statement schedules to this Report the financial statement schedules set forth in Item 14(a)2 hereof. -34- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Miller Industries, Inc.: We have audited the accompanying consolidated balance sheets of MILLER INDUSTRIES, INC. (a Tennessee corporation) AND SUBSIDIARIES as of April 30, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1999. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Miller Industries, Inc. and subsidiaries as of April 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chattanooga, Tennessee August 5, 1999 F-1 MILLER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 1999 AND 1998 (In thousands, except share data)
ASSETS 1999 1998 ------ ---- ---- CURRENT ASSETS: Cash and temporary investments $ 9,331 $ 7,367 Accounts receivable, net of allowance for doubtful accounts of $3,702 and $2,117 in 1999 and 1998, respectively 81,109 67,008 Inventories 77,912 71,839 Deferred income taxes 4,244 4,217 Prepaid expenses and other 12,264 5,362 --------- --------- Total current assets 184,860 155,793 PROPERTY, PLANT, AND EQUIPMENT, net 95,984 85,849 GOODWILL, net 103,292 81,605 PATENTS, TRADEMARKS, AND OTHER PURCHASED PRODUCT RIGHTS, net 1,147 1,276 OTHER ASSETS 7,197 5,207 --------- --------- $ 392,480 $ 329,730 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 ------------------------------------ ---- ---- CURRENT LIABILITIES: Current portion of long-term obligations $ 4,170 $ 4,900 Accounts payable 42,783 27,883 Accrued liabilities and other 16,458 18,236 --------- --------- Total current liabilities 63,411 51,019 --------- --------- LONG-TERM OBLIGATIONS, less current portion 133,850 95,778 --------- --------- DEFERRED INCOME TAXES 7,916 2,697 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 9) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding 0 0 Common stock, $.01 par value; 100,000,000 shares authorized, 46,679,783 and 45,941,814 shares issued and outstanding at 1999 and 1998, respectively 467 459 Additional paid-in capital 144,607 139,480 Retained earnings 43,068 40,862 Accumulated other comprehensive income (expense) (839) (565) --------- --------- Total shareholders' equity 187,303 180,236 --------- --------- $ 392,480 $ 329,730 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets.
F-2 MILLER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED APRIL 30, 1999, 1998, AND 1997 (In thousands, except per share data)
1999 1998 1997 -------- -------- -------- NET SALES $525,932 $397,213 $292,394 -------- -------- -------- COSTS AND EXPENSES: Costs of operations 435,691 319,453 238,625 Selling, general, and administrative expenses 75,368 49,420 30,192 Restructuring costs 0 4,100 0 Interest expense, net 10,395 3,389 620 -------- -------- -------- Total costs and expenses 521,454 376,362 269,437 -------- -------- -------- INCOME BEFORE INCOME TAXES 4,478 20,851 22,957 INCOME TAXES 2,272 8,186 8,436 -------- -------- -------- NET INCOME $ 2,206 $ 12,665 $ 14,521 ======== ======== ======== NET INCOME PER COMMON SHARE: Basic $ 0.05 $ 0.28 $ 0.37 ======== ======== ======== Diluted $ 0.05 $ 0.27 $ 0.35 ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 46,338 44,559 39,565 ======== ======== ======== Diluted 47,266 46,201 41,454 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-3
MILLER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED APRIL 30, 1999, 1998, AND 1997 (In thousands, except share data) Accumulated Other Additional Comprehensive Common Paid-In Retained Income Stock Capital Earnings (Expense) Total ----- ------- -------- --------- ----- BALANCE, April 30, 1996 $ 373 $ 54,808 $ 16,749 $ (17) $ 71,913 Comprehensive income: Net income 0 0 14,521 0 14,521 Other comprehensive income, net of tax: Foreign currency translation adjustments 0 0 0 (425) (425) --------- Comprehensive income 14,096 Exercise of stock options 6 1,170 0 0 1,176 Issuance of 1,943,028 common shares through a public offering 19 29,225 0 0 29,244 Issuance of 2,709,503 common shares in acquisitions 27 25,570 (2,530) 0 23,067 Distributions to former shareholders of pooled entities 0 0 (713) 0 (713) -------- --------- -------- --------- --------- BALANCE, April 30, 1997 425 110,773 28,027 (442) 138,783 Comprehensive income: Net income 0 0 12,665 0 12,665 Other comprehensive income, net of tax: Foreign currency translation adjustments 0 0 0 (123) (123) --------- Comprehensive income 12,542 Exercise of stock options 2 1,558 0 0 1,560 Issuance of 3,709,560 common shares in acquisitions 37 31,356 170 0 31,563 Repurchase of 547,900 common shares (5) (4,207) 0 0 (4,212) -------- --------- -------- --------- --------- BALANCE, April 30, 1998 459 139,480 40,862 (565) 180,236 Comprehensive income: Net income 0 0 2,206 0 2,206 Other comprehensive income, net of tax: Foreign currency translation adjustments 0 0 0 (274) (274) --------- Comprehensive income 1,932 Exercise of stock options 1 93 0 0 94 Issuance of 1,242,167 common shares in acquisitions 12 7,368 0 0 7,380 Repurchase of 500,000 common shares (5) (2,334) 0 0 (2,339) -------- --------- -------- --------- --------- BALANCE, April 30, 1999 $ 467 $ 144,607 $ 43,068 $ (839) $ 187,303 ======== ========= ========= ======== ========= The accompanying notes are an integral part of these consolidated statements.
