** **

 

**United States**

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark one)**

| **x**  | **ANNUAL REPORT UNDER SECTION 13 OR  15(d) OF THE** |
|--------|---------------------------------------------------------------|
|   | **SECURITIES EXCHANGE ACT OF 1934**                           |

 

**For thefiscal year ended December 31, 2007**

 

**OR**

 

| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
|------------|-------------------------------------------------------------------------|
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                     |

 

**For thetransition period from                        to**

 

**Commissionfile number 333-123598**

 

**J.B.POINDEXTER & CO., INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **76-0312814**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 

**600 Travis**

### **Suite 200**

### **Houston,Texas 77002**

(Address of principalexecutive offices)

(Zip Code)

 

**(713)  655-9800**

(Registrant’stelephone number, including area code)

 

Securities registered pursuant to Section 12(b) ofthe Act:  **None**

 

Name of each exchange which registered:  **None**

 

Securities registered pursuant to Section 12(g) ofthe Act:  **None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes  o   No  x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.  Yes  x   No  o

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.)  Yes  o   No  x

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates as of March 28, 2008 was $0.00.

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large  accelerated filer  o | Accelerated filer  o | Non-accelerated filer  x                 | Smaller  reporting company  o |
|----------------------------------|---------------------------|-----------------------------------------------|------------------------------------|
|                             |                      | (Do not check if a smaller reporting company) |                               |

 

Asof March 28, 2008, the registrant had 100,000 shares authorized and 3,059shares of common stock issued.

 

Documentsincorporated by reference. **None**

 

 

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

 

**Table of Contents**

 
| **PART I**   | ** **                                                                                                         | ** ** |
|-------------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                                         | ** ** |
| Item 1.           | Business                                                                                                           | 2          |
| Item  1a.         | Risk  Factors                                                                                                      | 11         |
| Item 1b.          | Unresolved Staff  Comments                                                                                         | 15         |
| Item 2.           | Properties                                                                                                         | 16         |
| Item  3.          | Legal  Proceedings                                                                                                 | 17         |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                               | 17         |
|              |                                                                                                               |       |
| **PART II**  | ** **                                                                                                         | ** ** |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of  Equity Securities | 17         |
| Item 6.           | Selected Financial  Data                                                                                           | 18         |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 20         |
| Item 7a.          | Quantitative  and Qualitative Disclosure About Market Risk                                                         | 33         |
| Item 8.           | Financial  Statements and Supplementary Data                                                                       | 34         |
| Item 9.           | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                              | 63         |
| Item 9a.          | Controls and  Procedures                                                                                           | 63         |
| Item  9b.         | Other  Information                                                                                                 | 64         |
|              |                                                                                                               |       |
| **Part III** | ** **                                                                                                         | ** ** |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                            | 64         |
| Item 11.          | Executive  Compensation                                                                                            | 67         |
| Item 12.          | Security Ownership  of Certain Beneficial Owners and Management and Related Stockholder  Matters              | 72         |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                         | 72         |
| Item 14.          | Principal  Accountant Fees and Services                                                                            | 73         |
|              |                                                                                                               |       |
| **Part IV**  | ** **                                                                                                         | ** ** |
| Item 15.          | Exhibits and  Financial Statement Schedules                                                                        | 75         |

** **

 

1

----

** **

**J.B. POINDEXTER &CO., INC. AND SUBSIDIARIES**

** **

**PART I**

** **

**Item 1.               Business**

** **

**Overview**

** **

J.B. Poindexter & Co.,Inc operates primarily transportation-related manufacturing businesses.  Our operating subsidiaries are Morgan TruckBody, LLC (“Morgan”), Morgan Olson, LLC (“Morgan Olson”), Truck AccessoriesGroup, LLC (“Truck Accessories”), EFP, LLC (“EFP”), MIC Group, LLC (“MIC Group”),Federal Coach, LLC (“Federal Coach”), and Eagle Specialty Vehicles, LLC (“EagleCoach”). Eagle Coach and Federal Coach comprise the Specialty VehicleGroup.  The Specialty Vehicle Group, MICGroup and EFP comprise our Specialty Manufacturing Division (“SpecialtyManufacturing”).  Effective April 30,August 23, and September 4, 2007, we acquired Richard’s ManufacturingCo., Inc. (“Richard’s Manufacturing”), Tarlton Supply Company and Handley,L.P. (Tarlton Supply Co. and its affiliated company Handley, L.P., collectively“Tarlton”) and Machine & Manufacturing I, Inc. (“MMI”),respectively.  The acquired operationsare operated as part of MIC Group.

 

Unless the context otherwise requires, the “Company,”“we,” “our” or “us” refers to J.B. Poindexter & Co., Inc. (“JBPCO”)together with its operating subsidiaries. We are wholly owned by John B.Poindexter.

 

During March 2004, weissued $125 million in aggregate principal amount of 8.75% senior notesdue 2014 (“8.75% Notes”). With the proceeds of that offering we redeemed the$76 million in aggregate principal amount of the then outstanding 12.50%senior secured notes due 2007, paid accrued interest of approximately$4 million and repaid outstanding borrowings under our revolving creditfacilities and other loans of approximately $37 million.  At the same time as the issuance of$125 million in aggregate principal amount of 8.75% Notes, we entered intoa new $30 million revolving credit facility with a new lender.  In May 2004 and January 2005, weissued an additional $30 million and $45 million, respectively, inaggregate principal amount of our 8.75% Notes, the proceeds from whichincreased our cash and cash equivalents.

 

We operate our business in fourdifferent segments: Morgan, Morgan Olson, Truck Accessories and SpecialtyManufacturing. Please see Note 3 of our financial statements included hereinfor a description of financial information by segments.

 

**Morgan**

** **

We believe Morgan is theleading United States manufacturer of commercial truck bodies for medium-dutytrucks based upon estimated market share and total 2007 sales volume. Morgangenerally manufactures products for medium-duty trucks having a gross vehicularweight rating of between 10,001 pounds (Class 3) and 33,000 pounds (Class 7).Trucks equipped with Morgan’s products are commonly used in a wide variety ofapplications, including general freight deliveries, moving and storage, anddistribution of refrigerated consumables. Morgan also offers service programsfor its truck bodies.

 

Morgan reaches a broad base ofcustomers in the United States and Canada through its sales force and its morethan 200 authorized distributors and Morgan authorized service centers.  Its customers include rental companies, truckdealers, leasing companies and companies that operate fleets of deliveryvehicles. Through nine manufacturing plants and seven service facilities instrategic locations throughout North America, Morgan can provide timely productdelivery and service to its customers.

 

The principal products Morgan manufactures and sellsare:

 

·             dry freight bodies that are typically fabricatedwith prepainted aluminum or fiberglass-reinforced plywood panels, hardwoodfloors and various door configurations to accommodate end-user loading andunloading requirements;

 

2

----

 

·             refrigerated van bodies fabricated with insulatedaluminum or fiberglass-reinforced plywood panels that accommodate controlledtemperature and refrigeration needs of end users;

 

·             aluminum or fiberglass-reinforced plywood cutaway vanbodies that are installed only on cutaway chassis and are available with orwithout access to the cargo area from the cab; and

 

·             stake bodies, which are flatbeds with variousconfigurations of removable sides.

 

Morgan manufactures itsproducts to customer specifications and installs its products on truck chassissupplied by its customers.

 

***Customersand sales. ***Morgan principally generates revenue through three sources:

 

·             sales of truck bodies to commercial divisions ofleasing companies, companies with fleets of delivery vehicles, truck dealersand distributors (“Commercial” sales);

 

·             sales of truck bodies to consumer rental companies (“ConsumerRental” sales); and

 

·             sales of parts and service.

 

Morgan’s net sales constituted54% of our consolidated net sales in 2005, 48% in 2006 and 42% in 2007.  Morgan makes sales of truck bodies throughits sales force directly to large end-user customers, including Penske andRyder, and to distributors and truck dealers. Commercial sales of truck bodies,not including Consumer Rental sales, constituted 86% of Morgan’s net sales in2005, 85% in 2006 and 83% in 2007.

 

Morgan has an independentauthorized distributor network of 39 distributors nationwide. Most distributorssell a wide variety of trucks or related equipment to truck dealers and endusers. Generally, distributors sell Morgan products in a specified territorywith limited exclusivity.  Morgan alsosells its products directly to truck dealers, selling to approximately 490dealers in 2007.

 

Consumer Rental sales arecomposed of sales to companies that maintain large fleets of one-way and localhauling vehicles available for rent to the general public. Morgan makes thesesales through a bid process and negotiation directly with these companiesthrough its sales force. Primary Consumer Rental customers include Penske,U-Haul and Budget. Morgan negotiates contracts for Consumer Rental salesannually, usually in late summer to early fall, with products to be shippedduring the first half of the next year. These sales are seasonal, withsubstantially all product shipments occurring in the first six months of theyear. Consumer Rental sales tend to be the most volatile and price-sensitiveaspect of Morgan’s business, and depend on factors such as product mix and deliveryschedules. Consumer Rental sales constituted 9% of Morgan’s net sales in 2005,10% in 2006 and 11% in 2007.

 

Morgan’s two largest customers,Ryder and Penske, together have historically represented approximately 45% to55% of Morgan’s total net sales. Each has been Morgan’s customer forapproximately 20 years and we believe relations with each are good. Salesto these customers represented 24% of our consolidated net sales in 2005, 22%in 2006 and 23% in 2007.

 

Morgan also builds truck bodiesand installs them on chassis acquired under a bailment pool agreement withGeneral Motors Acceptance Corporation. The truck may be placed with a dealer for display and ultimate sale,however, they are currently being built based on orders from thecustomers.  Pool program sales were $0.5million in 2006 and $0.7 million in 2007.

 

Morgan offers limited serviceprograms at its own service facilities and its authorized distributors. Servicesales constituted 3% of Morgan’s net sales in 2005, 4% in 2006 and 5% in 2007.

 

***Manufacturing andsupplies. ***Morgan, which is headquartered in Morgantown, Pennsylvania, operatesmanufacturing, body mounting, and parts and service facilities in Arizona,California, Florida, Georgia, 

 

3

----

 

Pennsylvania, Texas, Wisconsin,and Ontario, Canada. Morgan also has sales, service and body mountingfacilities in Colorado, Florida, Georgia, Pennsylvania, Texas, Wisconsin, andOntario, Canada. Many of Morgan’s domestic manufacturing facilities are ISO9001-2000 certified.

 

Generally, Morgan engineers itsproducts to the specifications of the customer. Typically, the customer placesan order and arranges for a truck chassis manufacturer to deliver the truckchassis to Morgan. Morgan manufactures and installs the body on the customer’schassis and the customer or Morgan arranges for delivery of the completedtruck. Morgan’s production cycle ranges from three to seven days for dryfreight products and up to 28 days for more complex refrigerated products.  Delays in chassis deliveries can disruptMorgan’s operations and can increase its working capital requirements.

 

Because contracts for ConsumerRental sales are entered into in the summer or fall but production does notbegin generally until the following January, Morgan has a significant backlogof Consumer Rental sales orders at the end of each year that is processedthrough May of the following year. In addition, Morgan typically maintainsa significant backlog of Commercial sales. Morgan’s backlog at December 31,2007 was $42.0 million compared to $114.6 million at December 31,2006. Morgan expects to complete all of the orders in its 2007 backlog during2008.

 

Morgan provides limitedwarranties against construction defects in its products. These warrantiesgenerally allow for the replacement or repair of defective parts or workmanshipfor up to five years following the date of sale. Warranty costs have not had amaterial adverse effect on its business.

 

Morgan maintains an inventoryof raw materials necessary to build truck bodies according to customers’orders. Because Morgan usually manufactures its products to customer orders, itdoes not maintain substantial inventories of finished goods.

 

Morgan’s principal rawmaterials include aluminum, steel, fiberglass-reinforced plywood and hardwood.Morgan acquires raw materials from a variety of sources and has not experiencedsignificant shortages of materials. However, there are a limited number ofsuppliers of fiberglass-reinforced plywood, an important truck body material.While Morgan has not experienced a disruption in supply or a shortage offiberglass-reinforced plywood, such a disruption or shortage could occur in thefuture. Morgan may not be able to replace its existing supply offiberglass-reinforced plywood on acceptable terms or at all. To manage itssupply costs, Morgan sometimes enters into long-term supply contracts onprincipal materials to secure prices for up to one year if considerednecessary.

 

***Industry. ***Industryrevenue and growth depend primarily on the demand for delivery vehicles in thegeneral freight, moving and storage, parcel delivery and food distributionindustries, all of which are affected by general economic conditions.Replacement of older vehicles in fleets represents an important revenuesource.  Replacement cycles areapproximately six to seven years, depending on vehicle types. During economicdownturns, replacement orders are often deferred or, in some cases, oldervehicles are retired without replacement. During periods of economic growth, ascustomers decide to increase their capital expenditures, sales of deliverytrucks grow as customers make purchases they deferred in prior years.

 

The federally mandated emissionstandards for diesel engines were changed effective January 1, 2007 andwill change again in 2010.  Thesestandards require a reduction in the amount of pollutants allowed to bereleased during the operation of the diesel engine included with the truckchassis that Morgan is provided by its customers and has increased the cost toMorgan’s customers of the chassis and changed the economics of operating thetruck.  Historically, approximately 90%of Morgan truck bodies are installed on chassis with diesel engines.  We believe that the 2007 change to theemission standards changed Morgan’s customers’ buying patterns in 2007 as theinventory of chassis manufactured before the change were rapidly consumedthroughout 2007.  We cannot predict howour operations will be affected in 2010 as a result of the uncertain impactthat the change will have on Morgan’s customers’ operations.

 

***Competition. ***Thetruck body manufacturing industry is highly competitive. Morgan competes withthree national manufacturers: Supreme Industries, Inc., Kidron, a divisionof Specialized Vehicles Corporation, and America’s Body Company, a division ofLeggett & Platt, Inc. Corporation, some of which may be largerand have more 

 

4

----

 

resources than Morgan. Thereare a large number of smaller manufacturers that are regionally focused.Competitive factors in the industry include product quality, delivery time,geographic proximity of manufacturing facilities to customers, warranty terms,service and price. We believe customers value Morgan’s high-quality products,competitive pricing and delivery times.

 

**MorganOlson**

** **

Morgan Olson is one of two major manufacturers ofstep vans. Step vans are specialized vehicles designed for multiple-stopdelivery applications and they enable the driver of the vehicle to easilyaccess the cargo area of the vehicle from inside the cab. Step vans are made tocustomer specifications for use in parcel, food, vending, uniform, linen andother delivery applications. Morgan Olson’s step van bodies are installed onInternational, Ford, Freightliner and Workhorse truck chassis with body sizesranging from 11 to 30 feet. Morgan Olson is headquartered in Sturgis, Michigan,where it has manufacturing and parts distribution facilities.

 

Morgan Olson’s net sales constituted 9%, 13% and 14% of our consolidated net sales in 2005,2006 and 2007, respectively.

 

***Customers and sales. ***Customerspurchase step vans through dealers and distributors and from Morgan Olsonthrough its direct sales force. Two customers, United Parcel Service of America, Inc.and FedEx, purchase the majority of step vans produced in the United States.The United States Postal Service has historically been a major buyer of stepvans; however, it has not placed a significant order for new step vans sincethe completion of the prior contract in early 2004 that Morgan Olsonparticipated in with two chassis manufacturers. Morgan Olson’s end usercustomers include these customers along with Frito-Lay, Inc., BimboBakeries, DHL, W.B. Mason, ARAMARK Corporation and others. The preferences andpurchasing decisions of these customers dramatically affect the results ofoperations of Morgan Olson.

 

Morgan Olson also sells stepvan body service parts through its dealers and distributors and directly tocustomers. Morgan Olson is a major supplier of service parts for step vansmanufactured by it for the United States Postal Service under an agreement ofindefinite term that is reviewed annually. The United States Postal Service hasthe right to terminate the agreement for its convenience at any time, but webelieve Morgan Olson’s relationship with the United States Postal Service issatisfactory. However, there can be no assurance that the parts supplyagreement will continue at all or for any length of time.

 

Morgan Olson offers aftermarket support through itsService Parts Department for both step vans manufactured by Morgan Olson anddry freight vans manufactured by Morgan.  The Service Partsbusiness allows Morgan and Morgan Olson to consolidate their parts supportfunctions, with dedicated fabrication, warehousing, and shippingfacilities.  This serviceprovides fleet customers with a full range of parts and partsassemblies for their vehicles. Morgan Olson Service Parts and the Morgan Serviceand Repair Centers offer combined support that we believe gives both companiesa competitive advantage.

 

Morgan Olson has one customerthat accounted for approximately 37%, 38% and 27% of Morgan Olson’s net salesduring 2007, 2006 and 2005, respectively. Accounts receivable from this customer were $2,044 and $667 at December 31,2007 and 2006, respectively.

 

***Manufacturing andsupplies. ***Morgan Olson has ISO 9000 certified manufacturing and parts distributionfacilities in Sturgis, Michigan.

 

Generally, Morgan Olsonmanufactures its products to customer specifications. Typically, the customerplaces an order and arranges for a truck chassis manufacturer to deliver atruck chassis to Morgan Olson. Morgan Olson manufactures the complete truckbody, including the installation of windows, doors, instrument panels, seating,wiring, painting and decal application. The customer arranges for delivery ofthe completed truck.

 

At December 31, 2007,Morgan Olson’s total backlog was $43.5 million, compared to $25.1 millionat December 31, 2006. We expect that Morgan Olson will fill all 2007backlog orders in 2008.

 

5

----

 

Morgan Olson provides a limitedwarranty against construction defects in its products. These warrantiesgenerally provide for the replacement or repair of defective parts orworkmanship for up to five years following the date of sale. Warranty costshave not had a material adverse effect on its business.

 

Morgan Olson maintains aninventory of raw materials necessary to build step van bodies. Because MorganOlson manufactures its products to customer orders, it does not maintainsubstantial inventories of finished goods. Principal raw materials include steel and aluminum, and raw materialsare acquired from a variety of sources that have not experienced significantshortages. Morgan Olson has taken advantage of the combined purchasing power ofour companies, including Morgan, thereby generating savings on raw materialscommon to our businesses.

 

Morgan Olson’s customerspurchase their truck chassis from major truck manufacturing companies. Thedelivery of truck chassis to Morgan Olson depends upon the truck manufacturers’production schedules, which are beyond Morgan Olson’s control. Delays inchassis deliveries can disrupt Morgan Olson’s operations and can increase itsworking capital requirements.

 

***Industry. ***Industryrevenue and growth depend primarily on the demand for delivery vehicles, whichis affected by general economic conditions. Because of the concentration ofcustomers in the industry, the demand for delivery vehicles is significantlyinfluenced by the requirements of the United States Postal Service, FedEx andUnited Parcel Service of America, Inc. Replacement of older vehicles infleets represents an important revenue source, with replacement cycles varying,depending on vehicle types and usage. During economic downturns, replacementorders are often deferred or, in some cases, older vehicles are retired withoutreplacement. During periods of economic growth, as customers decide to increasetheir capital expenditures, sales of delivery trucks grow as customers makepurchases that were deferred in prior years.

 

The federally mandated emissionstandards for diesel engines were changed effective January 1, 2007 andwill change again in 2010. Morgan Olson’s operations were not significantlyaffected in 2007, however we cannot predict whether our operations will beaffected in 2010 as a result of the uncertain impact that the change will haveon our customers’ operations.

 

***Competition. ***Thestep van body manufacturing industry is highly competitive. Morgan Olsoncompetes with one other major manufacturer of step van bodies, Utilimaster,which may have more resources than Morgan Olson. Competitive factors in theindustry include product quality, delivery time, warranty terms, aftermarketservice and price.

 

**Truck Accessories**

** **

We believe Truck Accessories, which is headquartered inElkhart, Indiana, is the leading manufacturer of hard pickup truck caps andtonneaus for the combined United States and Canadian market. TruckAccessories markets its products under the brand names Leer, Century, Raider,LoRider, BoxTop and Pace Edwards.

 

Caps and tonneaus provide an engineered, stylizedenclosure for the bed of pickup trucks, transforming them into lockableweather-protected storage areas. Truck Accessories’ truck caps and tonneausoffer customers a variety of designs and features, including a number ofdistinctive styles, allowing them to customize the look and utility oftheir pickup trucks.  The Truck Accessories product line of truck caps andtonneaus ranges from standard to premium and is differentiated byfeatures, styling and brand name.  Pace Edwards offers a variety ofretractable hard tonneau covers that can be mechanically retracted into anintegrated storage canister behind the pickup truck cab.  State Widemanufactures windows and doors used by Truck Accessories, other cap and tonneaumanufacturers, and horse trailer manufacturers in the assembly of theirproducts.

 

Key pickup truck cap features include shape and design,color and finish, window configurations, roof racks, glass tint, trim, andinterior features such as lighting, carpeting and special storage options.Tonneaus also offer a range of styling, storage and convenience alternatives.  Caps and tonneaus can be designed to targetspecific customers.  For example, Leer, Century and Raider offerlifestyle-equipped caps for hunters, fishermen and outdoors enthusiasts thatare styled and designed, through storage features and product appearance, toappeal to these customers. Through 

 

6

----

 

Truck Accessories’ multiple lines of caps and tonneaus,each with numerous features and options, we believe Truck Accessories is theindustry leader in engineering, product innovation and styling.

 

Truck Accessories’ net sales constituted 23% of ourconsolidated net sales in 2005, 20% in 2006 and 20% in 2007.

 

***Customers and sales. ***Most of Truck Accessories’ truck caps and tonneaus are purchased byindividuals, small businesses and fleet operators through a network of over1,270 independent, nonexclusive dealers using brand-specific sales forces.

 

Pace Edwards’ retractable tonneau covers are soldprimarily through automotive accessory warehouse distributors.  State Wide sells directly to manufacturersthrough its dedicated sales team.

 

Truck Accessories also sellsits products in Canada. In 2007, foreign sales (primarily in Canada)represented approximately 13% of Truck Accessories’ net sales and 2.6% of ourconsolidated net sales.

 

***Manufacturing andsupplies. ******The design and manufacture of Truck Accessories’products takes place at six************manufacturing facilities*********located in California, Indiana, Pennsylvania and Washington. During thefourth quarter of 2006, Truck Accessories announced that it would discontinuemanufacturing operations at its Canadian facility and subsequently, the Raiderproduct line was transferred to other facilities in the United States during2007.  All Raider dealers are nowsupplied Raider products from these new locations. TAG maintains a sales officeand sales personnel in Canada.