F-4
MILLER INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30, 1999, 1998, AND 1997 (In thousands) 1999 1998 1997 -------- -------- -------- OPERATING ACTIVITIES: Net income $ 2,206 $ 12,665 $ 14,521 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 15,500 10,247 5,782 Gain on disposals of property, plant, and equipment (837) (1,359) (170) Deferred income tax provision (benefit) 5,054 927 (703) Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable (10,181) (13,281) (10,385) Inventories (6,209) (2,316) (20,442) Prepaid expenses and other (9,706) (2,462) 1,312 Accounts payable 12,554 (17,993) (1,124) Accrued liabilities and other (4,906) (6,742) 200 -------- -------- -------- Net cash provided by (used in) operating activities 3,475 (20,314) (11,009) -------- -------- -------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (19,867) (25,286) (7,701) Purchases of property, plant, and equipment (18,998) (26,515) (11,073) Proceeds from sales of property, plant, and equipment 6,606 4,345 297 Payments received on notes receivable 272 627 0 Proceeds from sale of finance receivables 0 3,861 24,596 Funding of finance receivables 0 (2,262) (28,679) Other 0 (1,027) (304) -------- -------- -------- Net cash used in investing activities (31,987) (46,257) (22,864) -------- -------- -------- FINANCING ACTIVITIES: Net borrowings (payments) under line of credit 40,000 85,000 (5,236) Payments on long-term obligations (7,579) (17,292) (7,365) Borrowings under long-term obligations 405 1,020 1,374 Repurchase of common stock (2,339) (4,212) 0 Proceeds from exercise of stock options 94 966 546 Proceeds from issuance of common stock 0 0 29,244 Distributions to former shareholders of pooled entities 0 0 (713) Other 0 0 (560) -------- -------- -------- Net cash provided by financing activities 30,581 65,482 17,290 -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND TEMPORARY INVESTMENTS (105) (52) (26) NET CHANGE IN CASH AND TEMPORARY INVESTMENTS 1,964 (1,141) (16,609) CASH AND TEMPORARY INVESTMENTS, beginning of year 7,367 8,508 25,117 -------- -------- -------- CASH AND TEMPORARY INVESTMENTS, end of year $ 9,331 $ 7,367 $ 8,508 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest, net of amounts capitalized $ 10,433 $ 3,440 $ 1,298 ======== ======== ======== Cash payments for income taxes $ 5,011 $ 7,662 $ 7,898 ======== ======== ======== The accompanying notes are an integral part of these consolidated statements.
F-5 MILLER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 1999 AND 1998 1. ORGANIZATION AND NATURE OF OPERATIONS Miller Industries, Inc. and subsidiaries ("the Company") is an integrated provider of vehicle towing and recovery equipment, systems and services. The principal markets for the towing and recovery equipment are independent distributors and users of towing and recovery equipment located primarily throughout the United States, Canada, Europe, Asia, and the Middle East. The Company's products are marketed under the brand names of Century, Challenger, Holmes, Champion, Eagle, Jige, Boniface, Vulcan, and Chevron. The truck chassis on which towing and recovery equipment are installed are either purchased by Miller or provided by customers. The Company markets its towing and recovery services in the United States through its wholly-owned subsidiary RoadOne, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONSOLIDATION The accompanying consolidated financial statements include the accounts of Miller Industries, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated. CASH AND TEMPORARY INVESTMENTS Cash and temporary investments include all cash and cash equivalent investments with original maturities of three months or less, primarily consisting of repurchase agreements. F-6 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and temporary investments, accounts receivable, accounts payable, and accrued liabilities are reasonable estimates of their fair values because of the short maturity of these financial instruments. The carrying values of long-term obligations are reasonable estimates of their fair values based on the rates available for obligations with similar terms and maturities. INVENTORIES Inventory costs include materials, labor, and factory overhead. Inventories are stated at the lower of cost or market, determined on a first-in, first-out basis. Inventories at April 30, 1999 and 1998 consisted of the following (in thousands): 1999 1998 ------- ------- Chassis $18,340 $14,211 Raw materials 16,348 22,027 Work in process 12,180 11,470 Finished goods 31,044 24,131 ------- ------- $77,912 $71,839 ======= ======= PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are used for income tax purposes. Estimated useful lives range from 20 to 30 years for buildings and improvements and 5 to 10 years for machinery and equipment, furniture, fixtures, vehicles, and software costs. Expenditures for routine maintenance and repairs are charged to expense as incurred. Expenditures related to major overhauls and refurbishments of towing services equipment that extend the related useful lives are capitalized. Internal labor is used in certain capital projects. Property, plant, and equipment at April 30, 1999 and 1998 consisted of the following (in thousands): 1999 1998 --------- --------- Land $ 4,535 $ 5,027 Buildings and improvements 23,354 18,849 Machinery and equipment 88,429 80,302 Furniture and fixtures 11,317 8,448 Software costs 4,786 1,660 Construction in progress 810 957 --------- --------- 