 

Typical product delivery timesrange from one to two weeks from the time of order. Truck Accessories operatesa fleet of trucks and trailers for the efficient and timely delivery of itsproducts to its dealers.

 

Truck Accessories provides a warranty period,exclusive to the original truck owner, which is, in general but withexceptions, one year for parts, five years for paint and lifetime forstructure. Warranty costs have not had a material adverse effect on its business inrecent years.

 

Truck Accessories obtains rawmaterials and components from a variety of sources. The most important areresin, fiberglass, paint, aluminum, locks and automotive-quality glass.  Truck Accessories and three other of ourcompanies have committed to purchase principally all of their paintrequirements through 2008 from one supplier at favorable prices.  As a result of its size and purchasing power,Truck Accessories has maintained a stable supply of materials and components onfavorable terms and to date has not experienced significant shortages of theseitems.

 

Truck Accessories’ products aretypically manufactured upon receipt of an order from its customers,consequently, its backlog represents between one and two weeks of production.Truck Accessories’ backlog was $3.6 million at December 31, 2007compared to $4.1 million at December 31, 2006.

 

***Industry. ***Salesof caps and tonneaus correspond to the level of new pickup truck sales in the UnitedStates and Canada. In 2007, we estimate that 18% to 20% of new pickup truckswere equipped with caps and tonneaus. Based on Truck Accessories’ market sharein the United States and Canada of approximately 39%, we estimate thatapproximately 8% of new pickup trucks are equipped with Truck Accessories’ capsand tonneaus. Factors influencing the automotive industry, including generaleconomic conditions, customer preferences, new model introductions, interestrates and fuel costs, will directly influence Truck Accessories’ business. Capand tonneau sales are seasonal, with sales typically being higher in the springand fall than in the winter and summer.

 

***Competition. ***Thepickup truck fiberglass cap and tonneau industry is highly competitive. TruckAccessories competes with one other national competitor, A.R.E., Inc., anda number of smaller companies that are regionally focused. Competitive factorsinclude design, features, delivery times, product availability, warranty terms,quality and price.  Based on the numberof products and features it offers, and its ability to quickly supply productfor newly introduced pickup truck models, we believe Truck Accessories is theindustry leader in product design and available accessory options.

 

7

----

 

**Specialty Manufacturing**

** **

Specialty Manufacturing iscomprised of Specialty Vehicle Group, MIC Group and EFP, and its sales made up14% of our consolidated net sales in 2005, 20% in 2006 and 25% in 2007.  Specialty Vehicle Group representsapproximately 36% of Specialty Manufacturing’s 2007 net sales and is comprisedof Federal Coach and Eagle Coach. Specialty Vehicle Group manufactures funeral coaches, limousines andspecialized transit buses.

 

MIC Group represents approximately49% of Specialty Manufacturing’s 2007 net sales and provides manufacturingservices for customers requiring precision machining of metal parts andmachining and casting services with a concentration of customers in the oil andgas exploration and development industry. During 2007, MIC Group acquired three machining operations each of whichalso has a customer concentration in the oil and gas services industry.  The three acquisitions, Richard’s, Tarltonand MMI, are located in Duncan, Oklahoma, Brenham, Texas and Houston, Texas.

 

EFP represents approximately15% of Specialty Manufacturing’s net sales and manufactures and sellsexpandable polystyrene and polypropylene foam, engineered to customerspecifications for use by the automotive, electronics, food, furniture, bathand plumbing, and appliance industries as packaging, shock-absorbing componentsand material handling products.

 

***Products.******  ******Specialty Vehicle Group manufactures a full line offuneral coaches, limousines and specialized buses.****** ******We estimate that Specialty Vehicle’s funeral productsales represent approximately 35% of the domestic funeral coach market.***

 

MIC Group is a contractmanufacturer that produces precision metal parts used in energy exploration andproduction, aerospace and other industries and performs machining and castingservices for manufacturers of metal parts and components.

 

EFP manufactures and sellsmaterial handling and protective packaging products including shock-absorbingpackaging material, reusable trays and containers that are used fortransporting components and the protection of customers’ products. EFP alsofabricates block and sheet products used by the RV industry for producingsidewalls and doors and the construction industry for insulation and commercialroofing applications. EFP has also recently introduced a line oftemperature-controlled shipping containers for the protection oftemperature-sensitive products such as food and medical products.

 

***Customers and sales. ******Specialty Vehicle Group manufactures and sells itsline of funeral coaches, limousines and specialized buses to end users, such aslivery companies, and approximately 48 authorized dealers.  Its largest customer representedapproximately***8***% of the total net sales of Specialty Manufacturingin 2005, 8% in 2006 and 3% in 2007.***

 

MIC Group sells products tointernational oilfield service companies and a variety of businesses in variousindustries. One oilfield service customer represented approximately 15% of thetotal sales of Specialty Manufacturing in 2005, 15% in 2006 and 18% in 2007.

 

EFP’s customers includemanufacturers that require special packaging materials for protecting theirproducts, as well as companies in the automotive industry.

 

***Manufacturing andsupplies. ***Specialty Manufacturing’s operations are located in Alabama, Arkansas,Indiana, Oklahoma, Ohio, Tennessee, Texas, Wisconsin and Mexico. Its facilitiesin Alabama, Indiana and the three Texas plants are ISO 9000 certified and itsfacility in Wisconsin is QS 9000 certified.

 

Specialty Vehicle Groupengineers its products to its own specifications as well as those of chassismanufacturers in order to maintain the original equipment manufacturer’swarranty.  Specialty Vehicle Group takesdelivery of a truck chassis or a modified sedan, usually manufactured by theCadillac division of General Motors or the Lincoln division of Ford, andmodifies it to its specifications.  Busbodies are built on truck chassis and funeral coaches and 

 

8

----

 

limousines are manufacturedfrom a modified sedan by removing part of the interior, lengthening the bodyand building the required vehicle.  Theproduction process typically takes between four and six weeks.  Specialty Vehicle Grouputilizes metals, polymer resins, wood, fiberglass, and petrochemical-basedproducts (paints, plastics, sealants and lubricants) and participates in thepaint supply contract negotiated by Truck Accessories.

 

MIC Group performs a broadrange of services including computer-controlled precision machining andwelding, electrostatic discharge machining, electron beam welding, trepanning,gun drilling, investment casting and electro mechanical assembly services. MICGroup utilizes ferrous and nonferrous materials including stainless steel, alloysteels, nickel-based alloys, titanium, brass, beryllium-copper alloys andaluminum.

 

EFP’s products are manufacturedfrom a wide variety of materials including expandable polystyrene,polypropylene, polyethylene and resins which are subject to cost fluctuationsbased on changes to the price of oil and benzene in the international markets.

 

The Specialty Vehicle Group provides a warranty onits products for a period of 48 months or 50,000 miles on the section of thebody and parts manufactured for funeral coaches and funeral limousines, 36months or 50,000 miles on the body and parts manufactured for bus bodies, and48 months or 100,000 miles on the portion of the body and parts manufacturedfor limousines.  MIC Group and EFP do not provide warranties ontheir products.  Warranty costs have nothad a material adverse effect on Specialty Manufacturing’s business.

 

Specialty Manufacturing’s backlog at December 31,2007 was $108.5 million compared to $54.1 million at December 31,2006.  Materialsare obtained from a variety of sources and Specialty Manufacturing has notexperienced significant shortages in materials.

 

***Industry. ******Specialty Vehicle Group’s funeral products are usedby funeral operators and sales generally increase with the introduction of new modelsby the OEMs.  VIP limousines and small to medium-sized buses are purchasedby livery companies, churches and small tour bus operators whose operations areinfluenced by the general economy.***

 

MIC Group’s services are usedby companies in the automotive, aerospace and other industries with aconcentration of companies involved in oil and gas exploration. The demand forequipment and services supplied to the oilfield service industry is directlyrelated to the level of worldwide oil and gas drilling activity which isinfluenced by the price of oil and natural gas. The price of a barrel of oil as of December 31, 2007 was $91.73compared to $62.03 as of December 31, 2006.

 

The majority of EFP’s productsare manufactured for use by companies in the automotive, electronics,furniture, construction, appliance and other industries. It also manufacturesproducts used as thermal insulators; economic conditions that affect theseindustries will subsequently impact EFP’s operations.

 

Growth or downturns in the generaleconomy and specifically the entertainment, automotive, electronics, furnitureand appliance industries have a corresponding effect on Specialty Manufacturing’sbusiness.

 

***Competition. ******Specialty Vehicle Group competes with one majormanufacturer of funeral coaches and with other businesses engaged in themanufacturing limousines and***passenger shuttle/executivebuses.

 

MIC Group competes with otherbusinesses engaged in the machining, casting and manufacturing of parts andequipment utilized in the oil and gas exploration, aerospace and otherindustries.

 

EFP competes with a largenumber of other producers of molded, expandable plastic producers.

 

Some of Specialty Manufacturing’scompetitors may be larger and have more resources.  Price, delivery times, technologicalknow-how, design and capacity are the primary competitive factors in SpecialtyManufacturing’s industries.

 

9

----

 

**Trademarks and patents**

** **

We own rights to certainpresentations of Truck Accessories’ Leer brand name, which we believe arevaluable because we believe that Leer is recognized as being a leading brandname.  We own rights to the Federal Coachand Eagle Coach names.  We also ownrights to certain other trademarks and trade names, including certainpresentations of Morgan’s name. Although these and other trademarks and tradenames used by us help customers differentiate our product lines from those ofcompetitors, we believe that the trademarks or trade names themselves are lessimportant to customers than the quality of the products and services. Oursubsidiaries, principally Morgan, EFP and Eagle Coach, hold, directly orindirectly through subsidiaries, patents on certain products and componentsused in the manufacturing processes. We do not believe that the loss of any onepatent would have a material adverse effect on us.

 

**Employees**

** **

At December 31, 2007, wehad 4,227 full-time employees and an average of 4,565 full-time employeesthroughout the year.  Personnel areunionized only at EFP’s Decatur, Alabama facility (covering approximately 60persons, with a contract expiring in August 2009). We believe thatrelations with our employees are good.

 

**Environmentalmatters**

** **

Ouroperations are subject to a variety of federal, state and local environmentaland health and safety statutes and regulations, including those relating toemissions to the air, discharges to water, treatment, storage and disposal ofwaste, and remediation of contaminated sites. In certain cases, theserequirements may limit the productive capacity of our operations. Certain laws, including the Federal ComprehensiveEnvironmental Response, Compensation, and Liability Act of 1980, as amended (“Superfund”)impose strict, and under certain circumstances, joint and several, liabilityfor costs to remediate contaminated sites upon designated responsible partiesincluding site owners or operators and persons who dispose of wastes at, ortransport wastes to, such sites. Some of our operations also require permitswhich may restrict our activities and which are subject to renewal,modification or revocation by issuing authorities. In addition, we generatenonhazardous wastes, which are also subject to regulation under applicableenvironmental laws.

 

From time to time, we have received notices ofnoncompliance with respect to our operations which have typically been resolvedby investigating the alleged noncompliance, correcting any noncompliantconditions and paying fines, none of which individually or in the aggregate hashad a material adverse effect on us.   Further, wecannot ensure that we have been or will be at all times in compliance with allof these requirements, including those related to reporting or permitrestrictions, or that we will not incur material fines, penalties, costs orliabilities in connection with such requirements or a failure to comply withthem.  However,we expect that the nature of our operations will continue to make us subject toincreasingly stringent environmental regulatory standards. Although we believewe have made sufficient capital expenditures to maintain compliance withexisting laws and regulations, future expenditures may be necessary, ascompliance standards and technology change or as unanticipated circumstancesarise. Unforeseen and significant expenditures required, for example, to complywith new or more aggressively enforced requirements or newly discoveredconditions could limit expansion or otherwise have a material adverse effect onour business and financial condition. For a description of currently outstanding environmental issues, seeNote 16 of Notes to the Financial Statements.

 

**Reports to Security Holders**

 

Sinceall of the Company’s equity securities are privately held, the Company is notrequired by the SEC’s proxy rules or regulations, or stock exchangerequirements, to send an annual report to security holders. Nonetheless, theCompany will send to each security holder annually a copy of its Annual Reporton Form 10-K and quarterly a copy of each Quarterly Report on Form 10-Q.

 

10

----

 

 

**Item 1a.            Risk Factors**

** **

An investment in our securities is subject to anumber of risks. An investor should carefully consider the following riskfactors in evaluating this investment. Any of the following risks, as well asother risks and uncertainties that we do not know about now or that we do notthink are important, could seriously harm our business and financial resultsand cause the value of our securities to decline, which in turn could causeinvestors to lose all or part of their investment.

 

**Our businesses are highly cyclical. An economic downturncould adversely affect our ability to generate cash and make required paymentson our debt.**

 

Thesuccess of our business depends on general economic conditions and such factorsas:

 

· corporate profitability;

 

· interest rates;

 

· retail financing;

 

· fuel costs;

 

· consumer preferences;

 

· consumer spending patterns;

 

· sales of truck chassis and new pickup trucks; and

 

· levels of oil and gas exploration activity.

 

Inaddition, we sell our products to customers in inherently cyclical industries,such as the trucking industry and the energy services industry, whichexperience significant downturns from time to time. As a result of an economicrecession and adverse conditions in the trucking industry, we experiencedsubstantially lower sales at Morgan during 2001 and 2002   Morgan’s business began a recovery in 2003.During the same time period, a decline in oil and gas exploration activityresulted in substantially lower sales at Specialty Manufacturing. As a resultof these conditions and a reduction in the availability of credit from banksand securities markets, we did not expect to have enough cash to retire ourunsecured senior notes, initially issued by us in 1994, when they were due tomature in May 2004. In June 2003, we exchanged those unsecured notesfor $85 million of secured notes and extended the maturity to May 2007. Wesubsequently purchased for cash $9 million of the secured notes, effective September 29,2003 and subsequently redeemed the remaining $76 million in March 2004prior to the original maturity date. Another prolonged economic downturn orrecession would result in a significant decrease in our sales and wouldmaterially and adversely affect our operating cash flows and our ability tomake required payments on our debt.

 

**Demand for our truck body products depends largely on thereplacement cycle of delivery trucks.**

 

Morganand Morgan Olson produce and sell truck bodies for new delivery trucks,primarily in the general freight, moving and storage, parcel delivery anddistribution industries. Demand for these products is driven by customersreplacing older vehicles in their delivery truck fleets, and these customersoften decide to postpone their purchases of new delivery trucks during economicdownturns. If economic conditions or other factors, including longer usefullives of delivery trucks, cause our customers to reduce their capitalexpenditures and decrease investments in new delivery trucks, our sales wouldbe materially and adversely affected. As a result, our ability to generate cashand make required payments on our debt would be reduced.

 

**The cyclicality of pickup truck sales could cause a declinein Truck Accessories’ sales.**

 

TruckAccessories’ sales depend on the sales of new pickup trucks in North America. Adecline in pickup truck sales would cause a decline in Truck Accessories’sales, which would materially and adversely reduce Truck Accessories’ abilityto generate cash and could reduce our ability to make required payments on ourdebt. Sales of pickup trucks are characterized by periodic fluctuations indemand due to, among other things, changes in general 

 

11

----

 

economicconditions, interest rates, fuel costs, new model introductions, consumerspending levels and consumer preferences.

 

**We have a substantial amount of debt outstanding and can incur moredebt, which could hurt our business prospects, limit cash flow available fromour operations and prevent us from fulfilling our obligations under the 8.75%Notes and our other debt obligations.**

 

We are significantly leveraged and will continue to besignificantly leveraged.  We had$18.3 million of stockholder’s equity at December 31, 2007 andlong-term debt of $210.0 million, of which $8.4 million was comprised ofcapital lease obligations.  In addition,we had $23.6 million of secured debt availability under our revolving creditfacility and we may be able to incur substantially more debt in the future.

 

**We may not be able to compete favorably in our industries.**

 

Weexperience direct competition in all of our product lines and some competitorshave greater financial and other resources than we have. We face competitionfrom existing competitors with entrenched positions and we could facecompetition from new ones. Changes in the nature of the industries in which weoperate and our business could produce competition from new sources. Increasedcompetition may have a material adverse effect on our business, cash flows andability to make required payments on our debt by reducing our sales or margins.

 

**Most of our businesses rely on a small number of customers,the loss of any of which could have a material adverse effect on us.**

 

Fourof our businesses rely on a small number of customers to generate significantrevenues.

 

· Morgan’s two largest customers, Penske and Ryder, together accountedfor 47% of Morgan’s net sales in 2005, 46% in 2006 and 55% in 2007 andaccounted for 24% of our consolidated net sales during 2005, 22% in 2006 and 23% in 2007.

 

· One customer accounted for 27% of Morgan Olson’s net sales during2005, 38% in 2006 and 37% in 2007.

 

· One customer accounted for 15% of Specialty Manufacturing’s net salesduring 2005, 15% in 2006 and 18% in2007.

 

· Our top ten customers accounted for 35% of our consolidated net salesin 2005, 40% in 2006 and 41% in 2007.

 

Becauseof the relative importance of large customers and the degree of concentrationin the industries we serve, we are subject to additional risk. We may not beable to maintain these customer relationships or maintain our historical levelsof sales to these customers. Because of the size and importance of thesecustomers, these customers may be able to exert pressure on us to lower ourprices, which may reduce our margins and operating cash flow. If one of thesecustomers were to experience financial difficulties, our ability to collectreceivables from it or generate new sales to it would be materially andadversely affected.

 

**Disruptions in delivery of truck chassis to us could impactthe profitability of our business.**

 

Morganand Morgan Olson mount their truck bodies on truck chassis delivered from truckchassis manufacturers. If truck chassis manufacturers experience disruptions intheir businesses, Morgan and Morgan Olson may be unable to sell or delivertheir products. Work stoppages or slowdowns experienced by the large truckmanufacturers that supply truck chassis could result in delays or slowdowns inour ability to deliver products to our customers.

 

12

----

 

**Environmental and health and safety liabilities andrequirements could require us to incur material costs.**

 

Ouroperations are subject to a variety of federal, state and local environmentaland health and safety statutes and regulations, including those relating toemissions to the air, discharges to water, treatment, storage and disposal ofwaste, and remediation of contaminated sites. In certain cases, theserequirements may limit the productive capacity of our operations. Laws,including Superfund legislation, impose strict, and under certaincircumstances, joint and several, liability for costs to remediate contaminatedsites upon designated responsible parties including site owners or operatorsand persons who dispose of wastes at, or transport wastes to, such sites.

 

Fromtime to time, we have received notices of noncompliance with respect to ouroperations, which have typically been resolved by investigating the allegednoncompliance, correcting any noncompliant conditions and paying fines. We havefrom time to time been identified as a potentially responsible party at variousSuperfund sites, which, based on available information, we do not expect toresult in material liability. However, new environmental requirements or moreaggressive enforcement of existing ones or discovery of presently unknownconditions could require material expenditures or result in liabilities whichcould limit expansion or otherwise have a material adverse effect on ourbusiness, financial condition, operating cash flows and our ability to makerequired payments on our debt.

 

Fora description of current environmental issues, see “Item 1.   Business — Environmental Matters.”

 

**We may incur material losses and costs as a result of productliability and warranty claims that may be brought against us.**

 

Weface an inherent risk of exposure to product liability claims if the use of ourproducts result, or are alleged to result, in personal injury and/or propertydamage. If we manufacture a defective product, we may experience materialproduct liability losses and we may incur significant costs to defend productliability claims. We also could incur significant costs in correcting anydefects, lose sales and suffer damage to our reputation. Our product liabilityinsurance coverage may not be adequate for the liabilities we could incur andmay not continue to be available on terms acceptable to us.

 

Wealso are subject to product warranty claims in the ordinary course of ourbusiness. If we produce poor-quality products or use defective materials, wemay incur unforeseen costs in excess of what we have reserved in our financialstatements. These costs could have a material adverse effect on our business,operating cash flows and ability to make required payments on our debt.

 

**We depend on the services of key management personnel, theloss of whom would materially harm us.**

 

Ourability to compete successfully and implement our business strategy depends onthe efforts of our senior management personnel, including those of JohnPoindexter, our Chairman of the Board, President and Chief Executive Officer.The loss of the services of any of these individuals could have a materialadverse effect on our business. We do not maintain key-man life insurancepolicies on any of our executives.

 

**We may be unable to realize our business strategy ofimproving operating performance and generating cost reductions.**

 

Wehave either implemented or plan to implement strategic initiatives designed toimprove our operating performance. The failure to achieve the goals of theseinitiatives would have a material adverse effect on our business. We may decideto make significant expenditures in an effort to streamline our operations,including combining some of our operations at existing facilities, but be unableto successfully implement or realize the expected benefits of theseinitiatives. We also may not be able to sustain improvements made to date. Wemay decide to alter or discontinue some aspects of our strategy and may adoptalternative or additional strategies, which may not be in the best interests ofour note holders.

 

13

----

 

**We may not be able to consummate future acquisitions orsuccessfully integrate acquisitions into our business.**

 

Ourbusiness strategy includes growing through strategic acquisitions of otherbusinesses with complementary products, manufacturing capabilities orgeographic markets. We may not be able to continue to identify attractiveacquisition opportunities or successfully acquire identified targets.  If we fail to integrate acquired businessessuccessfully into our existing businesses, or incur unforeseen expenses inconsummating acquisitions, we could incur unanticipated expenses and losses.

 

Wemust successfully integrate acquired businesses into our operations to takefull advantage of projected benefits from those acquired businesses. Theintegration of future acquisitions into our operations could result inoperating difficulties and divert management and financial resources that wouldotherwise be available for the development and maintenance of our existingoperations. Our ability to make acquisitions may be constrained by our abilityto obtain additional financing and by the provisions of the indenture governingour outstanding 8.75% Notes and by the terms of our revolving credit facility.

 

Acquisitionsmay involve a number of special risks, including:

 

· unexpected losses of key employees or customers of the acquiredbusiness;

 

· conforming the standards, processes,procedures and controls of the acquired business with those of our existingoperations;

 

· coordinating our product and process development;

 

· hiring additional management and critical personnel; and

 

· increasing the scope, geographic diversity and complexity of our operations.

 

Acquisitionscould result in our incurrence of additional debt and contingent liabilities,including environmental, tax, pension and other liabilities. These liabilitiescould have a material adverse effect on our business, our ability to generatecash and our ability to make required payments on our debt.