133,231 115,243 Less accumulated depreciation (37,247) (29,394) --------- --------- $ 95,984 $ 85,849 ========= ========= F-7 NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is calculated by dividing net income by the weighted average number of common and potential dilutive common shares outstanding. Diluted net income per share takes into consideration the assumed conversion of outstanding stock options resulting in 0.9 million, 1.6 million, and 1.9 million potential dilutive common shares for the years ended April 30, 1999, 1998, and 1997, respectively. Per share amounts do not include the assumed conversion of stock options with exercise prices greater than the average share price because to do so would have been antidilutive for the periods presented. In September 1996 and December 1996, the Company effected a two-for-one and a three-for-two common stock split, respectively, each in the form of a stock dividend. All historical share and per share amounts have been retroactively restated to reflect the common stock splits. GOODWILL Goodwill is being amortized on a straight-line basis over 40 years. The Company periodically evaluates whether events and circumstances have occurred which would indicate that goodwill is not recoverable. Accumulated amortization of goodwill was $4,709,000 and $2,233,000 at April 30, 1999 and 1998, respectively. Amortization expense for 1999, 1998, and 1997 was $2,476,000, $1,434,000, and $253,000, respectively. PATENTS, TRADEMARKS, AND OTHER PURCHASED PRODUCT RIGHTS The cost of acquired patents, trademarks, and other purchased product rights are capitalized and amortized using the straight-line method over various periods not exceeding 20 years. Total accumulated amortization of these assets at April 30, 1999 and 1998 was $561,000 and $364,000, respectively. Amortization expense for 1999, 1998, and 1997 was $473,000, $271,000, and $64,000, respectively. ACCOUNTS PAYABLE Accounts payable includes checks written but not yet presented for payment at April 30, 1999 and 1998 of $5,215,000 and $6,409,000, respectively. ACCRUED LIABILITIES AND OTHER Accrued liabilities and other consisted of the following at April 30, 1999 and 1998 (in thousands): 1999 1998 ------- ------- Accrued wages, commissions, bonuses, and benefits $ 9,041 $ 7,607 Accrued income taxes 265 828 Other 7,152 9,801 ------- ------- $16,458 $18,236 ======= ======= F-8 PRODUCT WARRANTY The Company provides a one-year limited product and service warranty on certain of its products. The Company provides for the estimated cost of this warranty at the time of sale. Warranty expense for 1999, 1998, and 1997 was $1,719,000, $1,035,000, and $1,057,000, respectively. CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable. The Company places its cash investments with high-quality financial institutions and limits the amount of credit exposure to any one institution. The Company's trade receivables are primarily from independent distributors of towing and recovery equipment and towing service customers, and such receivables are generally not collateralized. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. REVENUE RECOGNITION Revenue is recorded by the Company when equipment is shipped to independent distributors or other customers. Revenue from towing services is recognized when services are performed. INTEREST RATE SWAP AGREEMENT The Company has entered into an interest rate swap agreement for the purpose of managing its interest rate exposure. The swap agreement is accounted for on an accrual basis and amounts to be paid or received under the agreement are recorded in interest expense in the period in which they accrue. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, which delayed the effective date of SFAS No. 133 until June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the timing of or method of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial information to conform with the 1999 presentation. F-9 3. BUSINESS COMBINATIONS All businesses acquired through April 30, 1999 which were accounted for under the purchase method of accounting are included in the accompanying consolidated financial statements from the dates of acquisition. Any excess of the aggregate purchase price over the estimated fair value of net assets acquired has been recognized as a component of goodwill in the accompanying consolidated financial statements. All significant businesses acquired through April 30, 1998 which were accounted for under the pooling-of-interests method of accounting have been included retroactively in the accompanying consolidated financial statements as if the companies had operated as one entity since inception. During fiscal 1997, the Company purchased three distributors of towing and recovery equipment for an aggregate purchase price of $4,073,000 which consisted of 318,157 shares of common stock. The Company also purchased 13 towing service companies for an aggregate purchase price of $29,239,000, which consisted of $7,479,000 in cash and $21,760,000 (1,639,491 shares) of common stock. These acquisitions have been accounted for under the purchase method. The excess of the aggregate purchase price over the estimated fair value of net assets acquired was approximately $32,062,000. Also, during fiscal 1997, the Company acquired all of the outstanding capital stock of Vulcan International, Inc., a manufacturer of towing and recovery equipment and an additional three distributors of towing and recovery equipment for an aggregate purchase price of $13,085,000, which consisted of 1,132,513 shares of common stock. The Company also purchased all of the outstanding common stock of 16 towing service companies for an aggregate purchase price of $28,053,000 which consisted of $250,000 in cash and $27,803,000 (2,217,680 shares) of common stock. These acquisitions were accounted for under the pooling-of-interests method. During fiscal 1998, the Company purchased Chevron, Inc., a manufacturer of towing and recovery equipment, and three distributors of towing and recovery equipment for an aggregate purchase price of $11,525,000, which consisted of $10,818,000 in cash and $707,000 (44,113 shares) of common stock. The Company also purchased 38 towing service companies for an F-10 aggregate purchase price of $45,065,000 which consisted of $14,468,000 in cash and $30,597,000 (2,798,217 shares) of common stock. These acquisitions have been accounted for using the purchase method of accounting. The excess of the aggregate purchase price over the estimated fair value of net assets acquired was approximately $42,516,000. Also, during fiscal 1998, the Company purchased all of the outstanding capital stock of an additional distributor of towing and recovery equipment for a purchase price of $2,190,000, which consisted of 151,046 shares of common stock. The Company also purchased all of the outstanding common stock of nine towing service companies for an aggregate purchase price of $8,398,000, which consisted of 716,184 shares of common stock. These acquisitions were accounted for using the pooling-of-interests method. During fiscal 1999, the Company purchased 35 towing service companies for an aggregate purchase price of $29,571,000, which consisted of $21,305,000 in cash, $950,000 in promissory notes and $7,316,000 (1,232,905 shares) of common stock. These acquisitions have been accounted for under the purchase method. The accompanying consolidated financial statements reflect the preliminary allocation of purchase price as the purchase price has not been finalized for all transactions. The excess of the aggregate purchase price over the estimated fair value of net assets acquired was approximately $20,058,000. The following unaudited pro forma summary combines the results of operations of (i) all 1999 purchase combinations and the Company as if these combinations had occurred at the beginning of fiscal 1998 and (ii) all 1998 and 1997 purchase combinations, the insignificant pooling-of-interests combinations, and the Company as if these combinations had occurred at the beginning of fiscal 1997, after giving effect to certain adjustments, including amortization of intangible assets and related income tax effects. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company and these acquisitions had constituted a single entity during these periods (in thousands, except per share data).
1999 1998 1997 -------------------- --------------------- --------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- -------- -------- -------- -------- -------- Net sales $525,932 $541,904 $397,213 $489,104 $292,394 $406,194 ======== ======== ======== ======== ======== ======== Net income $ 2,206 $ 3,957 $ 12,665 $ 18,118 $ 14,521 $ 16,099 ======== ======== ======== ======== ======== ======== Diluted net income per share $ 0.05 $ 0.08 $ 0.27 $ 0.38 $ 0.35 $ 0.39 ======== ======== ======== ======== ======== ========
Subsequent to April 30, 1999, the Company acquired two additional towing service companies for approximately $2,275,000 in cash. Also, the Company has executed letters of intent to acquire five additional towing service companies. F-11 4. LONG-TERM OBLIGATIONS AND LINE OF CREDIT LONG-TERM OBLIGATIONS Long-term obligations consisted of the following at April 30, 1999 and 1998 (in thousands):
1999 1998 --------- --------- Outstanding borrowings under line of credit $ 125,000 $ 85,000 Mortgage notes payable, weighted average interest rate at 5.40%, payable in monthly installments, maturing 2003 to 2011 3,209 3,508 Equipment notes payable, weighted average interest rate at 9.69%, payable in monthly installments, maturing 1999 to 2005 6,894 9,220 Other notes payable 2,917 2,950 --------- --------- 138,020 100,678 Less current portion (4,170) (4,900) --------- --------- $ 133,850 $ 95,778 ========= =========
At April 30, 1999, future maturities of long-term obligations (excluding future cash outflows for interest) are as follows (in thousands): 2000 $ 4,170 2001 128,059 2002 1,652 2003 1,270 2004 1,097 Thereafter 1,772 Certain equipment and manufacturing facilities are pledged as collateral under the mortgage and equipment notes payable. LINE OF CREDIT At April 30, 1999, the Company had an unsecured revolving credit facility of $175,000,000 (the "Credit Facility") for working capital and other general corporate purposes. Borrowings under the Credit Facility bear interest at a rate equal to the London Interbank Offered Rate, or the prime rate plus a margin ranging from 0.75% to 2.00% based on a specified F-12 ratio of funded indebtedness to earnings (6.68% at April 30, 1999) or the prime rate, as elected by the Company. The weighted average interest rate for borrowings outstanding under the Credit Facility during 1999 and 1998 was approximately 7.05% and 6.43%, respectively. Interest is payable monthly. The Credit Facility is due on January 30, 2001 and is renewable on an annual basis thereafter. The Credit Facility imposes restrictions on