 

**If we are unable to meet future capital requirements, ourcompetitive position may be adversely affected.**

 

Asa manufacturer, we are required to expend significant amounts of capital forengineering, development, tooling and other costs. Generally we seek to recoverthese costs through revenue generation, but we may be unsuccessful due tocompetitive pressures and other market constraints. We expect to fund capitalexpenditures through operating cash flows, borrowings under our revolvingcredit facility and other sources of borrowing such as capital leases, but wemay not have adequate funds or borrowing availability to make all the necessarycapital expenditures. If we are unable to make necessary capital expenditures,our business and our competitive position will be materially and adverselyaffected.

 

**As a privately held company, we are subject to less stringentcorporate governance requirements than a company with public equity. Thisprovides less protection to our investors. Further, we identified material internal control weaknesses over ourfinancial reporting.**

 

Whilewe are subject to certain requirements of the Sarbanes-Oxley Act of 2002, wewill not be subject to many of its provisions, including rules requiringus to have independent directors or an audit committee composed of independentdirectors. Two of our three directors, John Poindexter, our President and CEO,and Stephen Magee, the chairman of the Audit Committee of our board of directors,are not independent. We will not be subject to the same corporate governancestandards as a company with public equity or a company listed on a nationalexchange and our security holders will not have the protections provided byhaving independent directors or audit committee members.

 

Additionally,as a result of our assessment of our internal controls over financial reportingduring 2007, we identified the following material weaknesses in our internalcontrols:

 

14

----

 

·We restated the financialstatements as of December 31, 2006 and for the year then ended due to anerror in the accounting for inventory. The error was related to a failure to perform an adequate reconciliationof inventory records as a result of a combination of inadequate procedures andinventory tracking systems.  Thisrepresented a material weakness in the internal controls over the financialreporting of inventory as of December 31, 2006 and March 31,2007.  We believe that these weaknesseshave been corrected through the implementation of a new information system andimproved procedures.

 

· The timely oversight over the financial reporting of the businessunits and the work outsourced to third parties needs to be improved.  Specifically, more timely oversight may haveprevented an adjustment to record an additional FIN No. 48 provision for uncertainstate income tax positions in the fourth quarter of 2007 (see Note 13 in theconsolidated financial statements) and should enable us to more timely reportour financial results.  Improvements,including the addition of corporate and business unit personnel, are beingevaluated and are expected to be implemented in 2008.

 

Webelieve that the remedial action described above, once implemented, willsatisfactorily address all matters identified as weaknesses by management.  We will continue to monitor the effectivenessof our internal controls and procedures on an ongoing basis and will takefurther actions as appropriate.

 

**Item 1b.            UnresolvedStaff Comments**

** **

**None.**

** **

**15**

----

** **

**Item 2.              Properties**

** **

We own or lease the following manufacturing, office andsales facilities as of December 31, 2007:

 
| **Location**                                      | ** **   | **Principal  use**              | ** **   | **Approximate  square feet** | ** **   | **Owned  or leased** | ** **   | **Lease  expiration** | ** **   |
|---------------------------------------------------|--------------|---------------------------------|--------------|------------------------------|--------------|----------------------|--------------|-----------------------|--------------|
| ***Morgan:***                                     | *** *** | *** ***                    | *** *** | *** ***                 | *** *** | *** ***         | *** *** | *** ***          | *** *** |
| Ehrenberg, Arizona                                |         | Manufacturing                   |         | 125,000                      |         | Owned                |         | —                |         |
| Riverside, California                             |         | Manufacturing/service           |         | 62,000                       |         | Leased               |         | 2013                  |         |
| Atlanta, Georgia                                  |         | Parts & service        |         | 20,000                       |         | Leased               |         | 2009                  |         |
| Rydal, Georgia                                    |         | Manufacturing                   |         | 85,000                       |         | Owned                |         | —                |         |
| Ephrata, Pennsylvania                             |         | Manufacturing                   |         | 51,000                       |         | Owned                |         | —                |         |
| New Morgan, Pennsylvania                          |         | Manufacturing                   |         | 62,900                       |         | Leased               |         | 2008                  |         |
| Morgantown, Pennsylvania                          |         | Manufacturing/service           |         | 261,000                      |         | Owned                |         | —                |         |
| Morgantown, Pennsylvania                          |         | Office/warehouse                |         | 110,000                      |         | Leased               |         | 2009                  |         |
| Corsicana, Texas                                  |         | Manufacturing/service           |         | 63,000                       |         | Owned                |         | —                |         |
| Janesville, Wisconsin                             |         | Manufacturing/service           |         | 166,000                      |         | Leased               |         | 2010                  |         |
| Denver, Colorado                                  |         | Parts & service        |         | 15,000                       |         | Leased               |         | 2012                  |         |
| Lakeland, Florida                                 |         | Parts & service        |         | 47,000                       |         | Leased               |         | 2010                  |         |
| Tampa, Florida                                    |         | Parts & Service        |         | 24,000                       |         | Leased               |         | 2010                  |         |
| Brampton, Ontario, Canada                         |         | Office & manufacturing |         | 41,000                       |         | Leased               |         | 2008                  |         |
| Mississauga, Ontario, Canada                      |         | Manufacturing                   |         | 22,000                       |         | Leased               |         | 2009                  |         |
| ***Morgan Olson:***                               | *** *** | *** ***                    | *** *** | *** ***                 | *** *** | *** ***         | *** *** | *** ***          | *** *** |
| Sturgis, Michigan                                 |         | Office & manufacturing |         | 380,255                      |         | Owned                |         | —                |         |
| ***Truck Accessories:***                          | *** *** | *** ***                    | *** *** | *** ***                 | *** *** | *** ***         | *** *** | *** ***          | *** *** |
| Woodland, California                              |         | Manufacturing                   |         | 65,000                       |         | Leased               |         | 2009                  |         |
| Elkhart, Indiana                                  |         | Office & research      |         | 23,500                       |         | Owned                |         | —                |         |
| Elkhart, Indiana                                  |         | Manufacturing                   |         | 132,500                      |         | Leased               |         | 2010                  |         |
| Elkhart, Indiana                                  |         | Office & manufacturing |         | 80,000                       |         | Owned                |         | —                |         |
| Elkhart, Indiana                                  |         | Manufacturing                   |         | 10,000                       |         | Leased               |         | 2008                  |         |
| Elkhart, Indiana                                  |         | Manufacturing                   |         | 150,000                      |         | Leased               |         | 2011                  |         |
| Chickasha, Oklahoma                               |         | Warehouse                       |         | 9,700                        |         | Leased               |         | 2010                  |         |
| Salem, Oregon                                     |         | Warehouse                       |         | 20,900                       |         | Leased               |         | 2008                  |         |
| Milton, Pennsylvania                              |         | Manufacturing/retail            |         | 105,000                      |         | Leased               |         | 2009                  |         |
| Clackamas, Oregon                                 |         | Retail                          |         | 10,000                       |         | Leased               |         | 2008                  |         |
| Centralia, Washington.                            |         | Manufacturing                   |         | 45,950                       |         | Owned                |         | —                |         |
| ***Specialty  Manufacturing:***                   |         |                            |         |                         |         |                 |         |                  |         |
| Amelia, Ohio                                      |         | Office & manufacturing |         | 44,250                       |         | Leased               |         | 2010                  |         |
| Brenham, Texas                                    |         | Office & manufacturing |         | 125,000                      |         | Owned                |         | —                |         |
| Brenham, Texas                                    |         | Office & manufacturing |         | 130,000                      |         | Owned                |         | —                |         |
| Decatur, Alabama                                  |         | Manufacturing                   |         | 175,000                      |         | Leased               |         | 2009                  |         |
| Duncan, Oklahoma                                  |         | Office & manufacturing |         | 53,000                       |         | Leased               |         | 2012                  |         |
| Elkhart, Indiana                                  |         | Office & manufacturing |         | 211,600                      |         | Owned                |         | —                |         |
| Fort Smith, Arkansas                              |         | Office & manufacturing |         | 170,000                      |         | Leased               |         | 2010                  |         |
| Houston, Texas                                    |         | Office& manufacturing       |         | 97,000                       |         | Leased               |         | 2012                  |         |
| Milwaukee, Wisconsin                              |         | Office & manufacturing |         | 70,000                       |         | Leased               |         | 2010                  |         |
| Monterrey, Mexico                                 |         | Manufacturing                   |         | 38,000                       |         | Leased               |         | 2009                  |         |
| Nashville, Tennessee                              |         | Manufacturing                   |         | 40,900                       |         | Leased               |         | 2008                  |         |
| ***J.B. Poindexter &  Co., Inc.:*** |         |                            |         |                         |         |                 |         |                  |         |
| Houston, Texas                                    |         | Office                          |         | 10,000                       |         | Leased               |         | 2019                  |         |

 

We believe that our facilities are adequate forour current needs and are capable of being utilized at higher capacities tosupply increased demand, if necessary. All owned properties are pledged as collateral against our revolvingcredit facility.

 

16

----

 

**Item 3.              Legal Proceedings**

** **

We are involved in various lawsuits, which arisein the ordinary course of business. In the opinion of management, the ultimateoutcome of known lawsuits will not have a material adverse effect on us.

 

**Item4.              Submission of Matters to aVote of Security Holders**

 

**The sole shareholder ofthe Company signed a consent dated December 4, 2007 electing the followingmembers of the board of directors for the ensuing year: John B. Poindexter,Stephen P. Magee and William J. Bowen.**

 

**PART II**

 

**Item 5.              Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

The registrant’s common equity is privately heldand not publicly traded.  As of March 28,2008, John Poindexter owned all of the registrant’s issue and outstandingcommon equity.  The Company has neverpaid cash dividends.

 

The covenants in the indenture regarding the 8.75%Notes and the loan agreement for the Company’s revolving credit facility bothrestrict the Company’s ability to pay dividends on its common equity.

 

The Company has no securities authorized forissuance under equity compensation plans.

 

17

----

 

**Item 6.              SelectedFinancial Data**

 

The following tables set forthselected consolidated financial data and other data concerning J.B. Poindexter &Co., Inc. for each of the last five years. The selected financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe Consolidated Financial Statements and related Notes thereto.

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| **(Dollars in millions)**                      | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Operating data:**                            |       |                             |       |   |   |   |   |   |   |   |   |
| Net sales                                      |       | $                                | 435.5      |   | $ | 584.9 |   | $ | 668.1 |   | $ | 795.4 |   | $ | 792.2 |   |
| Cost of sales                                  |       | 373.8                            |       | 513.4 |   | 593.1 |   | 701.1 |   | 707.2 |   |
| Selling, general and administrative expense    |       | 36.9                             |       | 40.6 |   | 50.0 |   | 63.0 |   | 64.9 |   |
| Refinancing costs                              |       | 0.8                              |       | — |   | — |   | — |   | — |   |
| Loss (gain) on extinguishment of debt          |       | (0.4                             | )          | 2.4 |   | — |   | — |   | — |   |
| Closed and excess facility costs               |       | —                           |       | — |   | 0.4 |   | 2.7 |   | 0.2 |   |
| Other expense (income)                         |       | —                           |       | (0.4 | ) | 0.1 |   | (0.2 | ) | (0.3 | ) |
| Operating income                               |       | 24.4                             |       | 28.9 |   | 24.5 |   | 28.8 |   | 20.2 |   |
| Interest expense                               |       | 12.4                             |       | 14.5 |   | 18.5 |   | 18.9 |   | 18.7 |   |
| Interest income                                |       | —                           |       | (0.1 | ) | (1.7 | ) | (1.7 | ) | (0.8 | ) |
| Income tax provision                           |       | 2.7                              |       | 4.1 |   | 2.6 |   | 3.4 |   | 3.1 |   |
| Income (loss) before discontinued operations   |       | 9.3                              |       | 10.4 |   | 5.1 |   | 8.2 |   | (0.8 | ) |
| Loss from discontinued operations              |       | (0.2                             | )          | (0.5 | ) | — |   | — |   | — |   |
| Net income (loss)                              |       | $                                | 9.1        |   | $ | 9.9 |   | $ | 5.1 |   | $ | 8.2 |   | $ | (0.8 | ) |
| Ratio of earnings to fixed charges(a)          |       | 1.8                              | x          | 1.9 | x | 1.4 | x | 1.5 | x | 1.1 | x |
|                                           |       |                             |       |   |   |   |   |   |   |   |   |
| **Other data:**                                | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| EBITDA(b)                                      |       | $                                | 36.6       |   | $ | 46.4 |   | $ | 37.9 |   | $ | 43.8 |   | $ | 43.5 |   |
| Consolidated Coverage Ratio(c)                 |       | 3.0                              |       | 3.2 |   | 2.1 |   | 2.4 |   | 2.3 |   |
|                                           |       |                             |       |   |   |   |   |   |   |   |   |
| **Balance sheet data (at period end):**        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                                |       | $                                | 14.9       |   | $ | 75.8 |   | $ | 114.9 |   | $ | 112.3 |   | $ | 83.3 |   |
| Total assets                                   |       | 146.9                            |       | 217.5 |   | 273.2 |   | 292.4 |   | 297.2 |   |
| Total debt                                     |       | 107.8                            |       | 158.4 |   | 205.4 |   | 207.6 |   | 213.6 |   |
| Stockholder’s equity (capital deficiency) |       | (5.4                             | )          | 4.6 |   | 9.7 |   | 18.3 |   | 18.3 |   |

 

----

(a)           For the purpose ofcalculating the ratio of earnings to fixed charges, earnings consist of netincome (loss) plus income taxes and fixed charges (excluding capitalizedinterest). Fixed charges consist of interest expense, amortization of debtissuance costs and the estimated portion of rental expenses deemed a reasonableapproximation of the interest factor.

 

(b)           “EBITDA” is netincome from continuing operations increased by the sum of interest expense,income taxes, depreciation and amortization and other noncash items for thoseoperations defined as restricted subsidiaries in the indenture pertaining tothe 8.75% Notes.  EBITDA is not includedherein as operating data and should not be construed as an alternative tooperating income (determined in accordance with accounting principles generallyaccepted in the United States) as an indicator of the Company’s operatingperformance.  The Company has includedEBITDA because it is relevant for determining compliance under the indentureand because the Company understands that it is one measure used by certaininvestors to analyze the Company’s operating cash flow and historical abilityto service its indebtedness.  Thefollowing are the components of the Company’s EBITDA:

 

18

----

 
| ** **                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **(Dollars in millions)**                    | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (loss) before discontinued operations |       | $                                | 9.3        |   | $ | 10.4 |   | $ | 5.1 |   | $ | 8.2 |   | $ | (0.8 | ) |
| Income tax provision                         |       | 2.7                              |       | 4.1 |   | 2.6 |   | 3.4 |   | 3.1 |   |
| Interest expense                             |       | 12.4                             |       | 14.5 |   | 18.5 |   | 18.9 |   | 18.7 |   |
| Depreciation and amortization                |       | 9.2                              |       | 9.5 |   | 10.4 |   | 12.0 |   | 15.1 |   |
| Noncash charges (income)                     |       | (0.4                             | )          | 2.4 |   | 0.4 |   | 1.1 |   | — |   |
| Pro forma effect of acquisitions             |       | 3.4                              |       | 5.5 |   | 0.9 |   | 0.2 |   | 7.4 |   |
|                                         |       | $                                | 36.6       |   | $ | 46.4 |   | $ | 37.9 |   | $ | 43.8 |   | $ | 43.5 |   |

 

(c)            “ConsolidatedCoverage Ratio” is the ratio of EBITDA to interest expense of the Company andits subsidiaries that guarantee the 8.75% Notes.  It is used in the indenture to limit theamount of indebtedness that the Company may incur.  All the Company’s subsidiaries are restrictedunder the terms of the indenture and guarantee the 8.75% Notes.

 

19

----

 

 

**Item 7.**                                                         Management’sDiscussion and Analysis of Financial Condition and Results of Operations

** **

**Overview**

** **

Duringthe year ended December 31, 2007, MIC Group acquired 100% of theoutstanding stock of three manufacturing businesses that specialize in providingservices to the oil and gas exploration and production industry, primarilylarge multinational oil field services companies.  MIC Group has combined them with itsoperations.  MIC Group acquired Richard’sManufacturing effective April 30, 2007, Tarlton effective August 23,2007 and MMI effective September 4, 2007. The results of operations for these businesses for the period of timesubsequent to their acquisition have been included in the results of operationsof the Specialty Manufacturing Division for the year ended December 31,2007.

 

Thefollowing table shows our net sales, operating income and operating income as apercentage of net sales for each segment for the years ended December 31,2005, 2006 and 2007.

 
| ** **                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| **(Dollars in millions)**   | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net Sales                   |       |                             |       |   |   |   |   |
| Morgan                      |       | $                                | 358.2      |   | $ | 379.4 |   | $ | 332.9 |   |
| Morgan Olson                |       | 60.8                             |       | 100.4 |   | 110.3 |   |
| Truck  Accessories          |       | 153.7                            |       | 159.3 |   | 155.6 |   |
| Specialty  Manufacturing    |       | 95.7                             |       | 155.9 |   | 195.2 |   |
| Eliminations                |       | (0.3                             | )          | 0.4 |   | (1.8 | ) |
| Consolidated                |       | $                                | 668.1      |   | $ | 795.4 |   | $ | 792.2 |   |
| Operating Income (Loss)     |       |                             |       |   |   |   |   |
| Morgan                      |       | $                                | 20.7       |   | $ | 21.6 |   | $ | 15.4 |   |
| Morgan Olson                |       | (1.9                             | )          | 2.8 |   | (2.7 | ) |
| Truck  Accessories          |       | 8.3                              |       | 3.5 |   | 3.2 |   |
| Specialty  Manufacturing    |       | 2.5                              |       | 9.8 |   | 13.7 |   |
| JBPCO  (Corporate)          |       | (5.1                             | )          | (8.9 | ) | (9.4 | ) |
| Consolidated                |       | $                                | 24.5       |   | $ | 28.8 |   | $ | 20.2 |   |
| Operating Margin Percentage |       |                             |       |   |   |   |   |
| Morgan                      |       | 5.8                              | %          | 5.7 | % | 4.6 | % |
| Morgan Olson                |       | (3.1                             | )%         | 2.8 | % | (2.4 | )% |
| Truck  Accessories          |       | 5.4                              | %          | 2.2 | % | 2.1 | % |
| Specialty  Manufacturing    |       | 2.6                              | %          | 6.2 | % | 6.9 | % |
| Consolidated                |       | 3.7                              | %          | 3.6 | % | 2.5 | % |

 

The following is a discussion of the key componentsof our results of operations:

 

***Source of revenues.***  We derive revenues from:

 

·             Morgan’s sales of truckbodies, parts and services;

 

·             Morgan Olson’s sales of stepvan truck bodies, parts and services;

 

·             Truck Accessories’ sales ofpickup truck caps and tonneaus and trailer door and window components; and

 

·             Specialty Manufacturing’ssales of specialty vehicles, including funeral coaches, buses and limousines,contract manufacturing services, packaging and other products.

 

***Discounts, returns andallowances.***  Ourgross sales are reduced by discounts we provide to customers and returns andallowances in the ordinary course of our business.  We provide discounts as deemed necessary to 

 

20

----

 

generate sales volume and remain price competitive.Discounts include payment term discounts and discretionary discounts from listprice.

 

***Cost of sales.***  Cost of sales represents the costs directlyassociated with manufacturing our products and generally varies with the volumeof products produced. The components of cost of sales are materials, labor andoverhead including transportation costs. We have experienced significantincreases in transportation costs and in the cost of materials, such asaluminum, steel, fiberglass-reinforced plywood, lumber, fiberglass resin andplastic beads, that have affected our operating profit margins.  However, increased sales and the prices wecharge for our products and the cost to transport them have mitigated theimpact on our financial condition and results of operations. Additionally, weenter into supply contracts for some materials at a fixed price for up to oneyear and in some cases prepurchase bulk quantities of materials and sourcematerials from overseas to manage materials costs. Overhead costs are allocatedto production based on labor costs and include the depreciation andamortization costs associated with the assets used in manufacturing and othercosts including rent associated with manufacturing, indirect labor and othercosts.

 

***Selling, general andadministrative expenses.***  Selling, general and administrative expensesare made up of the costs of selling our products and administrative costsrelated to information technology, accounting, finance, human resources andengineering. Costs include personnel and related costs, including travel,equipment and facility rent expense not associated with manufacturingactivities, and professional services such as audit fees. Selling, general and administrativeexpenses also include our costs at corporate headquarters to manage and providesupport to our operating subsidiaries.

 

***Other income and expense.***  Income and expenses that we incur during theyear that are nonrecurring in nature and not directly comparable to the prioryear are included in other income and expense or are separately identified.

 

**Critical accounting policies and estimates**

 

Thediscussion and analysis of financial condition and the results of operationsare based upon our consolidated financial statements, which have been preparedin conformity with accounting principles generally accepted in the UnitedStates.  The preparation of theseconsolidated financial statements requires the use of estimates that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. The estimates are evaluatedcontinually, including those related to warranties offered on products,self-insurance reserves, bad debts, inventory obsolescence, investments,intangible assets and goodwill, income taxes, financing operations, workers’compensation insurance and contingent liabilities. The estimates are based onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We believe the following are the most criticalaccounting policies used in the preparation of our financial statements.

 

***Revenue recognition.***  Revenue is recognized upon shipment of theproduct to customers, except for Morgan and Morgan Olson where revenue isrecognized when title transfers to the customer upon final body assembly,quality inspection and customer notification. We classify amounts billed tocustomers related to shipping and handling as revenue. The costs associatedwith shipping and handling revenue are included in cost of sales.

 

***Warranties.*** Reserves for costs associated with fulfillingwarranty obligations offered on Morgan, Morgan Olson, Truck Accessories andSpecialty Vehicles Group products are established based on historicalexperience and an estimate of future claims. Increases in the incidence ofproduct defects would result in additional reserves being required in thefuture and would reduce income in the period of such determination.

 

21

----

 

***Self-insurance risks.***  We utilize a combination of insurancecoverage and self-insurance programs for property, casualty, workers’compensation and health care insurance. We record an actuarially determined,fully developed self-insurance reserve to cover the self-insured portion ofthese risks based on known facts and historical industry trends. Changes in theassumptions used by the actuary could result in a different self-insurancereserve.