the Company with respect to the maintenance of certain financial ratios, the incurrence of indebtedness, the sale of assets, capital expenditures, and mergers and acquisitions. At April 30, 1999, the Company was in violation of certain of these financial ratio covenants for which it has received a waiver. The Company obtained amended agreements dated July 27, 1999 in which certain financial ratio covenants were amended and the Company granted the lending institutions a security interest in substantially all assets of the Company. On May 1, 1998, the Company entered into an interest rate swap agreement covering a notional amount of $50 million of variable rate debt to fix the interest rate at 5.68% plus the applicable margin. The agreement expires at the end of three years unless cancelled by the bank at the end of two years. If the Company elected to terminate the swap agreement, the cost as of April 30, 1999 would have been approximately $480,000. The Company is exposed to credit losses in the event of nonperformance by the counterparty to its interest rate swap agreement but has no off balance sheet risk of accounting loss. The Company anticipates, however, that the counterparty will be able to fully satisfy its obligations under the agreement. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties. 5. STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for stock option grants since the options have exercise prices equal to the market value of the common stock at the date of grant. In accordance with the Company's stock-based compensation plans, the Company may grant incentive stock options as well as non-qualified and other stock-related incentives to officers, employees and nonemployee directors of the Company. Options vest ratably over a four-year period beginning on the grant date and expire ten years from the date of grant. Shares available for granting options at April 30, 1999 and 1998 were 0.4 million and 1.5 million, respectively. For SFAS No. 123 purposes, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1999, 1998, and 1997, respectively: expected dividend yield of 0%; expected volatility of 52%, 51% and 42%; risk-free interest rate of 5.23%, 5.99% and 6.33%; and expected lives of 5.5 years. Using these assumptions, the fair value of options granted in 1999, 1998, and 1997 is approximately $2,820,000, $5,058,000, and $7,457,000, respectively, which would be amortized as compensation expense over the vesting period of the options. F-13 Had compensation cost for 1999, 1998, and 1997 stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS No. 123, the Company's net income and net income per share would have been adjusted to the pro forma amounts indicated below:
1999 1998 1997 --------- ---------- ---------- Net income (in thousands): As reported $ 2,206 $ 12,665 $ 14,521 Pro forma (614) 10,447 13,624 Basic net income per share: As reported $ 0.05 $ 0.28 $ 0.37 Pro forma (0.01) 0.24 0.34 Diluted net income per share: As reported $ 0.05 $ 0.27 $ 0.35 Pro forma (0.01) 0.23 0.33
The pro forma effect on net income in this disclosure is not representative of the pro forma effect on net income in future years because its does not take into consideration pro forma compensation expense related to grants made prior to 1996. A summary of the activity of stock options during 1999, 1998, and 1997 is presented below (shares in thousands):
1999 1998 1997 --------------------- -------------------- ---------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Under Exercise Under Exercise Under Exercise Option Price Option Price Option Price ------ --- ----- ------ --------- ----- --------- Outstanding at Beginning of Year 4,146 $ 7.97 3,768 $ 6.39 2,776 $ 2.98 Granted 1,238 6.44 818 13.46 1,529 11.28 Exercised (34) 2.48 (300) 3.24 (515) 2.55 Forfeited (184) 11.18 (140) 7.62 (22) 6.67 ------ --------- ------ --------- ----- --------- Outstanding at End of Year 5,166 $ 7.43 4,146 $ 7.97 3,768 $ 6.39 ===== ========= ===== ========= ===== ========= Options exercisable at year end 2,683 $ 6.18 1,643 $ 5.18 811 $ 3.25 ===== ========= ===== ========= ===== ========= Weighted average fair value of options granted $ 3.15 $ 6.84 $ 5.54 ========= ========= =========
F-14 A summary of options outstanding under the Company's stock-based compensation plans at April 30, 1999 is presented below (shares in thousands):
Shares Weighted Weighted Average Exercise Under Average Shares Exercise Price of Price Range Option Remaining Life Exercisable Shares Exercisable --------------------------- ------- -------------- ----------- ------------------ $ 2.33 - $ 3.37 1,123 5.3 1,124 $ 2.37 3.78 - 5.48 1,131 7.6 548 4.10 5.75 - 7.75 856 8.9 71 6.68 8.79 - 12.88 1,330 7.5 683 10.77 13.38 - 18.00 726 8.1 257 14.96 ----- --- ----- ------- Total 5,166 7.3 2,683 $ 6.18 ===== === ===== =======