 

***Income taxes. ***We estimate our income taxesin each of the jurisdictions in which we operate. This process involvesestimating our current tax exposure and assessing temporary differencesresulting from the differing treatment of items for tax and financial reportingpurposes. These differences result in deferred tax assets and liabilities,which are included in the consolidated balance sheet. We then assess thelikelihood that the deferred tax assets will be recovered from future taxableincome and, to the extent recovery is not likely, a valuation allowance isestablished thereby reducing the deferred tax asset. When an increase in thisallowance within a period is recorded, we include an expense in the taxprovision in the consolidated statements of operations. Management’s judgmentis required in determining the provision for income taxes, deferred tax assetsand liabilities and any valuation allowance recorded against the net deferredtax assets. We had alternative minimum tax credit carryforwards ofapproximately $0.8 million and $0.5 million at December 31, 2007 and 2006,respectively, for U.S. federal income tax purposes, which may be carriedforward indefinitely.   We had a capitalloss carryforward deferred tax asset of approximately $1.4 million at December 31,2007 and 2006, which may be carried forward one year. As of December 31,2007 and 2006, we have recorded a valuation allowance of an equal amountagainst the asset as it is uncertain as to whether we will generate futurecapital gains necessary to utilize the loss carryforward.  At December 31, 2007 and 2006, we had astate tax net operating loss carryforward deferred tax asset of $4.1 million,and at December 31, 2007 and 2006, we had recorded a valuation allowanceof $2.5 million against the portion of which realization is uncertain.  We recognized a reduction in the valuationallowance of $1.0 million during 2005 which reduced the tax provision by anequal amount for the year.  We had Canadiantax net operating losses of approximately $6.7 million and $4.5 million andrecognized a deferred tax asset of $2.1 million and $1.9 million as of December 31,2007 and 2006, respectively.  As of December 31,2007, we had recorded a valuation allowance of $0.8 million against the portionof the deferred tax asset for which realization is uncertain.  $4.5 million of Canadian tax net operatinglosses will be carried back to prior years. The Canadian net operating loss carryforwards expire at various datesranging from 1 to 20****years.  While our deferred tax assets, net of thevaluation allowance, are considered realizable, actual amounts could be reducedif future taxable income is not achieved.

 

In June 2006, the FASB issued FIN 48, *Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized under SFAS No. 109, *Accounting for Income Taxes*. FIN 48prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return and also provides guidance on various related matterssuch as derecognition, interest and penalties, and disclosure.  In connection with the adoption of FIN 48, werecognized an increase of approximately $0.2 million to our net tax liabilitiesprimarily related to uncertain state income tax positions, net of a federal taxbenefit, which was accounted for as a reduction to retained earnings as of January 1,2007. As of January 1, 2007, we had approximately $1.6 million ofunrecognized state tax liabilities, and a corresponding federal tax benefit of$0.4 million, which included $0.3 million of interest and penalties.  During 2007, we recorded an additionalprovision for uncertain state tax positions of $1.0 million, and acorresponding federal tax benefit of $0.3 million, related to prior year statetax positions and a state tax liability of $0.3 million, and a correspondingfederal tax benefit of $0.1 million, related to current year state taxpositions.  As of December 31, 2007,we had approximately $2.9 million of unrecognized tax benefits relatedprimarily to uncertain state tax liabilities, and a corresponding federalbenefit of $0.8 million, including $0.7 million of possible interest and theconsequential late payment penalties, if assessed, of which $2.1 million, ifrecognized, would reduce our income tax provision in future periods.

 

***Inventory valuation. ***Our inventories mainlyconsist of raw materials, vehicles prior to conversion, supplies andwork-in-progress. Because our largest segments, Morgan, Morgan Olson and TruckAccessories, primarily produce products to their customers’ orders, we maintaina relatively small stock of finished goods inventories. Inventories are statedat the lower of cost (first-in, first-out method) or market. We record reservesagainst the value of inventory based upon our determination that the inventoryis not usable in our products. These reserves 

 

22

----

 

are estimates, which could vary significantly,either favorably or unfavorably, from actual requirements if future economicconditions, customer inventory levels or competitive conditions differ from ourexpectations.

 

***Accounts receivable. ***We provide credit to ourcustomers in the ordinary course of business. We are not aware of anysignificant credit risks related to our customer base and do not generallyrequire collateral or other security to support customer receivables.  Specialty Vehicle Group sells to certaincustomers on extended terms and retains title to the vehicle until payment iscomplete. The carrying amount of our accounts receivable approximates the fairvalue of the receivables because of their short-term nature with paymenttypically due within 30 days of transfer of title to the product. Weestablish an allowance for doubtful accounts on a case-by-case basis when webelieve that we are unlikely to receive payment in full of amounts owed to us.We make a judgment in these cases based on available facts and circumstances andwe may record a reserve against a customer’s account receivable. We reevaluatethe reserves and adjust them as we obtain more information regarding theaccount. The collectibility of trade receivables could be significantly reducedif there is a greater than expected rate of defaults or if one or moresignificant customers experience financial difficulties or are otherwise unableto make required payments.

 

***Goodwill, identifiedintangibles and long-lived assets impairment. ***We perform a test of our goodwill for potentialimpairment annually as of October 1 as prescribed by Statement ofFinancial Accounting Standards No. 142, *“Goodwilland Other Intangibles.”* The fair values of our reporting units arebased on various valuation methods, including multiples of earnings derivedfrom information and analysis of recent acquisitions in the marketplace forcompanies with similar operations and discounted cash flow analysis. Changes inthe assumptions used in the fair value calculation could result in an estimatedreporting unit fair value that is below the carrying value, which may give riseto an impairment of our goodwill.  Inaddition to the annual review, we also test for impairment of our long-livedassets, goodwill and indefinite- lived intangible assets should events orcircumstances indicate a potential reduction in the fair value of those assetsbelow their carrying value.  Lastly, onan annual basis, we determine that the remaining lives of identifiedamortizable intangible assets continue to be appropriate.

 

**Comparison of 2007 to 2006**

 

***Sales.**** **Our*consolidated net salesdecreased $3.2 million, or 0.4%, to $792.2 million for 2007 compared to$795.4 million for 2006.  Excludingbusinesses acquired during 2007, consolidated net sales decreased $28.0million, or 3.5%, to $767.4 million for 2007.

 

·             Morgan’s net sales decreased$46.5 million, or 12.3%, to $332.9 million for 2007 compared to$379.4 million for 2006.  After a4.8% increase in sales in the six months ended June 30, 2007, salesdeclined $56.6 million, or 33.4%, in the six months ended December 31,2007 as an industry-wide decline in demand for truck bodies took effect.  Shipments decreased 17.7% for the year offsetby a 7.1% increase in the average unit price of a truck body. Sales of truckbodies to the commercial divisions of leasing companies, companies with fleetsof delivery vehicles, truck dealers and distributors, or Commercial sales,which represented 83.0% of Morgan’s net sales in 2007, decreased $47.5 million,or 14.6%, to $276.9 million.  ConsumerRental sales increased $0.6 million, or 1.7% on a 6.0% increase in unit pricewhich was offset by a 4.1% decrease in unit shipments.  Sales of parts and services increased $2.7million to $15.7 million compared to $12.9 million last year.

 

·             Morgan Olson’s net salesincreased $9.9 million, or 9.9%, to $110.3 million for 2007 compared to $100.4million for 2006.  Step van body salesincreased $5.9 million, or 7.1%, on a 4.8% increase in unit shipments.  Parts and service sales were $16.7 million in2007 and $17.1 million in 2006.

 

·             Truck Accessories’ net salesdecreased $3.7 million, or 2.4%, to $155.6 million for 2007 compared to $159.3million for 2006.   Shipments of caps andtonneaus decreased by 7.5% to approximately 173,700 units.   Demand for caps and tonneaus is dependent onnew pickup trucks sales which in the United States and Canada decreased 5.8%from the respective period last year to approximately 2.7 million units.

 

23

----

 

·             SpecialtyManufacturing’s net sales increased by $39.3 million, or 25.2%, to$195.2 million for 2007 compared to $155.9 million for 2006.  Sales to customers in the energy servicesbusiness excluding acquisitions increased 32.3% to $71.3 million comparedto $53.9 million in 2006. Acquisitions added an additional $24.8 million of sales for 2007.  Sales at the Specialty Vehicle Groupdecreased $1.6 million, or 2.2%, to $70.4 million compared to $72.0million.  Demand for funeral products,coaches and family cars, declined in 2007 after increasing in 2006 in responseto a new chassis introduction by Cadillac. Sales of funeral products decreased $11.7 million, which was offset byan increase in limousine, bus and van sales of $10.1 million.

 

***Backlog.***** **Consolidatedbacklog was $219.3 million as of December 31, 2007 compared to $198.1million as of December 31, 2006.

 

·             Morgan’sbacklog at December 31, 2007 was $62.0 million compared to$114.6 million at December 31, 2006. The decrease in backlog was dueto a decrease in orders for retail units in the latter half of 2007.

 

·             Morgan Olson’s backlog was$43.5 million at December 31, 2007 compared to $25.1 million at December 31,2006.  The increase was due primarily toan increase in UPS and DHL backlog of $16.7 million.

 

·             Truck Accessories’ backlogof approximately two weeks of production was $3.6 million at December 31,2007 compared to $4.1 million as of December 31, 2006.

 

·             Specialty Manufacturing’sbacklog at December 31, 2007 increased $56.1 million to$110.2 million compared to $54.1 million at December 31,2006.  The backlog of machining servicesincreased $50.4 million over last year; acquisitions accounted for $38.9million of the increase.

 

***Costof sales and gross profit. ******Our***consolidated cost of salesincreased by $6.1 million, or 0.9%, to $707.2 million for 2007 compared to$701.1 million for 2006. Consolidated gross profit decreased by$9.4 million, or 9.9%, to $84.9 million (10.7% of net sales) for 2007compared to $94.3 million (11.9% of net sales) for 2006.  Material, labor and overhead costs made up56.9%, 15.2% and 20.3%, respectively, of cost of sales during 2007 and 55.6%,14.9% and 19.4%, respectively, during 2006. Excluding businesses acquired in 2007, cost of sales decreased $14.7million, or 2.1%, and the gross profit was $80.8 million (10.5% of net sales).

 

·             Morgan’s gross profitdecreased by $8.4 million, or 19.9%, to $33.8 million (10.2% of itsnet sales) for 2007 compared to $42.2 million (11.1% of its net sales) for2006.  The decline in gross profit wasdue primarily to lower sales which at 2006 cost levels reduced gross profit by$5.6 million; however, a $1.0 million increase in overhead costs and a $3.3million increase in material costs partly offset by labor productivityimprovements that eliminated labor costs of $1.7 million increased the declinein gross profit in 2007 to $8.4 million.

 

·             Morgan Olson’s gross profitdecreased by $4.5 million, or 52.1%, to $4.2 million (3.8% of its netsales) for 2007 compared to $8.7 million (8.7% of its net sales) for2006.  The decrease in gross profit wasdue to increased material and overhead costs of $6.4 million partly offset byreduced labor costs of $1.0 million and the gross profit on the increasedvolume of about $0.8 million.  Theincrease in overhead costs included amounts resulting from events specific to2007 for step van warranty repairs, unemployment insurance costs and costsassociated with a failure to comply with environmental reporting requirementsthat totaled about $0.6 million. Material cost increases relative to the amount of sales were primarilydue to pricing errors on our products and increased scrap.

 

·             Truck Accessories’ grossprofit declined by $3.5 million, or 17.9%, to $16.1 million (10.4% ofits net sales) for 2007 compared to $19.6 million (12.3% of its net sales)for 2006. Gross profit decreased $3.5 million due to lower volumes ($0.4million), increased labor and overhead of $6.2 million (of which we estimate$4.0 million was the result of production problems arising from the move of theCanadian 

 

24

----

 

operationto two plants in the U.S.) partly offset by a reduction in material costs of$3.1 million (primarily due to the benefits derived from the acquisition of akey component supplier, State Wide, in March 2006).

 

·             Specialty Manufacturing’sgross profit increased $7.1 million, or 30.0%, to $30.8 million (15.8% of itsnet sales) for 2007 compared to $23.7 million (15.2% of its net sales) for2006.  Gross profit increased $11.2million, or 120% at the machining services business including $4.2 million fromacquisitions made during 2007, partly offset by a $4.1 million decline in grossprofit at the Specialty Vehicle Group and the packaging business due primarilyto lower production volumes.

 

***Selling, general andadministrative expenses. ***Ourconsolidated selling, general and administrative expenses increased $1.9million, or 3.0%, to $64.9 million (8.2% of net sales) for 2007 compared to$63.0 million (7.9% of net sales) for 2006. Excluding businesses acquired in 2007 selling, general andadministrative expenses increased $0.2 million (also 8.2% of net sales).

 

·             Morgan’s selling, generaland administrative expenses decreased $2.0 million, or 9.6%, to $18.7 million(5.6% of its net sales) for 2007 compared to $20.7 million (5.5% of itsnet sales) for 2006 due to lower spending on an Enterprise Resource Planning(ERP) implementation and lower sales commissions.

 

·             Morgan Olson’s selling,general and administrative expenses increased by $0.9 million, or 15.3%, to$6.9 million (6.2% of its net sales) for 2007 compared to $6.0 million(5.9% of its net sales) for 2006 due primarily to increased sales personnel andincreased commissions.

 

·             Truck Accessories’ selling,general and administrative expenses decreased by $0.5 million, or 3.9%, to$12.9 million (8.3% of its net sales) for 2007 from $13.4 million (8.4% of itsnet sales) for 2006.

 

·             Specialty Manufacturing’sselling, general and administrative expenses increased by $2.9 million, or 20.3%,to $17.0 million (8.7% of its net sales) for 2007 from $14.1 million (9.0%of its net sales) for 2006.  Businessesacquired in 2007 added $1.7 million of expense and expenses increased at themanufacturing services operations by $1.2 million due to higher salescommissions and executive incentive payments on improved performance.

 

·             Corporate selling, generaland administrative expenses increased by $0.6 million, or 7.0%, to$9.5 million for 2007 from $8.9 million for 2006.  The increase was due to increases in ERPimplementation costs of $1.1 million, acquisition-related costs of $0.5million, costs associated with the documentation and testing of internalcontrols of $0.5 million and increases in casualty insurance reserves of $0.5million all partly offset by a $2.0 million reduction in spending onmanufacturing consultants.

 

***Closed and excess facility costs.***During 2007,Specialty Manufacturing’s packaging business closed its plant in Tennessee dueto the loss of business resulting from the elimination of a product by a majorcustomer.  Costs associated with theclosure were $0.2 million. ** **During 2006, Truck Accessoriesannounced a plan to close its manufacturing facility in Canada and moveproduction of its Raider product line to other manufacturing locations. As aresult of this decision, Truck Accessories recorded a closed and excessfacility charge of $2.7 million during 2006. The $2.7 million expense included approximately $1.1 million of noncashcharges related to the write-down of property, plant and equipment.  The charge also included estimated personnelcosts. Manufacturing operations ceased at this location effective February 2007.

 

***Operating income. ***Due to the effect of thefactors summarized above, consolidated operating income decreased by$8.6 million, or 29.9%, to $20.2 million (2.5% of net sales) for 2007from $28.8 million (3.6% of net sales) for 2006.

 

·             Morgan’s operating incomedecreased by $6.2 million, or 28.7%, to $15.4 million (4.6% of itsnet sales) for 2007 compared to $21.6 million (5.7% of its net sales) for2006.

 

25

----

 

·             Morgan Olson’s operatingincome decreased by $5.5 million to a loss of $2.7 million for 2007 from incomeof $2.8 million (2.8% of its net sales) for 2006.

 

·             Truck Accessories’ operatingincome decreased by $0.3 million, or 9.3%, to $3.2 million (2.1% ofits net sales) for 2007 compared to $3.5 million (2.2% of its net sales) for2006.

 

·             Specialty Manufacturing’soperating income increased by $3.9 million, or 40.7%, to$13.7 million (7.0% of its net sales) for 2007 compared to $9.8 million(6.2% of its net sales) for 2006. Acquisitions contributed $2.5 million of operating income during theyear.

 

·             Corporate expenses increased$0.6 million to $9.5 million for 2007 compared to $8.9 million for 2006.

 

***Interest expense(income).  ******I***nterest expense decreased$0.2 million, or 1.2%, to $18.7 million (2.4% of net sales) for 2007 comparedto $18.9 million (2.4% of net sales) for 2006.  The decrease was due to about $0.6 million ofcapitalized interest associated with our ERP project.  We earned $0.9 million of interest income onour cash and cash equivalents during 2007 compared to $1.8 million during 2006as a result of the decrease in cash and cash equivalents.

 

***Income taxes.***The effective income taxrate was 134% and 29% of income before income taxes for 2007 and 2006,respectively.  The income tax provisionfor 2007 differs from amounts computed based on the federal statutory rate as aresult of state and foreign taxes, a $0.7 million increase in the valuationallowance for foreign net operating loss carryforwards and $1.0 millionincrease in reserves for uncertain tax positions. The income tax provision for2006 differs from amounts computed based on the federal statutory rate as aresult of state and foreign taxes, a $0.7 million benefit from an increase inthe state net operating loss carryforwards and other items.

 

**Comparison of 2006 to 2005**

 

***Sales.**** **Our*consolidated net salesincreased $127.3 million, or 19.0%, to $795.4 million for 2006 compared to$668.1 million for 2005.

 

·             Morgan’s net sales increased$21.2 million, or 5.9%, to $379.4 million for 2006 compared to$358.2 million for 2005.  Truck bodysales increased $21.1 million or 6.2%. The increase was due primarily to a 5.5% increase in the average unitprice of a truck body and a 0.7% increase in the number of units shipped.  Sales of truck bodies to the commercialdivisions of leasing companies, companies with fleets of delivery vehicles,truck dealers and distributors, or Commercial sales, which represented 85% ofMorgan’s net sales in 2006, increased $15.5 million, or 5.0%, to $324.4million.  Consumer Rental sales increased$5.7 million, or 6.2%, on an 11.0% increase in unit shipments.  Sales of parts and services increasedslightly to $12.9 million compared to $11.5 million in 2005.  Discounts decreased slightly to $9.9 millionor 2.6% of net sales in 2006 compared to $10.6 million or 3.0% of net sales in2005.

 

·             Morgan Olson’s net salesincreased $39.6 million, or 65.1%, to $100.4 million for 2006 compared to $60.8million for 2005.  Step van body salesincreased $39.7 million, or 91.0%, on an 82.0% increase in unit shipments.  The increase in unit shipments was dueprimarily to a 200% increase in sales to UPS from approximately 1,118 units in2005 to 3,340 units in 2006.  Parts andservice sales were $18.1 million in 2006 and 2005.

 

·             Truck Accessories’ net salesincreased $5.6 million, or 3.6%, to $159.3 million for 2006 compared to $153.7million for 2005.   Excluding State Wide,which was acquired in March 2006, sales revenue decreased 3.8% or $5.9million.  Shipments of caps and tonneausdecreased by 9.2% partially offset by a 5.4% increase in the average price perunit.   Pickup truck sales in the UnitedStates and Canada decreased 10.1% during 2006 compared to 2005.

 

26

----

 

·             SpecialtyManufacturing’s net sales increased by $60.2 million, or 62.9%, to$155.9 million for 2006 compared to $95.7 million for 2005.  Sales to customers in the energy servicesbusiness increased 46.5% to $41.8 million compared to $28.6 millionduring 2005.  Specialty Vehicle Group’ssales increased $49.3 million, or 218%, due to the acquisition of Eagle Coachon January 3, 2006 and $29.1 million, or 128.5%, due to the acquisition ofFederal Coach on June 6, 2005.

 

***Backlog.***** **Consolidatedbacklog was $198.1 million as of December 31, 2006 compared to $143.6million as of December 31, 2005.

 

·             Morgan’sbacklog at December 31, 2006 was $114.6 million compared to$94.7 million at December 31, 2005. The increase from a year earlierwas due primarily to the timing of the receipt of fleet orders from its twolargest customers.

 

·             Morgan Olson’s backlog was$25.1 million at December 31, 2006 compared to $9.3 million at December 31,2005.  The increase was due primarily toan order from UPS for $8.9 million included in the 2006 backlog.

 

·             Truck Accessories’ backlogof approximately two weeks of production was $4.1 million at December 31,2006 compared to $3.9 million as of December 31, 2005.

 

·             Specialty Manufacturing’sbacklog at December 31, 2006 increased $16.6 million to $52.3 millioncompared to $35.7 million at December 31, 2005.  The backlog of machining services increased$14.7 million over 2005.

 

***Costof sales and gross profit. ******Our***consolidated cost of salesincreased by $108.0 million, or 18.2%, to $701.1 million for 2006 compared to$593.1 million for 2005. Consolidated gross profit increased by$19.3 million, or 25.7%, to $94.3 million (11.9% of net sales) for2006 compared to $75.0 million (11.2% of net sales) for 2005.  Material, labor and overhead costs made up55.6%, 14.9% and 19.4%, respectively, of cost of sales during 2006 and 52.9%,15.2% and 20.7%, respectively, during 2005.

 

·             Morgan’s gross profitincreased by $2.6 million, or 6.6%, to $42.2 million (11.1% of itsnet sales) for 2006 compared to $39.6 million (11.1% of its net sales) for2005.

 

·             Morgan Olson’s gross profitincreased by $6.5 million, or 289.2%, to $8.7 million (8.7% of itsnet sales) for 2006 compared to $2.2 million (3.7% of its net sales) for2005.  The increase in gross profit wasdue to improved labor efficiencies and overhead absorption on higher productionvolumes.

 

·             Truck Accessories’ grossprofit declined by $2.0 million, or 9.2%, to $19.6 million (12.3% ofits net sales) for 2006 compared to $21.6 million (14.0% of its net sales)for 2005. Gross profit decreased $3.9 million excluding the results of StateWide which was acquired in March 2006. The decline in gross profit can be attributed to lower volumes, deliveryinefficiencies, and ongoing labor issues at our Raider plant partially offsetby reduced material component costs as a result of the acquisition of StateWide.

 

·             Specialty Manufacturing’s grossprofit increased $12.1 million, or 104.2%, to $23.7 million (15.2% of its netsales) for 2006 compared to $11.6 million (12.1% of its net sales) for2005.  The acquisition of Eagle Coach on January 3,2006 added $3.7 million to gross profit for the Specialty Vehicle Group whichcontributed $10.1 million of gross profit in 2006 compared to $1.9 million in2005.  The remaining operations ofSpecialty Manufacturing increased gross profit by $3.9 million, or 40.2%.

 

***Selling, general andadministrative expenses. ***Ourconsolidated selling, general and administrative expenses increased$13.0 million, or 26.0%, to $63.0 million (7.9% of net sales) for2006 compared to $50.0 million (7.5% of net sales) for 2005.

 

27

----

 

·             Morgan’s selling, generaland administrative expenses increased $1.8 million, or 9.7%, to$20.7 million (5.5% of its net sales) for 2006 compared to$18.9 million (5.3% of its net sales) for 2005.  The majority of the increase was due to $1.4million of expenses related to a new ERP system being implemented.