6. LEASE COMMITMENTS The Company has entered into various operating leases for buildings, office equipment, and trucks. Rental expense under these leases was $11,256,000, $7,952,000, and $455,000, for 1999, 1998, and 1997, respectively. At April 30, 1999, future minimum lease payments under noncancellable operating leases for the next five fiscal years are as follows (in thousands): 2000 $ 10,663 2001 9,393 2002 8,052 2003 5,745 2004 3,027 7. LITIGATION In January 1998, the Company received a letter from the Antitrust Division of the Department of Justice (the "Division") stating that it was conducting a civil investigation covering "competition in the tow truck industry." The letter asked that the Company preserve its records related to the tow truck industry, particularly documents related to sales and prices of products and parts, acquisition of other companies in the industry, distributor relations, patent matters, competition in the industry generally, and activities of other companies in the industry. In March 1998, the Company received a Civil Investigative Demand ("CID") issued by the Division as part of its continuing investigation of whether there are, have been or may be violations of the federal antitrust statutes in the tow truck industry. Under this CID, the Company has produced information and documents to assist in the investigation, has corresponded and met with the Division concerning the investigation, and is continuing to cooperate with the Division. It is unknown at this time what the eventual outcome of the investigation will be. During September, October, and November 1997, five lawsuits were filed by certain persons who seek to represent a class of shareholders who purchased shares of the Company's common stock during the period from F-15 either October 15 or November 6, 1996 to September 11, 1997. Four of the suits were filed in the United States District Court for the Northern District of Georgia. The remaining suit was filed in the Chancery Court of Hamilton County, Tennessee. In general, the individual plaintiffs in all of the cases allege that they were induced to purchase the Company's common stock on the basis of allegedly actionable misrepresentations or omissions about the Company and its business and, as a result, were thereby damaged. Four of the complaints assert claims under Sections 10(b) and 20 of the Securities Exchange Act of 1934. The complaints name as the defendants the Company and various of its present and former directors and officers. The plaintiffs in the four actions which involved claims in Federal Court under the Securities Exchange Act of 1934 have consolidated those actions. The Company filed a motion to dismiss in the consolidated case which was granted in part and denied in part. The proposed class was certified by order dated May 27, 1999. The Company filed a motion to dismiss in the Tennessee case which was granted in its entirety. The plaintiffs in that case, with the permission from the Court, amended and refiled their complaint, which was dismissed with prejudice by order of the Court dated March 11, 1999. On April 5, 1999, counsel for plaintiffs filed a notice of appeal. In both these actions, the Company has denied liability and will continue to vigorously defend itself. In January 1996, the Company was awarded a judgment in a patent infringement suit in the United States District Court for the Northern District of Iowa at Sioux City, Iowa in which the jury found the defendant manufacturer and distributor of towing equipment willfully infringed both the Company's underlift parallel linkage and L-arm patents and that the common owner of the manufacturer and distributor induced the infringement. The judgment was paid to the Company in August 1996 in the amount of approximately $1.8 million, which included enhanced damages for willfulness and pre-judgment and post-judgment interest and a broad permanent injunction against future infringement by the defendants. Defendants were not granted a license to use the Company's L-arm technology. With this payment, both the Company and the defendants withdrew their appeals, and the judgment, therefore, became a final judgment. In addition to the shareholder litigation described above, the Company is, from time to time, a party to litigation arising in the normal course of business. The ultimate disposition of such matters cannot be determined presently, but will not, in the opinion of management, based in part on the advice of legal counsel, have a material adverse effect on the financial position or results of operations of the Company. 8. INCOME TAXES Deferred tax assets and liabilities are determined based on the differences between the financial and tax bases of existing assets and liabilities using the currently enacted tax rates in effect for the year in which the differences are expected to reverse. F-16 The provision for income taxes consisted of the following for 1999, 1998, and 1997 (in thousands): 1999 1998 1997 ------- ------- ------- Current: Federal $(2,855) $ 6,300 $ 7,973 State (336) 720 938 Foreign 409 239 228 ------- ------- ------- (2,782) 7,259 9,139 ------- ------- ------- Deferred: Federal 4,498 713 (612) State 529 81 (72) Foreign 27 133 (19) ------- ------- ------- 5,054 927 (703) ------- ------- ------- $ 2,272 $ 8,186 $ 8,436 ======= ======= ======= The principal differences between the federal statutory tax rate and the consolidated effective tax rate for 1999, 1998, and 1997 were as follows:
1999 1998 1997 ---- ---- ---- Federal statutory tax rate 34.0% 35.0% 34.0% State taxes, net of federal tax benefit 4.0 4.0 4.0 Non-deductible goodwill amortization 17.2 1.7 0.6 Other (4.5) (1.4) (1.9) ---- ---- ---- Effective tax rate 50.7% 39.3% 36.7% ==== ==== ====
F-17 Deferred income tax assets and liabilities for 1999 and 1998 reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting and income tax reporting purposes. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at April 30, 1999 and 1998 are as follows (in thousands):