 

·             Morgan Olson’s selling,general and administrative expenses increased by $1.8 million, or 42.2%,to $6.0 million (5.9% of its net sales) for 2006 compared to$4.2 million (6.9% of its net sales) for 2005.  An increase in general and administrativeexpenses of $1.8 million was primarily due to an increase in sales personnelfrom 21 to 33.  Selling, general andadministrative expenses as a percentage of sales decreased by 1.0% from 6.9% in2005 to 5.9% for 2006.

 

·             Truck Accessories’ selling,general and administrative expenses increased by $0.8 million, or 6.3%, to$13.4 million (8.4% of its net sales) for 2006 from $12.6 million (8.2% of itsnet sales) for 2005. Costs increased primarily due to the incremental expensesof $1.0 million from the acquisition of State Wide.

 

·             Specialty Manufacturing’sselling, general and administrative expenses increased by $4.9 million, or52.5%, to $14.1 million (9.0% of its net sales) for 2006 from$9.2 million (9.6% of its net sales) for 2005. The acquisition of EagleCoach in 2006 added $2.2 million and the acquisition of Federal Coach in June 2005added $2.1 million of expenses 2006.

 

·             Corporate selling, generaland administrative expenses increased by $3.8 million, or 74.2%, to$8.9 million for 2006 from $5.1 million for 2005, primarily due toapproximately $0.5 million in executive severance pay and  $3.2 million of consulting costs related toour productivity initiatives.

 

***Closed and excess facility costs.***During thefourth quarter of 2006, Truck Accessories announced a plan to close itsmanufacturing facility in Canada and move production of its Raider product lineto other manufacturing locations. As a result of this decision, TruckAccessories recorded a closed and excess facility charge of $2.7 million duringthis period.  The $2.7 million expenseincludes approximately $1.1 million of noncash charges related to thewrite-down of property, plant and equipment. The charge also included estimated personnel costs. Manufacturingoperations ceased at this location effective February 2007.

 

***Operating income. ***Due to the effect of thefactors summarized above, consolidated operating income increased by$4.2 million, or 17.2%, to $28.8 million (3.6% of net sales) for 2006from $24.5 million (3.7% of net sales) for 2005.

 

·             Morgan’s operating incomeincreased by $0.9 million, or 3.9%, to $21.6 million (5.7% of its netsales) for 2006 compared to $20.7 million (5.8% of its net sales) for2005.

 

·             Morgan Olson’s operatingincome increased by $4.7 million to $2.8 million for 2006 (2.8% of its netsales) from a $1.9 million operating loss (3.2% of its net sales) for2005.

 

·             Truck Accessories’ operatingincome decreased by $4.8 million, or 57.8%, to $3.5 million (2.2% ofits net sales) for 2006 compared to $8.3 million (5.4% of its net sales) for2005.  State Wide’s operating income was$1.1 million for the 2006 period.

 

·             Specialty Manufacturing’soperating income increased by $7.3 million, or 295.1%, to$9.8 million (6.2% of its net sales) for 2006 compared to $2.5 million(2.6% of its net sales) for 2005.

 

·             Corporate expenses increased$3.8 million to $8.9 million for 2006 compared to $5.1 million for 2005.

 

***Interest expense(income).  ******I***nterest expense increased$0.4 million, or 2.6%, to $18.9 million (2.4% of net sales) for 2006 comparedto $18.5 million (2.8% of net sales) for 2005.  The increase was due to $0.2 million ofadditional interest in 2006 on the 8.75% Note offering, completed January 21,2005, and interest on additional capital leases of $0.2 million.  We earned $1.8 million of interest income onour cash, cash equivalents and short-term investments during 2006.

 

28

----

 

***Income taxes.***The effective income taxrate was 29% and 34% of income before income taxes for 2006 and 2005,respectively.  The income tax provisionsfor 2006 and 2005 differ from amounts computed based on the federal statutoryrate as a result of state and foreign taxes, a $0.7 million increase in thestate net operating loss carryforwards and a $1.0 million reduction in thevaluation allowance that reduced the income tax provision in 2006 and 2005,respectively, and other various items.

 

**Liquidityand capital resources**

 

Historically,we have funded our operations with cash available from the proceeds of our8.75% Notes, cash generated from operations and borrowings under our revolvingcredit facility, as needed.  Workingcapital at December 31, 2007 was $83.3 million compared to$112.3 million at December 31, 2006. Our cash and cash equivalents decreased by $22.6 million as a result ofcash paid for acquisitions during 2007 of $41.7 million and capitalexpenditures of $14.3 million less cash provided by operating activities of$30.8 million.  Excluding cash and cashequivalents, working capital decreased $6.4 million, primarily as a result of adecrease in accounts receivable of $14.8 million partly offset by an increasein inventories of $4.5 million and decreases in accounts payable and accruedexpenses of $1.6 million.  Averageaccounts receivable days sales outstanding at December 31, 2007 wereapproximately 24 compared to 31 at December 31, 2006 and inventory turnsduring 2007 were approximately 8.8 compared to 9.2 during 2006.  Excluding vehicle chassis at SpecialtyVehicle Group (vehicle chassis remain in inventory for extended periods of timeand amounted to $11.7 million and $10.9 million at December 31, 2007 and2006, respectively) inventory turns were 10.7 for both 2007 and 2006.

 

***Operating cash flows. ***Operatingactivities during 2007 generated cash of $30.8 million compared to $3.0million during 2006 and $14.6 million during 2005. The increase in net cashgenerated by operating activities during 2007 was due primarily to a decreasein working capital, primarily accounts receivable and inventories of $25.2million.

 

The decrease in cash fromoperating activities during 2006 compared to 2005 was due principally to anincrease in working capital.

 

***Investing cash flows. ******Net cash used in investing activities increased $42.8million in 2007 compared to 2006.  During2007 cash paid for acquisitions increased $27.8 million to $41.7 million andcapital expenditures increased $0.4 million. During 2006 we realized proceeds from the sale of short-term investmentsof $15.3 million that was not repeated in 2007.***

 

We acquired Richard’s Manufacturing effective April 30,2007 for cash of $12.6 million, Tarlton effective August 23, 2007 for cashof $18.4 million and MMI effective September 4, 2007 for cash of $10.6million.  These acquisitions were paidfor with proceeds from our 8.75% Note offerings and cash generated byoperations.

 

Capitalexpenditures during 2007 were $14.3 million ***comprised primarily of machineryand equipment of $10.0 million at Specialty Manufacturing and molds of $4.0million at Truck Accessories.  Weacquired approximately $4.6 million of equipment under capital leases that werenot included in capital expenditures.***As of December 31, 2007, we had nosignificant open commitments for capital expenditures.

 

***During 2006, we realized proceeds of$15.3 million from the sale of short-term investments compared to a netincrease in short-term investments of $10.3 million in 2005.  We acquired two companies in 2006 for acombined purchase price of $13.9 million, compared to $12.3 million paid in2005 for one acquisition.  Capitalexpenditures decreased $1.6 million to $13.9 million in 2006 and were comprisedprimarily of information technology costs related to the new ERP system of $3.6million, machinery and equipment of $5.4 million and molds of $2.0 million atTruck Accessories.  We acquiredapproximately $4.1 million of equipment under capital leases that were notincluded in capital expenditures.***

 

We acquired Federal Coachduring the second quarter of 2005 using cash proceeds of approximately $12.3million from our 8.75% Note offerings. Capital expenditures for 2005 were $15.5 million and included $6.1million of new machine tools and presses for Specialty Manufacturing, $2.4million of new product molds at Truck Accessories and 

 

29

----

 

a $1.5 million investment ininformation technology assets.   Weacquired approximately $1.0 million of equipment under capital leases that werenot included in capital expenditures.

 

***Financing cash flows. ******Net cash provided by financing activities totaled$1.5 million in 2007, an increase of $3.0 million compared to the prior yeardue to borrowings under our revolving credit agreement of $3.6 million.  Our Revolving Credit Agreement expired March 15,2008, however neither party to the agreement gave notice of termination and itbecame effective for an additional year ending on March 15, 2009.***

 

***During 2005, w***e generated$45.0 million of cash from financing activities for 2005 as the result ofobtaining $45.0 million in aggregate principal amount from our sale of 8.75% Notes (see below) at a 5% premium,the net proceeds of which were approximately $46.4 million of increased cashand short-term investments.

 

***Long-term debt. ******At December 31, 2007, our long-term debt was$210.0 million and was comprised of $201.5 million of our***8.75% Notes***, which included an unamortized premium on the sale of theNotes of $1.5 million, and $8.5 million of capital lease obligations.***

 

***On January 27,2005, we completed an offer to sell $45.0 million of our***8.75% Notes***at a premium of 5% over par on the same terms as theoriginal issue.  Net proceeds ofapproximately $46.4 million increased cash and short-term investments.***

 

At December 31, 2007, the Consolidated CoverageRatio, as defined in the indenture relating to our 8.75% Notes, was 2.3 to 1.0.As a result, we are able to incur additional borrowings including borrowingsfor capital expenditures. Our indenture and revolving credit facility restrictour ability to incur debt, pay dividends and undertake certain corporateactivities. We are in compliance with the terms of the indenture and revolvingcredit facility.

 

The revolving credit facilityprovides for available borrowings of up to $30.0 million in revolvingloans. We have the option, subject to certain conditions, to increase theamount we are permitted to borrow under the facility to $50.0 million. Asof December 31, 2007, we believe we have satisfied those conditions.Available borrowings are subject to a borrowing base of eligible accountsreceivable, inventory, machinery and equipment, and real estate. Borrowingsunder our revolving credit facility are secured by substantially all of ourassets and the assets of our existing subsidiaries. Our revolving creditfacility also includes a sub-facility for up to $15.0 million of lettersof credit. As of December 31, 2007, we had $3.6 million of borrowingsunder the facility, $2.4 million of letters of credit outstanding and ourborrowing base would have supported debt borrowings of the entire$30.0 million under our revolving credit facility.

 

In addition, the revolvingcredit facility includes covenants that place various restrictions on us, includinglimitation, on our ability to:

 

·             incur additional debt;

 

·             create or become subject to liens or guarantees;

 

·             make investments or loans;

 

·             pay dividends or make distributions;

 

·             prepay the 8.75%Notes or other debt;

 

·             merge with other entities or make acquisitions ordissolve;

 

·             sell assets;

 

·             change fiscal year or amend organizational documentsor terms of any subordinated debt;

 

30

----

 

·             enter into leases; and

 

·             enter into transactions with affiliates.

 

We believe that we will have adequateresources to meet our working capital and capital expenditure requirementsconsistent with past trends and practices for at least the nexttwelve months. Additionally, we believe that our cash and borrowingavailability under the revolving credit facility will satisfy our cashrequirements for the coming year, given our anticipated capital expenditures,working capital requirements and known obligations. Our ability to makepayments on our debt, including the 8.75% Notes, and to fund planned capital expenditureswill depend on our ability to generate cash in the future. This is subject togeneral economic conditions, other factors influencing the industries in whichwe operate and circumstances that are beyond our control.  We cannot be certain that we will generatesufficient cash flows, and if we do not, we may have to engage in otheractivities such as the sale of assets to meet our cash requirements.

 

**Off balance sheet arrangements**

 

We have no off balance sheetarrangements.

 

**Commitments and capital expenditures**

** **

We have entered into anagreement with a major paint manufacturer to which Truck Accessories, Morgan,Morgan Olson and Specialty Vehicle Group are committed to buying principallyall of their automotive paint for five years. We receive favorable pricing in return for the commitment and estimatethat we will purchase approximately $10 million of paint products during 2008under this agreement.  We sometimescommit to the purchase of aluminum based on expected levels of futureproduction and at December 31, 2007 Morgan and Morgan Olson had a combinedcommitment of $16.2 million.  We did nothave any material commitments to acquire new capital equipment as of December 31,2007.

 

Certain cash contractualobligations of ours as of December 31, 2007 are summarized in the tablebelow.

 
| **Obligations (Dollars in  millions)** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------------|------------|-----------|------------|-----------------------|------------|----------------|------------|----------------|------------|--------------------|------------|
| 8.75% Notes                            |       | $         | 200.0      |                  | $          | —         |       | $              | —     |               | $          | — |   | $ | 200.0 |   |
| Operating leases                       |       | 25.4      |       | 8.5                   |       | 11.4           |       | 4.0            |       | 1.5                |       |
| Capital leases                         |       | 8.4       |       | 2.4                   |       | 3.9            |       | 2.1            |       | —             |       |
| Total                                  |       | $         | 233.8      |                  | $          | 10.9           |       | $              | 15.3       |               | $          | 6.1 |   | $ | 201.5 |   |

 

**Other matters**

 

We are significantly leveragedand will continue to be significantly leveraged. We had $18.3 million ofstockholder’s equity at December 31, 2007 and 2006. We operate in cyclicalbusinesses and the markets for our products are highly competitive. Inaddition, we have two customers that accounted for 23% of 2007 consolidated netsales and our top ten customers accounted for 41% of our 2007 consolidated netsales.

 

We continually evaluate,depending on market conditions, the most efficient use of our capital andcontemplate various strategic options, which may include, without limitation,restructuring our business, indebtedness or capital structure. Accordingly, weor our subsidiaries may from time to time consider, among other things,purchasing, refinancing or otherwise retiring certain outstanding indebtedness(whether in the open market or by other means), public or private issuances ofdebt or equity securities, joint venture transactions, acquisitions ordispositions, new borrowings, tender offers, exchange offers or any combinationthereof, although there can be no assurances that such financing sources willbe available on commercially reasonable terms. Additionally, there can be noassurances that these strategic options, if pursued, will be consummated or, ifconsummated, what effect they will have on us.

 

31

----

 

Historically, inflation has notmaterially affected our business; however, a rapid acceleration of materialprice inflation reduced our operating profit margins during 2005 and 2004.  We believe that we have increased our sellingprices to levels necessary to offset the raw material cost inflation that wasexperienced during both 2005 and 2004. We implemented further price increases at Morgan, Truck Accessories andSpecialty Manufacturing during 2006 and 2007 but cannot predict the impact, ifany, of future raw material price increases on our profitability.  Operating expenses, such as salaries and teammember benefits, are subject to normal inflationary pressures.

 

During 2006, we paid $0.3 million in fees to SouthwesternHoldings, Inc. (“Southwestern”), which is wholly owned by Mr. Poindexter,for services provided by Mr. Poindexter during 2006. Beginning in July 2006,Mr. Poindexter began receiving a salary from the Company.  Southwestern is a named insured under theCompany’s general liability and excess umbrella insurancepolicies.  During 2007, Southwestern became the defendant in a suit fordamages resulting from a vehicle accident not involving the Company’s assets orany of its team members.  The outcome of the lawsuit or the amount of anysettlement cannot be estimated, however, in the event a settlement exceeds Southwestern’sseparate insurance coverage, coverage will be provided by the Company’spolicies and the Company will be liable up to the amount of the deductible or$0.3 million.  Any deductible amounts or increased premiums incurredby the Company will be reimbursed by Southwestern.

 

**Recently issued accounting standards**

 

**In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin (SAB) No. 108, *“Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements.”*  SAB No. 108 was issued in order toeliminate the diversity of practice surrounding how public companies quantifyfinancial statement misstatements.  InSAB No. 108, the SEC staff established an approach that requiresquantification of financial statement misstatements based on the effects of themisstatements on each of the company’s financial statements and the relatedfinancial statement disclosures.  Thismodel is commonly referred to as a “dual approach” because it requiresquantification of errors under both the iron curtain and the roll-overmethods.  SAB No. 108 permitsexisting public companies to initially apply its provision either by (i) restatingprior financial statements as if the “dual approach” had always been used or (ii) recordingthe value of assets and liabilities as of January 1, 2006 with anoffsetting adjustment recorded to the opening balance of retainedearnings.  SAB No. 108 is effectivefor fiscal years beginning after November 15, 2006.**

** **

**The Company has elected to apply the provisions ofSAB No. 108 using the cumulative effect transition method in connectionwith the preparation of the financial statements for the year ended December 31,2006.  As a result, the Company recordeda decrease in accrued liabilities and an increase in retained earnings in theamount of $0.4 million, net of tax of $0.2 million, as of January 1,2006.  This adjustment resulted from theCompany overstating liabilities for certain compensation agreements, which wasdeemed immaterial to the financial statements in each respective period.  This misstatement, decreasing net income inthe year reported, originated as follows: 2005 — $0.1 million; 2004 — $0.1million; and prior to 2004 — $0.2 million.**

** **

**In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities — including anAmendment of FASB Statement No. 115,*” which allows an entity tochoose to measure certain financial instruments and liabilities at fairvalue.  Subsequent measurements for thefinancial instruments and liabilities an entity elects to fair value will berecognized in earnings. The standard also establishes additional disclosurerequirements.  The Company has not yetdetermined the effect of adopting this standard, which is effective for fiscalyears beginning after November 15, 2007.**

** **

**In September 2006, the FASB issued SFAS No. 158,*“Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans,”* an amendment to FASB Statements No. 87,88, 106 and 132(R).  This standardrequires an employer to recognize the overfunded or underfunded status of adefined benefit pension and other postretirement benefit plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in the year in which the changes occur through comprehensiveincome.  The standard also requiresdisclosure in the notes to the financial statements of additional information aboutcertain effects on net periodic benefit costs of the next fiscal year thatarise from delayed recognition of gains or losses, prior service costs and the**

** **

**32**

----

** **

**transition asset or obligation.  The Company adopted this standard duringfiscal year 2007 as required without any significant impact on the Company’sfinancial position, results of operations or cash flow.**

** **

In September 2006, the FASB issued SFAS No. 157,*“Fair Value Measurements,”* whichprovides a definition of fair value, establishes a framework for measuring fairvalue and requires expanded disclosures about fair value measurements.  The Company has not yet determined the effectof adopting this standard, which is effective for fiscal years beginning after November 15,2007.  On February 12, 2008, theFASB issued FSP FAS 157-2 which delayed the effective date of this standard forall nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). This FSP partially deferred the effective date of this standard tofiscal years beginning after November 15, 2008, and interim periods withinthose fiscal years for items within the scope of this FSP.

 

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109 (“FIN 48”)*.FIN 48 clarifies the accounting for uncertainty in income taxes recognizedunder SFAS No. 109, *Accounting forIncome Taxes*. FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return and also providesguidance on various related matters such as derecognition, interest andpenalties and disclosure.  In connectionwith the adoption of FIN 48, we recognized an increase of approximately $0.2million to our net tax liabilities primarily related to uncertain state incometax positions, net of a federal tax benefit, which was accounted for as areduction to retained earnings as of January 1, 2007.  During 2007, we recorded an additionalprovision for uncertain state tax positions of $1.0 million, and acorresponding federal tax benefit of $0.3 million, related to prior year taxpositions and a tax provision of $0.3 million, and a corresponding federal taxbenefit of $0.1 million, related to current year state tax positions.  As of December 31, 2007, we hadapproximately $2.9 million of unrecognized tax benefits related primarily touncertain state tax liabilities, net of a federal tax benefit of $0.8 million,including $0.7 million of possible interest and penalties of which $2.1million, if recognized, will reduce our income tax provision in future periods.

 

**Item 7a.            Quantitative and Qualitative Disclosure about Market Risk**

 

Weare subject to certain market risks, including interest rate risk and foreigncurrency risk. The adverse effects of potential changes in these market risksare discussed below.  See the notes toour consolidated financial statements elsewhere in this 10-K for a descriptionof our accounting policies and other information related to these financialinstruments.

 

***Variable-rate debt. ***We have$3.6 million of borrowings outstanding under our revolving credit facility. Theinterest rates on the revolving credit facility are based upon a spread aboveeither the prime interest rate or the London Interbank Offered Rate (LIBOR),which rate used is determined at our option.

 

***Fixed-rate debt. ***As of December 31,2007, the Company had $200.0 million of 8.75% Notes outstanding, with anestimated fair value of approximately $167.5****millionand $130.0 million based upon the traded value at December 31, 2007 and March 24,2008, respectively. Market risk, estimated as the potential increase in fairvalue resulting from a hypothetical 1.0% decrease in interest rates, wasapproximately $7.5 million as of December 31, 2007

 

***Foreign currency. ***Morganhad a manufacturing plant in Canada during 2007 that generated sales ofapproximately $18.2 million for the year. The functional currency of ourCanadian operations is the Canadian dollar. Specialty Manufacturing has a plant in Mexico; however, the functionalcurrency is the U.S. dollar.  We do notcurrently employ risk management techniques to manage potential exposure toforeign currency fluctuations.

 

33

----

 

**Item  8.             Financial Statements and Supplementary Data**

** **
| **J.B. Poindexter & Co., Inc. and Subsidiaries**                                                                                                | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                          |       |
| Report of Independent  Registered Public Accounting Firm as of December 31, 2007 and 2006 and for the years ended  December 31, 2007, 2006 and 2005 | 35         |
| Financial Statements:                                                                                                                                         |       |
| Consolidated Balance  Sheets as of December 31, 2007 and 2006                                                                                            | 36         |
| Consolidated  Statements of Operations for the years ended December 31, 2007, 2006 and  2005                                                             | 37         |
| Consolidated  Statements of Stockholder’s Equity for the years ended December 31, 2007, 2006 and 2005                                               | 38         |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                                                              | 39         |
| Notes to  Consolidated Financial Statements                                                                                                                   | 40         |

 

34

----

 

**Reportof Independent Registered Public Accounting Firm**

 

Board of Directors and Stockholder ofJ.B. Poindexter & Co., Inc.

 

We have audited the accompanying consolidatedbalance sheets of J.B. Poindexter & Co., Inc. and subsidiaries(Company) as of December 31, 2007 and 2006, and the related consolidatedstatements of operations, stockholder’s equity, and cash flows for each of thethree years in the period ended December 31, 2007.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were engaged to perform,an audit of its internal controls over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of J.B. Poindexter & Co., Inc. andsubsidiaries as of December 31, 2007 and 2006, and the results of their operationsand their cash flows for each of the three years in the period ended December 31,2007 in conformity with U.S. generally accepted accounting principles.

 

As disclosed in Notes 2 and 13 to the consolidatedfinancial statements, the Company has adopted Financial Accounting StandardsBoard Interpretation No. 48 “*Accounting for Uncertaintyin Income Taxes*” effective January 1, 2007.