1999 1998 ------- ------ Deferred tax assets: Allowance for doubtful accounts $ 1,191 $ 601 Accruals and reserves 2,527 3,523 Inventory and related reserves 148 253 Other 44 38 ------- ------ Total deferred tax assets 3,910 4,415 ------- ------ Deferred tax liabilities: Property, plant, and equipment 7,004 2,680 Other 578 215 ------- ------ Total deferred tax liabilities 7,582 2,895 ------- ------ Net deferred tax (liability) asset $(3,672) $1,520 ======= ======
9. SALE OF FINANCE RECEIVABLES In April 1997, the Company entered into an agreement to sell certain finance receivables to a third party leasing company for $24,596,000. An additional $3,861,000 was sold in October 1997. The resulting gain on these sales did not have a material impact on the Company's consolidated financial statements. The agreement contingently obligates the Company to indemnify the leasing company for any losses it incurs up to specified amounts in the event the lessee defaults. The Company believes that any equipment returned as a result of lessee defaults could be sold to third parties at amounts approximating the debt obligations under the leases. The Company's aggregate potential liability under the agreement as of April 30, 1999 and 1998 was $2,733,000 and $5,393,000, respectively. Management believes its reserves for such recourse provisions are adequate to cover its exposures under the agreement. 10. PREFERRED STOCK The Company has authorized 5,000,000 shares of undesignated preferred stock which can be issued in one or more series. The terms, price, and conditions of the preferred shares will be set by the board of directors. No shares have been issued. 11. EMPLOYEE BENEFIT PLAN During 1996, the Company established a contributory retirement plan for all full-time employees with at least 90 days of service. Effective January 1, 1999, the Company split the plan into two identical plans by F-18 operating segment. These plans are designed to provide tax-deferred income to the Company's employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code. These plans provide that each participant may contribute up to 15% of his or her salary. The Company matches 33.33% of the first 3% of participant contributions. Matching contributions vest over a period of five years. All funds contributed by the participants are immediately vested. Under the terms of the plans, the Company may also make discretionary profit-sharing contributions. Profit-sharing contributions are allocated among participants based on their annual compensation. Each participant has the right to direct the investment of his or her funds among certain named investment options. Upon death, disability, retirement, or the termination of employment, participants may elect to receive periodic or lump-sum payments. Additionally, amounts may be withdrawn in cases of demonstrated hardship. Company contributions to the plans were not significant in 1999, 1998, and 1997. 12. STOCK REPURCHASE PLAN The Company's board of directors approved a share repurchase plan during fiscal 1998 under which the Company may repurchase up to 2,000,000 shares of its common stock from time to time until September 30, 1999. It is expected that such repurchased shares would be issued as consideration in business acquisitions currently being negotiated pursuant to the Company's ongoing acquisition strategy. All shares purchased under the plan during fiscal 1999 and 1998 (500,000 shares at a cost of $2.3 million for the year ended April 30, 1999 and 547,900 shares at a cost of $4.2 million for the year ended April 30, 1998) were reissued as consideration for towing service companies acquired prior to April 30, 1999. 13. RESTRUCTURING COSTS In September 1997, the Company announced its intention to further consolidate its domestic wrecker production at its Ooltewah, Tennessee facility. The consolidation entailed the closure of the Olive Branch, Mississippi facility with the relocation of wrecker production to Ooltewah. All equipment relocation and production consolidation was completed by April 1998. In the second quarter of fiscal 1998, the Company recorded a pretax restructuring charge of $4.1 million to provide for the plant closing and consolidation of manufacturing operations. Of the $4.1 million restructuring charge, approximately $0.5 million related to workforce reductions of approximately 150 employees and associated costs. Also, $1.9 million of asset valuation losses relating to plant and machinery and equipment writedowns is included in the restructuring charge. The balance of the charge covers lease terminations, property holding costs, and other shutdown related costs. At April 30, 1999 and 1998, approximately $3.9 million and $2.9 million, respectively, had been charged against the related reserves. F-19 14. SEGMENT INFORMATION During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement requires financial information to be reported on the basis that management uses for evaluating segment performance and making operating decisions. The Company operates in two principal operating segments: (i) towing and recovery equipment and (ii) towing services. The accounting policies of the reportable segments are the same as those described in Note 2. Management evaluates the performance of its operating segments separately to individually monitor the different factors affecting performance. The Company measures the performance of its operating segments based on net revenue and operating income. Income taxes are managed on a Company-wide basis. Segment performance is also evaluated based on profit or loss before taxes.