 

/s/ CROWE CHIZEK AND COMPANY LLC

 

SouthBend, IndianaApril 3**,**2008

 

35

----

 

**J.B. POINDEXTER & CO.,INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Dollars in Thousands)**

 
| ** **                                                                     | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Assets**                                                                     |       |                  |       |   |   |
| Current assets                                                                 |       |                  |       |   |   |
| Cash and cash  equivalents                                                     |       | $                     | 6,684      |   | $ | 29,304 |   |
| Accounts  receivable, net                                                      |       | 52,446                |       | 67,227 |   |
| Inventories, net                                                               |       | 79,443                |       | 74,954 |   |
| Deferred income  taxes                                                         |       | 2,038                 |       | 1,771 |   |
| Income tax  receivable                                                         |       | 5,665                 |       | — |   |
| Prepaid expenses  and other                                                    |       | 2,430                 |       | 1,735 |   |
| Total current  assets                                                          |       | 148,706               |       | 174,991 |   |
| Property, plant and equipment, net                                             |       | 80,125                |       | 60,615 |   |
| Goodwill                                                                       |       | 35,317                |       | 29,814 |   |
| Intangible assets, net                                                         |       | 19,656                |       | 11,414 |   |
| Deferred income taxes                                                          |       | 252                   |       | 1,135 |   |
| Other assets                                                                   |       | 13,097                |       | 14,414 |   |
| Total assets                                                                   |       | $                     | 297,153    |   | $ | 292,383 |   |
| **Liabilities and stockholder’s equity**                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities                                                            |       |                  |       |   |   |
| Current portion  of long-term debt                                             |       | $                     | 2,669      |   | $ | 1,934 |   |
| Borrowings under  revolving credit facility                                    |       | 3,637                 |       | — |   |
| Accounts payable                                                               |       | 31,925                |       | 32,790 |   |
| Accrued  compensation and benefits                                             |       | 8,841                 |       | 11,142 |   |
| Accrued income  taxes                                                          |       | —                |       | 23 |   |
| Other accrued  liabilities                                                     |       | 18,373                |       | 16,835 |   |
| Total current liabilities                                                      |       | 65,445                |       | 62,724 |   |
| Noncurrent liabilities                                                         |       |                  |       |   |   |
| Long-term debt,  less current portion                                          |       | 207,313               |       | 205,679 |   |
| Employee benefit  obligations and other                                        |       | 6,126                 |       | 5,646 |   |
| Total noncurrent  liabilities                                                  |       | 213,439               |       | 211,325 |   |
| Stockholder’s equity                                                      |       |                  |       |   |   |
| Common stock,  par value $0.01 per share (3,059 shares issued and outstanding) |       | —                |       | — |   |
| Capital in  excess of par value of stock                                       |       | 19,486                |       | 19,486 |   |
| Accumulated  other comprehensive income                                        |       | 1,017                 |       | 76 |   |
| Accumulated  deficit                                                           |       | (2,234                | )          | (1,228 | ) |
| Total  stockholder’s equity                                               |       | 18,269                |       | 18,334 |   |
| Total  liabilities and stockholder’s equity                               |       | $                     | 297,153    |   | $ | 292,383 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

36

----

 

**J.B. POINDEXTER &CO., INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollars in Thousands)**

 
| ** **                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                   |       | $                                 | 792,161    |   | $ | 795,379 |   | $ | 668,118 |   |
| Cost of sales                               |       | 707,244                           |       | 701,111 |   | 593,120 |   |
| Gross profit                                |       | 84,917                            |       | 94,268 |   | 74,998 |   |
| Selling, general and administrative expense |       | 64,914                            |       | 63,034 |   | 49,965 |   |
| Closed and excess facility costs            |       | 166                               |       | 2,678 |   | 377 |   |
| Other expense (income)                      |       | (323                              | )          | (202 | ) | 127 |   |
| Operating income                            |       | 20,160                            |       | 28,758 |   | 24,529 |   |
| Interest expense                            |       | 18,698                            |       | 18,929 |   | 18,452 |   |
| Interest income                             |       | (877                              | )          | (1,766 | ) | (1,617 | ) |
| Income from operations before income taxes  |       | 2,339                             |       | 11,595 |   | 7,694 |   |
| Income tax provision                        |       | 3,124                             |       | 3,370 |   | 2,582 |   |
| Net income (loss)                           |       | $                                 | (785       | ) | $ | 8,225 |   | $ | 5,112 |   |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

37

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY**

**(Dollars in Thousands)**

 
| **For the years ended  December 31, 2007, 2006 and 2005**         | ** ** | **Shares  of  common  stock** | ** ** | **Common  stock and  paid-in  capital** | ** ** | **Accumulated  deficit** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| **January 1,  2005**                                              |       | 3,059                         |       | $                                       | 19,486     |                     | $          | (14,937                                              | )          | $         | 73         |   | $ | 4,622 |   |
| Net income                                                             |       | —                        |       | —                                  |       | 5,112                    |       | —                                               |       | 5,112     |       |
| Translation  adjustment                                                |       | —                        |       | —                                  |       | —                   |       | (172                                                 | )          | (172      | )          |
| Unrealized gain  on short-terminvestments                              |       | —                        |       | —                                  |       | —                   |       | 89                                                   |       | 89        |       |
| Comprehensive  income                                                  |       |                          |       |                                    |       |                     |       |                                                 |       | 5,029     |       |
| **December 31,  2005**                                            |       | 3,059                         |       | 19,486                                  |       | (9,825                   | )          | (10                                                  | )          | 9,651     |       |
| Cumulative  effect adjustment,adoption of SAB No. 108, net of tax |       | —                        |       | —                                  |       | 372                      |       | —                                               |       | 372       |       |
| Net income                                                             |       | —                        |       | —                                  |       | 8 ,225                   |       | —                                               |       | 8,225     |       |
| Translation  adjustment                                                |       | —                        |       | —                                  |       | —                   |       | 86                                                   |       | 86        |       |
| Comprehensive  income                                                  |       |                          |       |                                    |       |                     |       |                                                 |       | 8,311     |       |
| **December 31,  2006**                                            |       | 3,059                         |       | 19,486                                  |       | (1,228                   | )          | 76                                                   |       | 18,334    |       |
| Adjustment for  adoption of FIN 48                                     |       | —                        |       | —                                  |       | (221                     | )          | —                                               |       | (221      | )          |
| Net loss                                                               |       | —                        |       | —                                  |       | (785                     | )          | —                                               |       | (785      | )          |
| Translation  adjustment                                                |       | —                        |       | —                                  |       | —                   |       | 941                                                  |       | 941       |       |
| Comprehensive  income                                                  |       |                          |       |                                    |       |                     |       |                                                 |       | 156       |       |
| **December 31,  2007**                                            |       | 3,059                         |       | $                                       | 19,486     |                     | $          | (2,234                                               | )          | $         | 1,017      |   | $ | 18,269 |   |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

38

----

 

**J.B. POINDEXTER &CO., INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in Thousands)**

* *
| ** **                                                                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                  |       |                              |       |   |   |   |   |
| Net income (loss)                                                                      |       | $                                 | (785       | ) | $ | 8,225 |   | $ | 5,112 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:     |       |                              |       |   |   |   |   |
| Depreciation and  amortization                                                         |       | 15,063                            |       | 12,017 |   | 10,360 |   |
| Amortization of  debt issuance costs                                                   |       | 791                               |       | 761 |   | 598 |   |
| Closed and excess  facility costs                                                      |       | —                            |       | 1,161 |   | 377 |   |
| Provision for  excess and obsolete inventory                                           |       | 1,796                             |       | 1,397 |   | 563 |   |
| Provision for  doubtful accounts receivable                                            |       | 64                                |       | 333 |   | 195 |   |
| Loss (gain) on  sale of property, plant and equipment                                  |       | (81                               | )          | (7 | ) | 223 |   |
| Deferred income  tax provision (benefit)                                               |       | 616                               |       | (434 | ) | 834 |   |
| Operating cash  flows from discontinued operations                                     |       | —                            |       | — |   | (319 | ) |
| Other                                                                                  |       | (178                              | )          | 393 |   | (63 | ) |
| Change in assets and liabilities, net of the effect  of acquisitions and dispositions: |       |                              |       |   |   |   |   |
| Accounts  receivable                                                                   |       | 17,571                            |       | (13,092 | ) | 2,437 |   |
| Inventories                                                                            |       | 7,635                             |       | (14,655 | ) | (1,045 | ) |
| Prepaid expenses  and other                                                            |       | (533                              | )          | (103 | ) | (1,647 | ) |
| Accounts payable                                                                       |       | (4,256                            | )          | 1,412 |   | 910 |   |
| Accrued income  taxes                                                                  |       | (4,414                            | )          | 1,784 |   | (2,481 | ) |
| Other accrued  liabilities                                                             |       | (2,520                            | )          | 3,847 |   | (1,410 | ) |
| Net cash provided  by operating activities                                             |       | 30,769                            |       | 3,039 |   | 14,644 |   |
| Cash flows from investing activities:                                                  |       |                              |       |   |   |   |   |
| Acquisition of  businesses, net of cash acquired                                       |       | (41,673                           | )          | (13,897 | ) | (12,270 | ) |
| Proceeds from  disposition of business, property, plant and equipment                  |       | 89                                |       | 214 |   | 58 |   |
| Purchase of  property, plant and equipment                                             |       | (14,312                           | )          | (13,874 | ) | (15,501 | ) |
| Purchases of  short-term investments                                                   |       | —                            |       | — |   | (53,728 | ) |
| Proceeds from  sale of short-term investments                                          |       | —                            |       | 15,266 |   | 43,462 |   |
| Issuance of  insurance collateral deposits                                             |       | (348                              | )          | (659 | ) | — |   |
| Other                                                                                  |       | 455                               |       | — |   | — |   |
| Net cash used in  investing activities                                                 |       | (55,789                           | )          | (12,950 | ) | (37,979 | ) |
| Cash flows from financing activities:                                                  |       |                              |       |   |   |   |   |
| Net proceeds  from revolving credit facility                                           |       | 3,637                             |       | — |   | — |   |
| Proceeds from  long-term debt                                                          |       | —                            |       | — |   | 47,251 |   |
| Payments of  long-term debt and capital leases                                         |       | (2,177                            | )          | (1,583 | ) | (1,047 | ) |
| Debt issuance  costs                                                                   |       | —                            |       | — |   | (1,197 | ) |
| Net cash  provided by (used in) financing activities                                   |       | 1,460                             |       | (1,583 | ) | 45,007 |   |
| Effect of  exchange rate on cash                                                       |       | 940                               |       | (57 | ) | (249 | ) |
| Change in cash and cash equivalents                                                    |       | (22,620                           | )          | (11,551 | ) | 21,423 |   |
| Cash and cash equivalents, beginning of year                                           |       | 29,304                            |       | 40,855 |   | 19,432 |   |
| Cash and cash equivalents, end of year                                                 |       | $                                 | 6,684      |   | $ | 29,304 |   | $ | 40,855 |   |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

39

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)**

**(Dollars in Thousands)**

** **

**1.**                   Organization &Business

** **

J.B. Poindexter & Co., Inc.(“JBPCO”) and its subsidiaries (the “Subsidiaries” and together with JBPCO, the“Company”) operate primarily manufacturing businesses principally in NorthAmerica. JBPCO is owned and controlled by John Poindexter.

 

The Company acquired sixbusinesses during the three years ended December 31, 2007 (see Note 4).

 

The Company’s operatingsegments are as follows:

 

***Morgan Truck Body, LLC (“Morgan”)*** manufactures truck bodies in the United States and Canada for dryfreight and refrigerated trucks and vans (excluding those made for pickuptrucks and tractor-trailer trucks). Morgan’s operations include its Canadian subsidiary Commercial Babcock, Inc.  The truck bodies are attached to truckchassis provided by its customers. Customers include truck rental and leasing companies, truck dealers andcompanies that operate fleets of delivery vehicles. The principal raw materialsused by Morgan include steel, aluminum, fiberglass-reinforced plywood,hardwoods and oil acquired from a variety of sources.

 

***Morgan Olson, LLC (“MorganOlson”)*** manufactures step van bodiesfor parcel, food, newspaper, uniform, linen and other delivery applications.Step vans are specialized vehicles designed for multiple stop applications andenable the driver of the truck to easily access the cargo area. Morgan Olsonmanufactures the complete truck body, including the installation of windows,doors, instrument panels, seating, wiring and painting. The step van bodies areinstalled on truck chassis provided by Morgan Olson’s customers. The principalraw materials used by Morgan Olson include steel and aluminum and a variety ofautomotive components.

 

***Truck Accessories Group, LLC(“Truck Accessories”)***manufactures pickup truck caps and tonneau covers, which are fabricatedenclosures that fit over the open beds of pickup trucks, converting the bedsinto weatherproof storage areas. Truck Accessories’ brands include Leer,Century, Raider, Pace Edwards and State Wide Aluminum, which was acquired on March 17,2006 (see Note 4).  The principal rawmaterials used by Truck Accessories are resin, fiberglass, paint, glass andmanufactured components such as locks and gas struts.

 

***Specialty ManufacturingDivision (“Specialty Manufacturing”)*** iscomprised of the Specialty Vehicle Group, MIC Group, LLC (“MIC Group”), andEFP, LLC (“EFP”). The Specialty Vehicle Group is comprised of Federal Coach,LLC (“Federal Coach”) and Eagle Specialty Vehicles, LLC (“Eagle Coach”).  The Specialty Vehicle Group manufacturesfuneral coaches, limousines and specialty buses.  MIC Group acquired three companies during2007. Effective April 30, August 23, and September 4, 2007, itacquired Richard’s Manufacturing Co., Inc. (Richard’s Manufacturing”),Tarlton Supply Company (“Tarlton”), and Machine and Manufacturing I, Inc.(“MMI”), respectively. MIC Group is a manufacturer, investment caster andassembler of precision metal parts for use in the worldwide oil and gasexploration, automotive and aerospace industries, and other general industries.EFP molds, fabricates and markets expandable foam products used as packaging,shock absorbing and materials handling products primarily by the automotive,electronics, furniture, construction, appliance and other industries. It alsomanufactures products used as thermal insulators. The principal raw materialsused by Specialty Manufacturing are ferrous and nonferrous materials includingstainless steel, alloy steels, nickel-based alloys, titanium, brass,beryllium-copper alloys, aluminum, expandable polystyrene, polypropylene,polyethylene and other resins.  TheSpecialty Vehicle Group purchases vehicle chassis from the major automotivemanufacturers’ dealers for modification and sale to its customers.

 

Effective September 30, 2006, each of Morgan(formerly Morgan Corporation), Morgan Olson (formerly Morgan OlsonCorporation), Truck Accessories (formerly Truck Accessories Group, Inc.),EFP (formerly EFP Corporation), MIC Group (formerly MIC Group, Inc.) andEagle Coach (formerly Eagle Specialty Vehicles, Inc.) was, by means of amerger or statutory conversion, converted into a Delaware limited liabilitycompany. Each of

 

40

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 

those subsidiaries was and remains a wholly ownedsubsidiary of the Company with only the form of entity being changed.

 

**2.**                   Summary of SignificantAccounting Policies

** **

*Principles of Consolidation. *Theconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States.  All intercompany accounts and transactionshave been eliminated in consolidation.

 

*Cash and Cash Equivalents.*  Cash and all highly liquid investments with amaturity of three months or less at the date of purchase, including short-termdeposits and government agency and corporate obligations, are classified ascash and cash equivalents.

 

*Short-Term Investments.*  Short-term investments, considered to beavailable-for-sale investments, include auction rate municipal bond securitieswith original maturities beyond three months. Available-for-sale investments are those which the Company may decide tosell if needed for liquidity, asset-liability management or other reasons.  Available-for-sale investments are reportedat fair value with unrealized gains or losses included as a separate componentof equity.  There were no investments inauction rate securities at December 31, 2007 or 2006. Unrealized gains orlosses on auction rate securities at December 31, 2005 totaled an $89loss.

 

*Revenue Recognition*.  Revenue is recognized upon shipment of theproduct to customers, except for Morgan and Morgan Olson where revenue isrecognized when title transfers to the customer upon final body assembly,quality inspection and customer notification. Amounts billed to customers related to shipping and handling isclassified as revenue.  The costsassociated with the shipping and handling revenue are included in cost ofsales.

 

*Accounts Receivable. *The Companysells to customers as is customary in its industries and typically extends itscustomers 30-day payment terms.  Interestis charged on accounts receivable in cases where there is an economic reasonfor extended terms.  Discounts areallowed for early payment but only if economically justified based on our costof capital.  Accounts receivable isstated net of an allowance for doubtful accounts of $1,182 and $1,547 at December 31,2007 and 2006, respectively.  The Companyestablishes an allowance for doubtful accounts receivable on a case-by-casebasis when it believes that the required payment of specific amounts owed isunlikely to occur.  The activity in theallowance for doubtful accounts for the years ended December 31 was:

 

| ** **                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at the beginning of the year |       | $        | 1,547      |     | $          | 1,490    |       | $ | 933 |   |
| Provision for losses                 |       | 64       |       | 333      |       | 195      |       |
| Charge-offs                          |       | (301     | )          | (340     | )          | (153     | )          |
| Recoveries                           |       | (128     | )          | (3       | )          | 30       |       |
| Acquisitions                         |       | —   |       | 67       |       | 425      |       |
| Balance at the end of the year.      |       | $        | 1,182      |     | $          | 1,547    |       | $ | 1,490 |   |

 

The carrying amounts of trade accounts receivable approximate fairvalue because of the short maturity of those instruments.  The Company is not aware of any significantcredit risks related to its customer base and does not generally requirecollateral or other security to support customer receivables.

 

*Inventories. *Inventories arestated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.

 

*Property, Plant and Equipment. *Property, plantand equipment, including property under capital leases, are stated atcost.  The cost of property under capitalleases represents the present value of the future minimum lease payments at theinception of the lease.  Depreciation andamortization is computed by using the straight-line

 

41

----

** **

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 

method over the estimated useful lives of the applicable assets or overthe shorter of the lease term or the estimated useful life of leasehold improvements.  The cost of maintenance and repairs ischarged to operating expense as incurred and the cost of major replacements andsignificant improvements is capitalized. The Company records impairment losses on long-lived assets used inoperations when events and circumstances indicate that the assets may beimpaired and the undiscounted cash flows estimated to be generated by thoseassets are less than the carrying amounts of those assets.

 

*Debt Issuance Costs. *Debt issuancecosts are amortized using the effective interest method over the term of therelated debt, which ranges from four to ten years.  Amortization of debt issuance costs isincluded in interest expense.

 

*Evaluation of Impairment of Long-Lived Assets. *In accordance with Statementof Financial Accounting Standard (“SFAS”) No. 144, *“Impairmentor Disposal of Long-Lived Assets,*” the Company evaluates thecarrying value of long-lived assets whenever significant events or changes incircumstances indicate the carrying value of these assets may be impaired.  The Company evaluates potential impairment oflong-lived assets by comparing the carrying value of the assets to the expectednet future cash flows resulting from the use of the assets.  As indicated in Note 6, the Company recordedimpairment charges in 2006 and 2005.

 

*Warranty. *Morgan providesproduct warranties for periods of up to five years.  Morgan Olson provides a warranty period,which is one year or 12,000 miles for components, three years or 36,000 milesfor paint, and five years or 50,000 miles for the van body structure.  Truck Accessories provides a warranty period,exclusive to the original truck owner, which is, in general but withexclusions, one year for parts, five years for paint and lifetime forstructure.  The Specialty Vehicle Groupprovides a warranty on its products for a period of 48 months or 50,000 mileson the section of the body and parts manufactured for funeral coaches andfuneral limousines, 36 months or 50,000 miles on the body and partsmanufactured for bus bodies, and 48 months or 100,000 miles on the section ofthe body and parts manufactured for limousines. The remaining operations of Specialty Manufacturing do not provide awarranty on their products.  A provisionfor warranty costs is included in cost of sales when goods are sold based onhistorical experience and estimated future claims.  The Company had accrued warranty costs of$4,343 and $4,185 at December 31, 2007 and 2006, respectively.  The activity in the accrued warranty costaccounts for the years ended December 31 was:

 
| ** **                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at the beginning of the year |       | $        | 4,185      |     | $          | 4,255    |       | $ | 4,233 |   |
| Provision for losses                 |       | 3,002    |       | 4,362    |       | 4,136    |       |
| Charge-offs                          |       | (2,844   | )          | (4,545   | )          | (4,180   | )          |
| Acquisitions                         |       | —   |       | 113      |       | 66       |       |
| Balance at the end of the year       |       | 4,343    |       | 4,185    |       | 4,255    |       |
| Less: Short-term                     |       | 2,089    |       | 1,795    |       | 2,219    |       |
| Long-term                            |       | $        | 2,254      |     | $          | 2,390    |       | $ | 2,036 |   |

 

*Advertising and Research and Development Expense.*  The Company expenses advertising costs andresearch and development (“R&D”) costs as incurred.  During the years ended December 31,2007, 2006 and 2005, advertising expense was $3,606,****$3,474and $3,340, respectively, and R&D expense was $3,476, $3,495 and $2,240,respectively.

 

*Income Taxes. *The Companyaccounts for income taxes under the provisions of SFAS No. 109, *“Accounting for Income Taxes.*”  Under SFAS No. 109, deferred tax assetsand liabilities are computed based on the difference between the financialstatement and income tax bases of assets and liabilities using the enacted taxrates.

 

The Company’s management believes that it is more likely than not thatcurrent and long-term deferred tax assets will reduce future income taxpayments.  The Company has consideredongoing prudent and feasible tax planning

 

42

----

** **

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 

strategies in making this assessment. There are significant assumptionsinherent in the Company’s prudent and feasible tax planning strategies.  Changes in these assumptions would impact theestimated amount of deferred tax assets realized by these tax planningstrategies.  Should the Company determinethat it is more likely than not unable to realize all or part of the net deferredtax asset in the future, a valuation allowance, necessary to reduce thedeferred tax asset to the amount that is more likely than not to berealized,  would reduce income in theperiod such determination was made.

 

The Company accounts for uncertain tax positions in accordance with FIN48, which was adopted effective January 1, 2007. Accordingly, the Companyreports a liability for unrecognized tax benefits resulting from uncertain taxpositions taken or expected to be taken in a tax return.  The Company recognizes interest andpenalties, if any, related to unrecognized tax benefits in income tax expense.

 

*Self-InsuranceRisks*.  The Company utilizes acombination of insurance coverage and self-insurance programs for property,casualty, workers’ compensation and health care insurance.  The Company records an actuariallydetermined, fully developed self-insurance reserve to cover the self-insuredportion of these risks based on known facts and historical industry trends.  Changes in management’s assumptions mayresult in a different self-insurance reserve.

 

*ContingentLiabilities. *Reserves areestablished for estimated environmental and legal loss contingencies when aloss is probable and the amount of the loss can be reasonably estimated.  Revisions to contingent liabilities arereflected in income in the period in which different facts or informationbecome known or circumstances change that affect the previous assumptions withrespect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon the assumptions andestimates regarding the probable outcome of the matter.  Should the outcome differ from theassumptions and estimates, revisions to the estimated reserves for contingentliabilities would be required.

 

*Comprehensive Income.*Comprehensive incomeconsists of net income (loss) and other comprehensive income (loss).  Other comprehensive income (loss) includesforeign currency translation adjustments and unrealized gains and losses onavailable-for-sale investments, which are also recognized as separatecomponents of equity.

 

*Translation of Foreign Financial Statements. *Assets and liabilities offoreign operations are translated at year-end rates of exchange, and the incomestatements are translated at the average rates of exchange for the year.  Gains or losses resulting from translatingforeign currency financial statements are accumulated in a separate componentof stockholder’s equity until the foreign operations are sold or substantiallyliquidated.  Gains or losses resultingfrom foreign currency transactions (transactions that require settlement in acurrency other than the Company’s functional currency) are included in netincome (loss).

 

*Fair Value of Financial Instruments*.  The Company’s financial instruments consistof cash and cash equivalents, receivables, and debt.  Fair values of cash and cash equivalents andreceivables approximate carrying values for these financial instruments sincethey are relatively short-term in nature. The carrying amount of debt, except for the Company’s 8.75% Notes (seeNote 10), approximates the fair value due either to length of maturity orexistence of variable interest rates that approximate prevailing market rates.

 

*Use of Estimates.*The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Significant estimates subjectto change include the valuation of goodwill and other intangible assets, theallowances for doubtful accounts and shrinkage and excess and obsoleteinventory, the valuation of deferred tax assets, and the allowances forself-insurance risks, warranty claims, and environmental claims.

 

43

----

** **

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 

***Recent Accounting Pronouncements***.  In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin (SAB) No. 108, *“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*.*”*  The Company adoptedthe provisions of SAB No. 108 using the cumulative effect transitionmethod in connection with the preparation of the financial statements for theyear ended December 31, 2006.  As aresult, the Company recorded a decrease in accrued liabilities and an increasein retained earnings in the amount of $372, net of tax of $159, as of January 1,2006.  This adjustment resulted from theCompany overstating liabilities for certain compensation agreements, which wasdeemed immaterial to the financial statements in each respective period.  This misstatement, decreasing net income inthe year reported, originated as follows: 2005 — $81; 2004 — $81; and prior to2004— $210.

** **

**In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities — including anAmendment of FASB Statement No. 115,*” which allows an entity tochoose to measure certain financial instruments and liabilities at fairvalue.  Subsequent measurements for thefinancial instruments and liabilities an entity elects to fair value will be recognizedin earnings. The standard also establishes additional disclosurerequirements.  The Company has not yetdetermined the effect of adopting this standard, which is effective for fiscalyear beginning after November 15, 2007.**

** **

**In September 2006, the FASB issued SFAS No. 158,“*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans,*” an amendment to FASB Statements No. 87,88, 106 and 132(R).  The Company adoptedthis standard during fiscal year 2007 as required, without any significantimpact on the Company’s financial position, results of operations or cashflows.**

** **

**In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements,*” which providesa definition of fair value, establishes a framework for measuring fair value andrequires expanded disclosures about fair value measurements.  The Company has not yet determined the effectof adopting this standard, which is effective for fiscal years beginning after November 15,2007.  On February 12, 2008, theFASB issued FSP FAS 157-2 which delayed the effective date of this standard forall nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). This FSP partially deferred the effective date of this standard tofiscal years beginning after November 15, 2008, and interim periods withinthose fiscal years for items within the scope of this FSP.**

** **

**In July 2006, the FASB released Interpretation No. 48“*Accounting for Uncertainty in Income Taxes.*”  The Company adopted this Interpretation on January 1,2007.  See Note 13.**

** **

**3.           Segment Data**

** **

TheCompany operates and manages its subsidiaries within the separate businesssegments described in Note 1.  TheCompany evaluates performance and allocates resources based on the operatingincome of each segment.  The accountingpolicies of the reportable business segments are the same as those described inthe summary of significant accounting policies.

 

Thefollowing is a summary of the business segment data for the years ended December 31:

 
| **Net Sales**           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Morgan                  |       | $        | 332,926    |     | $          | 379,434  |       | $ | 358,216 |   |
| Morgan Olson            |       | 110,291  |       | 100,361  |       | 60,793   |       |
| Truck Accessories       |       | 155,564  |       | 159,310  |       | 153,726  |       |
| Specialty Manufacturing |       | 195,163  |       | 155,856  |       | 95,658   |       |
| Eliminations            |       | (1,783   | )          | 418      |       | (275     | )          |
| Net Sales               |       | $        | 792,161    |     | $          | 795,379  |       | $ | 668,118 |   |

 

44

----

** **

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 
| **Operating Income**                      | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Morgan                                    |       | $          | 15,384     |       | $          | 21,576     |       | $ | 20,771 |   |
| Morgan Olson                              |       | (2,680     | )          | 2,778      |       | (1,942     | )          |
| Truck Accessories                         |       | 3,196      |       | 3,524      |       | 8,327      |       |
| Specialty Manufacturing                   |       | 13,726     |       | 9,759      |       | 2,470      |       |
| JBPCO (Corporate)                         |       | (9,466     | )          | (8,879     | )          | (5,097     | )          |
| Operating Income                          |       | $          | 20,160     |       | $          | 28,758     |       | $ | 24,529 |   |
|                                      |       |       |       |       |       |       |       |
| **Depreciation and Amortization Expense** | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| Morgan                                    |       | $          | 2,472      |       | $          | 2,241      |       | $ | 2,661 |   |
| Morgan Olson                              |       | 1,210      |       | 958        |       | 901        |       |
| Truck Accessories                         |       | 4,237      |       | 4,233      |       | 3,701      |       |
| Specialty Manufacturing                   |       | 7,028      |       | 4,547      |       | 3,066      |       |
| JBPCO (Corporate)                         |       | 56         |       | 38         |       | 31         |       |
| Depreciation and Amortization Expense     |       | $          | 15,003     |       | $          | 12,017     |       | $ | 10,360 |   |
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Assets as of December 31,**  | ** ** | **2007**   | ** ** | **2006**   |       |       |       |
| Morgan                                    |       | $          | 60,146     |       | $          | 93,295     |       |   |   |
| Morgan Olson                              |       | 27,865     |       | 28,333     |       |       |       |
| Truck Accessories                         |       | 69,059     |       | 67,435     |       |       |       |
| Specialty Manufacturing                   |       | 133,650    |       | 82,872     |       |       |       |
| JBPCO (Corporate)                         |       | 6,433      |       | 20,448     |       |       |       |
| Identifiable Assets                       |       | $          | 297,153    |       | $          | 292,383    |       |   |   |
|                                      |       |       |       |       |       |       |       |
| **Capital Expenditures**                  | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| Morgan                                    |       | $          | 1,361      |       | $          | 1,764      |       | $ | 2,953 |   |
| Morgan Olson                              |       | 958        |       | 328        |       | 599        |       |
| Truck Accessories                         |       | 5,044      |       | 3,569      |       | 4,457      |       |
| Specialty Manufacturing                   |       | 6,671      |       | 4,485      |       | 6,740      |       |
| JBPCO (Corporate)                         |       | 278        |       | 3,728      |       | 752        |       |
| Capital Expenditures                      |       | $          | 14,312     |       | $          | 13,874     |       | $ | 15,501 |   |

 

Morganhas two customers (truck leasing and rental companies) that accounted for, on acombined basis, approximately 55%, 46% and 47% of Morgan’s net sales during2007, 2006 and 2005, respectively.  Accounts receivable from these customers totaled$3,023 and $8,876 at December 31, 2007 and 2006, respectively.  Specialty Manufacturing has one customer inthe international oil-field service industry that accounted for approximately18%,****15% and 15% of Specialty Manufacturing’snet sales during 2007, 2006 and 2005, respectively.  Accountsreceivable from this customer totaled $ 3,828 and $2,622 at December 31,2007 and 2006, respectively.

 

45

----

 

 

 

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

**(Dollars in Thousands)**

 

Morgan Olson has one customer that accounted forapproximately 37%, 38% and 27% of Morgan Olson’s net sales during 2007, 2006and 2005, respectively.  Accountsreceivable from this customers were $2,044 and $667 at December 31, 2007and 2006, respectively.  During 2007 twoof Morgan Olson’s customers representing 18% of Morgan Olson’s net salesfinanced their purchases through a third party, at December 31, 2007accounts receivable form the third party were $3,200.  MorganOlson shipped truck bodies and spare parts to its Canadian customers and usedMorgan’s Canadian operations as an intermediary in the transaction.

 

TheCompany, on a consolidated basis, has two customers that accounted forapproximately, 22%, 22% and 25% of total net sales during 2007, 2006 and 2005,respectively.  Accounts receivable fromthese customers totaled $2,652 and $8,375 at December 31, 2007 and 2006,respectively.  These are customers ofMorgan.

 

The Company’s operations are located principally in the UnitedStates.  However, Morgan has operationslocated in Canada and Specialty Manufacturing has operations in Mexico.  Long-lived assets relating to these foreignoperations were $11,664 and****$10,185 at December 31,2007 and 2006, respectively. Consolidated net sales included $29,706, $29,610 and****$21,476in 2007, 2006 and 2005, respectively, of sales to customers outside the UnitedStates.

 

JBPCO(Corporate) operating expenses for all periods comprise the costs of the parentcompany office and personnel who provide strategic direction and support to thesubsidiary companies.  The JBPCO (Corporate) costs of $9,466, $8,879 and$5,097 for 2007, 2006 and 2005, respectively, included consulting feesassociated with manufacturing process improvements of $1,200 and $3,200 in 2007and 2006, respectively.

 

**4.             Acquisitions**

** **

Effective June 6, 2005, the Company acquired 100% of themembership interests in Federal Coach LLC (“Federal Coach”).  The results of Federal Coach’s operationshave been included in the consolidated financial statements of the Companysince that date.   Federal Coach islocated in Fort Smith, Arkansas and is a manufacturer of funeral coaches,limousines and mid-sized buses.  FederalCoach operates as a division of Specialty Manufacturing and continues toutilize the purchased assets in the same manner as prior to theacquisition.  The acquisition wasaccounted for as a purchase and the aggregate purchase price was $12,270.

 

The following summarizes the fair values of the assets acquired andliabilities assumed at the date of acquisition:

 
| **Federal Coach**             | ** ** | **June 6, 2005** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| Accounts receivable           |       | $                     | 2,465      |   |
| Inventories                   |       | 9,330                 |       |
| Other current assets          |       | 15                    |       |
| Property, plant and equipment |       | 649                   |       |
| Goodwill                      |       | 1,850                 |       |
| Acquired intangibles          |       | 3,650                 |       |
| Accounts payable              |       | (4,336                | )          |
| Customer deposits             |       | (343                  | )          |
| Accrued warranty              |       | (66                   | )          |
| Other current liabilities     |       | (944                  | )          |
|                          |       | $                     | 12,270     |   |

 

EffectiveJanuary 3, 2006, The Company acquired all of the outstanding stock ofKellerman Coach Co., Inc. (“Eagle Coach”). The results of Eagle Coach’s operations have been included in theconsolidated financial statements since that date.  Eagle Coach is located in Amelia, Ohio andmanufactures funeral coaches.  EagleCoach and Federal Coach comprise the Specialty Vehicle Group that operates as adivision of the Specialty 

 

46

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

**(Dollars in Thousands)**

 

Manufacturingsegment and Eagle Coach continues to utilize the purchased assets in the samemanner as prior to the acquisition.  Theacquisition was accounted for as a purchase and the purchase price was $7,440.

 

Thefollowing summarizes the fair value of the assets acquired and liabilitiesassumed at the date of acquisition:

 
| **Eagle Coach**               | ** ** | **January 3, 2006** | ** ** |
|-------------------------------|------------|--------------------------|------------|
| Accounts receivable           |       | $                        | 1,933      |   |
| Inventories                   |       | 1,658                    |       |
| Other current assets          |       | 18                       |       |
| Property, plant and equipment |       | 232                      |       |
| Other long-term assets        |       | 161                      |       |
| Goodwill                      |       | 1,527                    |       |
| Acquired intangibles          |       | 2,900                    |       |
| Current liabilities           |       | (954                     | )          |
| Accrued warranty              |       | (35                      | )          |
|                          |       | $                        | 7,440      |   |

 

EffectiveMarch 17, 2006, the Company acquired all of the outstanding stock of StateWide Aluminum, Inc. (“State Wide”). The results of State Wide’s operation have been included in theconsolidated financial statements since that date.  State Wide is located in Elkhart, Indiana andis one of Truck Accessories’ two principal suppliers of windows and doors usedin the manufacture of pickup truck caps. State Wide operates as a division of Truck Accessories and continues toutilize the purchased assets in the same manner as prior to the acquisition.  The acquisition was accounted for as apurchase and the purchase price was $6,457. The following summarizes the fair value of the assets acquired andliabilities assumed at the date of acquisition:

 
| **State Wide**                | ** ** | **March 17, 2006** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| Accounts receivable           |       | $                       | 2,181      |   |
| Inventories                   |       | 2,493                   |       |
| Other current assets          |       | 149                     |       |
| Property, plant and equipment |       | 923                     |       |
| Goodwill                      |       | 3,528                   |       |
| Current liabilities           |       | (2,782                  | )          |
| Other long-term liabilities   |       | (35                     | )          |
|                          |       | $                       | 6,457      |   |

 

Effective April 30, 2007, the MIC Group acquired all of the commonstock of Richard’s Manufacturing Co., Inc. (“Richard’s Manufacturing”).Richard’s Manufacturing is a precision machining business located in Duncan,Oklahoma and operates as a division of Specialty Manufacturing and continues toutilize the purchased assets in the same manner as prior to the acquisition.  The results of Richard’s Manufacturing’soperations have been included in the consolidated financial statements sincethat date.

 

The acquisition was accounted for as a purchase and the aggregate cashpurchase price was $12,635.  The Companyhas completed its valuation of certain intangible assets.

 

47

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

**(Dollars in Thousands)**

 

The following summarizes the estimated fair value of the assetsacquired and liabilities assumed at the date of acquisition:

 
| **Richard’s Manufacturing** | ** ** | **April 30, 2007** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| Accounts receivable              |       | $                       | 755        |   |
| Inventories                      |       | 1,305                   |       |
| Other current assets             |       | 226                     |       |
| Property, plant and equipment    |       | 3,397                   |       |
| Goodwill                         |       | 3,843                   |       |
| Acquired intangibles             |       | 3,890                   |       |
| Current liabilities              |       | (781                    | )          |
|                             |       | $                       | 12,635     |   |

 

Effective August 23, 2007, the MIC Group acquired all of thecommon stock of Tarlton Supply Company (“Tarlton”). Tarlton is a precisionmachining and assembly business located in Brenham, Texas and operates as adivision of Specialty Manufacturing and continues to utilize the purchasedassets in the same manner as prior to the acquisition.  The results of Tarlton’s operations have beenincluded in the consolidated financial statements since that date.

 

The acquisition was accounted for as a purchase and the aggregate cashpurchase price was $18,435.  The Companyhas completed its valuation of certain intangible assets and the followingsummarizes the estimated fair value of the assets acquired and liabilitiesassumed at the date of acquisition:

 
| **Tarlton**                   | ** ** | **August 23, 2007** | ** ** |
|-------------------------------|------------|--------------------------|------------|
| Accounts receivable           |       | $                        | 2,793      |   |
| Inventories                   |       | 8,394                    |       |
| Other current assets          |       | 66                       |       |
| Property, plant and equipment |       | 6,502                    |       |
| Goodwill                      |       | 1,334                    |       |
| Acquired intangibles          |       | 2,430                    |       |
| Current liabilities           |       | (3,049                   | )          |
| Other long-term liabilities   |       | (35                      | )          |
|                          |       | $                        | 18,435     |   |

 

Effective September 4, 2007, the Company acquired all of thecommon stock of Machine and Manufacturing I, Inc. (“MMI”). MMI is aprecision machining business located in Houston, Texas and operates as adivision of Specialty Manufacturing and continues to utilize the purchasedassets in the same manner as prior to the acquisition.  The results of MMI’s operations have beenincluded in the consolidated financial statements since that date.

 

48

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

**(Dollars in Thousands)**

 

The acquisition was accounted for as a purchase and the aggregate cashpurchase price was $10,603.  The Companyhas completed its valuation of certain intangible assets.  The following summarizes the estimated fairvalue of the assets acquired and liabilities assumed at the date ofacquisition:

 
| **MMI**                       | ** ** | **September 4, 2007** | ** ** |
|-------------------------------|------------|----------------------------|------------|
| Inventories                   |       | $                          | 3,457      |   |
| Property, plant and equipment |       | 4,431                      |       |
| Goodwill                      |       | 326                        |       |
| Acquired intangibles          |       | 2,575                      |       |
| Current liabilities           |       | (186                       | )          |
|                          |       | $                          | 10,603     |   |

 

Thecombined results of operations of the Company for the years ended December 31,2007, 2006 and 2005 including Federal Coach, Eagle Coach, State Wide, Richards,Tarlton and MMI as if acquired on the first day of the year of theiracquisition and one immediately preceding year on an unaudited pro forma basiswould be as follows:

 
| ** **       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales        |       | $        | 827,536    |     | $          | 849,924  |       | $ | 731,378 |   |
| Operating income |       | 25,930   |       | 34,825   |       | 27,249   |       |
| Net income       |       | 2,530    |       | 11,716   |       | 6,748    |       |
|                  |            |          |            |          |            |          |            |  |  |  |

** **

**5.             Inventories**

** **

Consolidated net inventoriesconsisted of the following:

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Raw materials     |       | $                     | 40,820     |   | $ | 46,217 |   |
| Work in process   |       | 26,661                |       | 21,563 |   |
| Finished goods    |       | 11,962                |       | 7,174 |   |
| Total inventories |       | $                     | 79,443     |   | $ | 74,954 |   |

 

Inventories are stated net of an allowance for excess and obsoleteinventory of $1,707 and****$1,919 at December 31,2007 and 2006, respectively.  Theactivity in the allowance for excess and obsolete inventory accounts for theyears ended December 31 was:

 
| ** **                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at the beginning of the year |       | $        | 1,919      |     | $          | 2,529    |       | $ | 2,753 |   |
| Provision for losses                 |       | 1,796    |       | 1,397    |       | 563      |       |
| Charge-offs                          |       | (1,748   | )          | (2,049   | )          | (1,137   | )          |
| Recoveries                           |       | (260     | )          | —   |       | —   |       |
| Acquisitions                         |       | —   |       | 42       |       | 350      |       |
| Balance at the end of the year       |       | $        | 1,707      |     | $          | 1,919    |       | $ | 2,529 |   |

 

49

----

 

**J.B. POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)**

**(Dollars in Thousands)**

 

**6.             Property, Plant and Equipment**

** **

Property, plant and equipment, as of December 31,2007 and 2006, consisted of the following:

 
| ** **                                | ** ** | **Range  of  Useful Lives in  years** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|----------|------------|----------|------------|
| Land                                      |       | —                                |       | $        | 4,877      |     | $          | 4,785 |   |
| Buildings and improvements                |       | 5-25                                  |       | 33,522   |       | 29,339   |       |
| Machinery and equipment                   |       | 3-10                                  |       | 125,421  |       | 104,787  |       |
| Furniture and fixtures                    |       | 2-10                                  |       | 15,763   |       | 15,861   |       |
| Transportation equipment                  |       | 2-10                                  |       | 5,828    |       | 5,672    |       |
| Leasehold improvements                    |       | 3-10                                  |       | 6,843    |       | 6,700    |       |
| Construction in progress                  |       | —                                |       | 5,660    |       | 6,365    |       |
|                                      |       |                                  |       | 197,914  |       | 173,509  |       |
| Accumulated depreciation and amortization |       |                                  |       | (117,789 | )          | (112,894 | )          |
| Property, plant and equipment, net        |       |                                  |       | $        | 80,125     |     | $          | 60,615 |   |

 

Machinery and equipment included approximately $13,899 and $8,539 ofequipment at cost recorded under capital leases as of December 31, 2007and 2006, respectively, and accumulated depreciation of approximately $3,976and $2,602 at December 31, 2007 and 2006, respectively.

 

In 2007, the Company capitalized $569 of interest costs incurredrelated to constructed assets in progress.

 

In the fourth quarter of 2006, the Company decided to close itsremaining Truck Accessories’ Canadian operations, resulting in a write-down ofthe carrying value of the assets by $1,161. A $2,678 charge has been recorded as closed and excess facility coststhat included the write-down of assets and certain personnel-related costs.

 

In the third quarter of 2005, the Company decided to consolidate itstwo Truck Accessories’ locations in Canada which resulted in a write-down ofits Drinkwater facility.  The write-downof $377 was recorded as closed and excess facility costs.

 

Depreciation expense was $13,899,****$11,201 and$9,725 and included $1,374, $1,044, and $742 for assets recorded under capitalleases, for the years ended December 31, 2007, 2006 and 2005,respectively.

 

**7.             Goodwill, Intangibles and Other Assets**

** **

Goodwill represents the excess of costs over fair value of net assetsof businesses acquired.  The Company paida premium over the fair value of net tangible and identifiable intangibleassets acquired for reasons such as the profitable expansion of its business,strategic fit, economies of scale and the value of an assembled workforce,among others.  Pursuant to SFAS No. 142,*“Goodwill and Other Intangible Assets,*”goodwill and intangible assets acquired in a purchase business combination anddetermined to have an indefinite life are not amortized but instead tested forimpairment at least annually.

 

The Company completed its annual impairment review effective October 1,2007, 2006 and 2005, which indicated that there was no impairment.  The fair value of our reporting units isbased on various valuation methods, including acquisition multiples of earnings,which were derived from information and analysis of recent acquisitions in themarketplace for companies with similar operations and discounted cash flowanalysis.

 

50

----

 

 

**J.B.PINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

SFAS No. 142 also requires that intangible assets with estimableuseful lives be amortized over their respective estimated useful lives andreviewed for impairment in accordance with SFAS No. 144, “*Accounting for Impairment or Disposal of Long-Lived Assets*.”

 

The Company records impairment losses on long-lived assets used inoperations when events and circumstances indicate that the assets may beimpaired and the undiscounted cash flows estimated to be generated by thoseassets are less than the carrying amounts of those assets.  At December 31, 2007, goodwill was$7,408, $14,884 and $13,025 for the Morgan, Truck Accessories, and SpecialtyManufacturing reporting units, respectively.