Towing and Recovery Towing Equipment Services Eliminations Consolidate --------- -------- ------------ ----------- (In Thousands) 1999 Net sales-external $ 342,388 $183,544 $ 0 $525,932 Net sales-intersegment 4,850 0 (4,850) 0 Depreciation and amortization 3,853 11,647 0 15,500 Operating income 14,867 430 (424) 14,873 Interest expense, net 4,889 5,506 0 10,395 Income (loss) before income taxes 9,553 (5,075) 0 4,478 Capital expenditures 7,170 11,828 0 18,998 Total assets 257,959 187,084 (52,563) 392,480 1998 Net sales-external $ 282,241 $ 114,972 $ 0 $397,213 Net sales-intersegment 2,398 0 (2,398) 0 Depreciation and amortization 3,495 6,752 0 10,247 Operating income 19,163 5,167 (90) 24,240 Interest expense, net 933 2,456 0 3,389 Income before income taxes 16,317 4,534 0 20,851 Capital expenditures 5,851 20,664 0 26,515 Total assets 223,647 146,996 (40,913) 329,730 F-20 1997 Net sales-external $ 254,977 $ 37,417 $ 0 $292,394 Net sales-intersegment 0 0 0 0 Depreciation and amortization 2,983 2,799 0 5,782 Operating income 21,200 2,377 0 23,577 Interest (income) expense, net (271) 891 0 620 Income before income taxes 21,471 1,486 0 22,957 Capital expenditures 7,996 3,077 0 11,073 Total assets 161,120 65,557 (11,380) 215,297
Total net sales to foreign countries were not significant in 1999, 1998, and 1997. Total long-lived assets located in foreign countries were not significant at April 30, 1999, 1998, and 1997. 15. QUARTERLY FINANCIAL INFORMATION (unaudited) The following is a summary of the unaudited quarterly financial information for the years ended April 30, 1999 and 1998 (in thousands, except per share data):
Basic Diluted Net Net Income Income Net Operating Net (Loss) Per (Loss) Per Sales Income Income Share Share ----- ------ ------ ----- ----- Year ended April 30, 1999: First quarter $117,754 $ 6,684 $ 2,684 $0.06 $0.06 Second quarter 134,055 7,265 3,079 0.07 0.07 Third quarter 132,629 4,443 931 0.02 0.02 Fourth quarter 141,494 (3,519) (4,488) (0.10) (0.10) --------- -------- -------- ----- ----- Total $525,932 $14,873 $ 2,206 $0.05 $0.05 ======== ======= ======== ===== ===== Year ended April 30, 1998: First quarter $ 85,353 $ 7,924 $ 4,798 $0.11 $0.11 Second quarter 94,727 4,117 2,277 0.05 0.05 Third quarter 105,221 5,081 2,391 0.05 0.05 Fourth quarter 111,912 7,118 3,199 0.07 0.07 --------- -------- -------- ----- ----- Total $ 397,213 $ 24,240 $ 12,665 $0.28 $0.27 ========= ======== ======== ===== ===== Amounts as restated in public filings on Forms 10Q/A.
In connection with its annual physical inventory counts, the Company identified certain adjustments that it deemed necessary to more accurately state the previously filed fiscal 1999 quarterly financial statements. During the interim periods, the Company records inventory using estimated margins. While this method has proven to be reliable in the past, this year's physical inventory counts revealed aggregate adjustments which the Company believes to be attributable to material, production, and other inventory costs being higher, and the related utilization being less efficient than estimated during the year. The sum of quarterly earnings per share may differ from annual earnings per share due to rounding. F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS To Miller Industries, Inc. We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Miller Industries, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated August 5, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chattanooga, Tennessee August 5, 1999 S-1 MILLER INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Accounts Balance at Beginning Charged to Charged to Written End of of Period Expenses Other Off Period --------- -------- ----- --- ------ (In Thousands) Year ended April 30, 1997: Deduction from asset accounts: Allowance for doubtful accounts $1,265 174 474 (139) $1,774 Year ended April 30, 1998: Deduction from asset accounts: Allowance for doubtful accounts $1,774 214 1,082 (953) $2,117 Year ended April 30, 1999: Deduction from asset accounts: Allowance for doubtful accounts $2,117 2,123 175 (713) 3,702 other addition to the allowance for doubtful accounts results from the acquisitions in fiscal 1997, 1998 and 1999 which were accounted for under the purchase method of accounting.
S-2 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, on the 12th day of August, 1999. MILLER INDUSTRIES, INC. By: /s/ Jeffrey I. Badley Jeffrey I. Badgley, President, Chief Executive Officer and Director 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 in the capacities indicated on the 12th day of August, 1999. Signature Title /s/ William G. Miller* Chairman of the Board of Directors William G. Miller /s/ Jeffrey I. Badgley President, Chief Executive Officer Jeffrey I. Badgley and Director /s/ J. Vincent Mish* Vice President, Treasurer and J. Vincent Mish Chief Financial Officer (Principal Financial and Accounting Officer) /s/ A. Russell Chandler, III* Director A. Russell Chandler, III /s/ Paul E. Drack* Director Paul E. Drack /s/ Richard H. Roberts* Director Richard H. Roberts /s/ James A. McKinney* Chief Executive Officer James A. McKinney - RoadOne, Inc. and Director * By: /s/ Jeffrey I. Bedgley Jeffrey I. Badgley, attorney in fact II-1 EXHIBIT INDEX EXHIBIT DESCRIPTION 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (for SEC use only) EX-23 2 ARTHUR ANDERSEN CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into Miller Industries, Inc.'s previously filed Registration Statements on Form S-4 (File No. 333-34641) and Form S-8 (File No. 33-82282). ARTHUR ANDERSEN LLP Chattanooga, Tennessee August 5, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 0000924822 MILLER INDUSTRIES, INC. /TN 1,000 YEAR APR-30-1999 MAY-01-1998 APR-30-1999 9,331 0 81,109 0 77,912 184,860 133,231 37,247 392,480 63,411 133,850 0 0 467 186,836 392,480 525,932 525,932 435,691 511,059 0 0 10,395 4,478 2,272 2,206 0 0 0 2,206 .05 .05
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