 

Effective June 6, 2005, the Company acquired all of the membershipinterests in Federal Coach, a manufacturer of funeral coaches, limousines andspecialty buses, and combined it with the Specialty Manufacturing segment.  Goodwill of $1,850 and acquired intangiblesof $3,650 were recorded at the time of purchase.

 

Effective January 3, 2006, the Company acquired all of theoutstanding stock of Eagle Coach, a manufacturer of funeral coaches, andcombined it with the Specialty Manufacturing segment.  Goodwill of $1,527 and acquired intangiblesof $2,900 were recorded at the time of purchase.

 

Effective March 17, 2006, the Company acquired all of theoutstanding stock of State Wide, a manufacturer of windows and doors used inpickup truck caps. State Wide operates as a division of Truck Accessories.  Goodwill of $3,528 was recorded at the timeof purchase.

 

Effective April 30, 2007, the Company acquired all of theoutstanding stock of Richard’s Manufacturing, a manufacturing services providerfor companies operating in the oil and gas exploration and production industry.Richard’s Manufacturing operates as part of MIC Group which is part of theSpecialty Manufacturing segment. Goodwill of $3,843 and acquired intangibles of $3,890 were recorded atthe time of purchase.

 

Effective August 23, 2007, the Company acquired all of theoutstanding stock of Tarlton, a manufacturing services provider for companiesoperating in the oil and gas exploration and production industry. Tarltonoperates as part of MIC Group which is part of the Specialty Manufacturingsegment.  Goodwill of $1,334 and acquiredintangibles of $2,430 were recorded at the time of purchase.

 

Effective September 4, 2007, the Company acquired all of the outstandingstock of MMI, a manufacturing services provider for companies operating in theoil and gas exploration and production industry. MMI operates as part of MICGroup which is part of the Specialty Manufacturing.  Goodwill of $326 and acquired intangibles of$2,575 were recorded at the time of purchase

 

The changes in the carrying amount of goodwill for the years ended December 31,2007 and 2006 were:

 
| ** **                        | ** ** | **Morgan** | ** ** | **Truck  Accessories** | ** ** | **Specialty  Manufacturing** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------|------------|------------------------------|------------|-----------|------------|
| Balance, January 1, 2006     |       | $          | 7,408      |                   | $          | 11,356                       |       | $         | 5,995      |   | $ | 24,759 |   |
| Goodwill acquired during the year |       | —     |       | 3,528                  |       | 1,527                        |       | 5,055     |       |
| Balance, December 31, 2006   |       | 7,408      |       | 14,884                 |       | 7,522                        |       | 29,814    |       |
| Goodwill acquired during the year |       | —     |       | —                 |       | 5,503                        |       | 5,503     |       |
| Balance, December 31, 2007   |       | $          | 7,408      |                   | $          | 14,884                       |       | $         | 13,025     |   | $ | 35,317 |   |

 

Goodwillrecognized in acquisitions (see Note 4) is generally deductible for income taxpurposes.

 

51

----

 

**J.B.PINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

Intangible assets (allacquired in connection with the acquisitions described in Note 4) and therelated accumulated amortization as of December 31, 2007 and 2006 were:

 
| ** **                       | ** ** | **Cost**                    | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| **December 31, 2007:**      | ** ** | **Useful  Lives  in Years** | ** ** | **Morgan** | ** ** | **Truck  Accessories** | ** ** | **SMG** | ** ** | **Total** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizable intangible assets:   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Customer base                    |       | 5 - 20                      |       | $ | 1,883 |   | $ | 2,556 |   | $ | 10,400 |   | $ | 14,839 |   | $ | 1,571 |   |
| Noncompete agreements            |       | 5                           |       | 231 |   | — |   | 663 |   | 894 |   | 251 |   |
| Supplier relationship            |       | 10                          |       | — |   | — |   | 3,200 |   | 3,200 |   | 440 |   |
| Patents                          |       | 2                           |       | — |   | 300 |   | — |   | 300 |   | 300 |   |
|                             |       |                        |       | 2,114 |   | 2,856 |   | 14,263 |   | 19,233 |   | 2,562 |   |
| Unamortizable intangible assets: |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Trade names                      |       | —                      |       | 1,189 |   | 616 |   | 1,180 |   | 2,985 |   | — |   |
| Balance, December 31, 2007  |       |                        |       | $ | 3,303 |   | $ | 3,472 |   | $ | 15,443 |   | $ | 22,218 |   | $ | 2,562 |   |

 
| ** **                       | ** ** | **Cost**                    | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| **December 31, 2006:**      | ** ** | **Useful  Lives  in Years** | ** ** | **Morgan** | ** ** | **Truck  Accessories** | ** ** | **SMG** | ** ** | **Total** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizable intangible assets:   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Customer base                    |       | 5 - 20                      |       | $ | 1,581 |   | $ | 2,573 |   | $ | 2,060 |   | $ | 6,214 |   | $ | 759 |   |
| Noncompete agreements            |       | 5                           |       | 194 |   | — |   | 110 |   | 304 |   | 104 |   |
| Supplier relationship            |       | 10                          |       | — |   | — |   | 3,200 |   | 3,200 |   | 235 |   |
| Patents                          |       | 2                           |       | — |   | 300 |   | — |   | 300 |   | 300 |   |
|                             |       |                        |       | 1,775 |   | 2,873 |   | 5,370 |   | 10,018 |   | 1,398 |   |
| Unamortizable intangible assets: |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Trade names                      |       | —                      |       | 998 |   | 616 |   | 1,180 |   | 2,794 |   | — |   |
| Balance, December 31, 2006  |       |                        |       | $ | 2,773 |   | $ | 3,489 |   | $ | 6,550 |   | $ | 12,812 |   | $ | 1,398 |   |

 

The amortization ofintangible assets was $1,164, $816, and $523 for the years ended December 31,2007, 2006 and 2005, respectively. Estimated amortization expense for each of the subsequent five yearsending December 31 is $1,689 — 2008, $1,678 — 2009, $1,616 — 2010, $1,555 —2011 and $1,366 — 2012.

 

Other assets, as of December 31, 2007 and 2006,consisted of the following:

 
| ** **                         | ** ** | **Amortization**     | ** ** | **2007**                      | ** ** | **2006**            | ** ** |
|------------------------------------|------------|----------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **Period in  Years** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Other Assets:                      |       |                 |       |                          |       |                |       |   |   |   |   |
| Debt issuance  costs               |       | 4-10                 |       | $                             | 2,804      |                | $          | 3,551 |   | $ | 2,013 |   | $ | 4,342 |   |
| Insurance cash  collateral deposit |       | —               |       | —                        |       | 6,527               |       | — |   | 6,179 |   |
| Other                              |       | —               |       | —                        |       | 3,019               |       | — |   | 3,893 |   |
| Total                              |       |                 |       | $                             | 2,804      |                | $          | 13,097 |   | $ | 2,013 |   | $ | 14,414 |   |

 

52

----

 

**J.B.PINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

The amortization of debtissuance costs was $791, $761 and $598 for the years ended December 31,2007, 2006 and 2005, respectively. Estimated amortization of debt issuance costs for each of the subsequentfive years ending December 31 is $559 per year.

 

The Company created a trustin favor of its insurance carrier to secure its liabilities under itsself-insured, casualty insurance program including workers’ compensationinsurance.  The liabilities werepreviously secured by an irrevocable standby letter of credit that was cancelledupon the initial deposit of $5,520 into the trust.  During the years ended December 31, 2007and 2006, the Company contributed an additional $348 and $659, respectively, tothe trust.

 

**8.             Floor Plan NotesPayable**

 

The Company has a floor planfinancing agreement with Ford Motor Credit Company for financing part of itschassis inventory at Federal Coach and Eagle Coach.  Floor plan notes payable reflect the monetaryvalue of the chassis that are in the Company’s possession as of December 31,2007 and 2006.  These obligations arereflected on the accompanying balance sheet as accounts payables, a currentliability.

 

The total amount financedunder these agreements was $3,286 and $4,735 as of December 31, 2007 and2006, respectively.  These borrowings bearinterest at the prime rate plus 150 basis points on balances outstanding over90 days.  As of December 31, 2007and 2006, the weighted average interest rate on all outstanding floor plannotes payable was 0.1% and 2.1%, respectively. The average interest rate on the liabilities that bear interest was9.52% and 9.61% at December 31, 2007 and 2006, respectively.

 

**9.             Revolving Credit Facility**

** **

On March 15, 2004, concurrently with the 8.75% Note offering discussed in Note 10, the Company enteredinto a secured revolving credit agreement (the “Revolving Credit Facility”)that expired March 15, 2008.  TheRevolving Credit Facility automatically renews for a twelve-month period after March 15,2008 unless notice is provided at least 90 days prior to expiration by eitherparty.  It was renewed for a twelve-monthperiod ending March 15, 2009.  TheRevolving Credit Facility currently provides for borrowings by the Company ofup to $30,000, which may be increased to $50,000 at the Company’s option. TheRevolving Credit Facility allows the Company to borrow funds up to the lesserof $30,000 or an amount based on the sum of: 1) advance rates applied to thetotal amounts of eligible accounts receivable and inventories of thesubsidiaries and 2) up to $20,000 secured by the fixed assets of theCompany.  The advance rates are 85% foreligible accounts receivable and 60% for eligible inventory, as defined.  Borrowings against inventory may not exceed$20,000.  The Company is entitled toborrow up to an additional $20,000 against fixed assets not to exceed themaximum amount of credit under the facility. The availability of funds secured by the fixed assets will amortize tozero over 60 months for that portion secured by machinery and equipment and 120months for real estate or the remaining term of the Revolving Credit Facility,whichever is shorter.  The RevolvingCredit Facility includes a subfacility for up to $15,000 of letters of credit.

 

The Revolving Credit Facility provides for borrowing at variable ratesof interest, based on either LIBOR (London Interbank Offered Rate, which was4.46%****at December 31, 2007) plus amargin of 1.75% or the bank’s base rate (the greater of the Federal Funds Rateplus 0.5% or its prime rate, which was 7.25%****atDecember 31, 2007).  Interest ispayable monthly including a fee of 0.375% on the portion of the maximum amountof borrowings of the $50,000 total commitment, including the option to increasethe commitment, that remain unused during the period.  The Subsidiaries are also guarantors of the 8.75% Notes defined in Note 10.

 

The Revolving Credit Facility contains provisionsallowing the lender to accelerate the repayment of debt upon the occurrence ofan event the lender determines to represent a material adverse change.  The Revolving Credit Facility also containsrestrictive covenants, which, among other things, restrict the use of proceedsfrom the sale 

 

53

----

 

**J.B.PINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

of assets, the ability of the Company to incuradditional debt or pay dividends, and certain other corporate activities.  In addition, the Company is subject to afinancial covenant requiring it to maintain a minimum fixed charge coverageratio, as defined, of 1.0 to 1.0 should availability fall below $10,000.  At December 31, 2007, the Company was incompliance with all covenants of the Revolving Credit Facility. In the eventthat the Company’s borrowing availability is below $20,000, the Company’s cashbalances will become restricted.

 

At December 31, 2007 and 2006, the Company had borrowings of$3,637 and $0, respectively, and $2,358 in standby letters of credit (see Note16) at December 31, 2007, and had unused gross borrowing availability,based on eligible accounts receivable and inventory, in excess of the $30,000borrowing limit under the Revolving Credit Facility.

 

**10.          Long-term Debt and 8.75%Note Offering**

** **

Long-term debt as of December 31, 2007 and 2006 consisted of:

 
| ** **                                                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                      |       |     |       |     |       |
| 8.75% Notes due 2014, plus unamortized premium of  $1.5 million at December 31, 2007 |       | $        | 201,536    |     | $          | 201,780 |   |
| Obligations under capital leases                                                          |       | 8,446    |       | 5,833    |       |
| Total long-term debt                                                                      |       | 209,982  |       | 207,613  |       |
| Less current portion                                                                      |       | 2,669    |       | 1,934    |       |
| Long-term debt, less current portion                                                      |       | $        | 207,313    |     | $          | 205,679 |   |

 

On March 15, 2004, the Company completed a note offering of$125,000, 8.75% senior notes due in 2014 (the “8.75% Notes”) with interest payable semiannually.  On May 17, 2004 and January 21,2005, the Company completed offers to sell an additional $30,000 and $45,000,respectively, of 8.75% Notes.  The additional $30,000 of 8.75% Notes were issued at par and the$45,000 of 8.75% Notes were issued ata 5% premium.  The additional 8.75% Notes were issued on the same termsas the original issue.  Net proceeds fromthe additional offerings of approximately $46,400 increased the Company’s cashand short-term investments.  The 8.75% Notes mature on March 15, 2014and bear interest at an annual rate of 8.75% payable each September 15 andMarch 15 to the holders of record on September 1 and March 1immediately preceding the interest payment date.  Costs associated with the $45,000 offering of8.75% Notes totaling approximately $1,300 have been capitalized as debtissuance costs (see Note 7) and will be amortized over the term of the 8.75%Notes.  On May 11, 2005, the Companycompleted an offer to exchange (“2005 Exchange Offer”) $200 million principalamount of its 8.75% Notes which had been registered under the Securities Actfor any and all of its outstanding unregistered 8.75% Notes.

 

The 8.75% Notes aresubordinated to borrowings under the Revolving Credit Facility (see Note 9) andother secured indebtedness to the extent of the assets securing the debt.  Also, the Company’s obligations under the 8.75% Notes are guaranteed by each whollyowned subsidiary of the Company (the “Subsidiary Guarantors”).  Each guarantee is a senior unsecuredobligation of the Subsidiary providing such Guarantee.  The Subsidiary Guarantors are also borrowersunder the Revolving Credit Facility (see Note 9).

 

The Company has the option to redeem the 8.75% Notes at any time on or after March 15, 2009, at adefined premium plus accrued and unpaid interest to the date of redemption.

 

The 8.75% Notes’ indentureincludes covenants that limit the ability of the Company to: incur additionaldebt, including sale and leaseback transactions; pay dividends or distributionson its capital stock or repurchase capital stock; issue stock of subsidiaries;make certain investments; create liens on its assets to secure debt; enter intotransactions with affiliates; merge or consolidate with another company; andtransfer and sell assets.  As noted, 

 

54

----

 

**J.B.PINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

the indenture contains a covenant to limit the incurrence of additionalindebtedness as measured by its Consolidated Coverage Ratio, as defined.  The Company may incur indebtedness if thisratio is greater than 2.0 to 1.0 and there is no other event of default, asdefined.  At December 31, 2007, theConsolidated Coverage Ratio, as defined, was 2.3 to 1.0.

 

The Company estimates the fair value of the 8.75% Notes at December 31, 2007 and 2006 was approximately$167,500 and $171,000, respectively, based on their market value at that datecompared to a recorded amount of $200,000.

 

The Company’s obligation under capital leases is due in varyingmaturity dates through 2012.  The capitalleases are secured by certain equipment with a net book value of approximately$9,190 and $5,937 at December 31, 2007 and 2006, respectively.

 

**Maturities.**  Aggregate principal payments on long-termdebt based on scheduled maturities for the next five years and thereafter as ofDecember 31, 2007 are as follows:

 
| 2008                |   | $       | 2,669   |   |
|---------------------|--------|---------|---------|--------|
| 2009                |   | 2,490   |    |
| 2010                |   | 1,927   |    |
| 2011                |   | 1,664   |    |
| 2012                |   | 923     |    |
| 2013 and thereafter |   | 200,309 |    |
|                |   | $       | 209,982 |   |

 

**11.          Operating Leases**

** **

The Company leases certain manufacturing facilities and equipment undernoncancelable operating leases certain of which contain renewal options. Thefuture minimum lease payments subsequent to December 31, 2007 are asfollows:

 
| 2008                         |   | $     | 8,469  |   |
|------------------------------|--------|-------|--------|--------|
| 2009                         |   | 7,221 |   |
| 2010                         |   | 4,237 |   |
| 2011                         |   | 2,582 |   |
| 2012                         |   | 1,422 |   |
| 2013 and thereafter          |   | 1,458 |   |
| Total minimum lease payments |   | $     | 25,389 |   |

 

Total rental expense included in continuing operations under alloperating leases was approximately $9,485, $8,933 and $8,542 for the years endedDecember 31, 2007, 2006 and 2005, respectively.

 

55

----

 

**J.B.PINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

**12.          Supplemental Cash Flow Information**

** **

The supplemental cash flowinformation for the years ended December 31, 2007, 2006 and 2005 was asfollows:

 
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash paid for interest                                 |       | $        | 18,688     |     | $          | 18,070   |       | $ | 16,517 |   |
| Cash paid for income taxes                             |       | 6,875    |       | 2,022    |       | 4,228    |       |
| Noncash investing and financing activities:            |       |     |       |     |       |     |       |
| Capital lease  obligations for machinery and equipment |       | 4,635    |       | 4,051    |       | 970      |       |
|                                                        |            |          |            |          |            |          |            |  |  |  |

** **

**13.          Income Taxes**

** **

The income tax provision consists of the followingfor the years ended December 31, 2007, 2006 and 2005:

 
| ** **           | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------|------------|----------|------------|------------|------------|------------|------------|
| Current:             |       |     |       |       |       |       |       |
| Federal              |       | $        | 970        |       | $          | 2,995      |       | $ | 1,819 |   |
| State                |       | 1,509    |       | 809        |       | 362        |       |
| Foreign              |       | 29       | ** ** | **—** |       | (433       | )          |
|                 |       | 2,508    |       | 3,804      |       | 1,748      |       |
| Deferred:            |       |     |       |       |       |       |       |
| Federal              |       | 466      |       | 3,174      |       | 1,784      |       |
| State                |       | 158      |       | (1,739     | )          | (950       | )          |
| Foreign              |       | (8       | )          | (1,869     | )          | **—** | ** ** |
|                 |       | 616      |       | (434       | )          | 834        |       |
| Income tax provision |       | $        | 3,124      |       | $          | 3,370      |       | $ | 2,582 |   |

 

The following table reconciles the differences between the federalstatutory income tax rate and the effective tax rate for the years ended December 31,2007, 2006 and 2005:

 
| ** **                                                 | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005**   | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| ** **                                                 | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Tax provision at federal statutory income tax rate         |       | $          | 796        |     | 34         | %          | $          | 4,058 |   | 35 | % | $ | 2,616 |   | 34 | % |
| Valuation allowance                                        |       | 827        |       | 35       | ** ** | **—** | ** ** | **—** |   | (1,000 | ) | (13 | ) |
| Increase in state net  operating loss carryforwards        |       | —     |       | —   |       | (700       | )          | (6 | ) | **—** | ** ** | **—** | ** ** |
| Nondeductible expenses                                     |       | 201        |       | 9        |       | 336        |       | 3 |   | 81 |   | 1 |   |
| State income taxes, net of federal income tax  benefit     |       | 304        |       | 13       |       | 396        |       | 3 |   | 239 |   | 3 |   |
| FIN 48 adjustment related to prior years                   |       | 668        |       | 29       |       | —     |       | — |   | — |   | — |   |
| FIN 48 adjustment related to current year                  |       | 219        |       | 9        |       | —     |       | — |   | — |   | — |   |
| Foreign income taxes, at rate different than federal  rate |       | 19         |       | 1        |       | (167       | )          | (1 | ) | 106 |   | 2 |   |
| Other                                                      |       | 90         |       | 4        |       | (553       | )          | (5 | ) | 540 |   | 7 |   |
| Provision for income taxes and effective tax rates         |       | $          | 3,124      |     | 134        | %          | $          | 3,370 |   | 29 | % | $ | 2,582 |   | 34 | % |

 

56

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

The domestic and foreign components of income (loss)before income taxes were:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | 4,374      |     | $          | 17,061   |       | $ | 8,934 |   |
| Foreign    |       | (2,035   | )          | (5,466   | )          | (1,240   | )          |
| Total      |       | $        | 2,339      |     | $          | 11,595   |       | $ | 7,694 |   |

 

Deferred income taxes are based on the estimated future tax effects ofdifferences between the financial statements and tax basis of assets andliabilities given the provisions of the enacted tax laws.  The net deferred tax assets and liabilitiesas of December 31, 2007 and 2006 were:

 
| ** **                                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|
| **Current deferred tax asset:**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance for doubtful accounts                   |       | $          | 209        |       | $          | 346 |   |
| Employee benefit accruals and reserves            |       | 393        |       | 1,191      |       |
| FIN No. 48 tax benefit                       |       | 852        |       | —     |       |
| Other                                             |       | 584        |       | 234        |       |
| Total current deferred tax asset                  |       | $          | 2,038      |       | $          | 1,771 |   |
|                                              |       |       |       |       |       |
| **Long-term deferred tax asset:**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tax credit and state operating loss carryforwards |       | $          | 8,328      |       | $          | 7,858 |   |
| Warranty liabilities                              |       | 1,498      |       | 1,384      |       |
| Other                                             |       | 2,834      |       | 2,436      |       |
| Valuation allowance                               |       | (4,581     | )          | (3,754     | )          |
| Total long-term deferred tax asset                |       | 8,079      |       | 7,924      |       |
|                                              |       |       |       |       |       |
| **Long-term deferred tax liabilities:**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation and amortization                     |       | (6,598     | )          | (5,655     | )          |
| Intangible assets                                 |       | (1,229     | )          | (1,134     | )          |
| Total long-term deferred tax liability            |       | (7,827     | )          | (6,789     | )          |
| Net long-term  deferred tax asset                 |       | 252        |       | 1,135      |       |
| Net deferred tax  asset                           |       | $          | 2,290      |       | $          | 2,906 |   |

 

The Company had alternative minimum tax creditcarryforwards of approximately $768 and $536 at December 31, 2007 and2006, respectively, for U.S. federal income tax purposes, which may be carriedforward indefinitely.  The Company hadcapital loss carryforwards of approximately $3,600 at December 31, 2007and 2006 for U.S. federal income tax purposes, which may be carried forward forone more year and can only offset capital gains.  At December 31, 2007 and 2006, theCompany had a full valuation allowance against the capital loss carryforwards.

 

**As a result of the Company’s subsidiaries conversioninto Delaware limited liability companies in September 2006, the Companywas able to generate additional state net operating loss carryforwards, whichprovided an after tax benefit of $700. At December 31, 2007 and 2006, the Company had state tax netoperating loss carryforwards of approximately $80,000 and recognized a deferredtax asset of approximately $4,100. The state net operating loss carryforwardsexpire at varying dates ranging from 1 to 20 years.  At December 31, 2007 and 2006, theCompany had recorded a valuation allowance of approximately $2,500 against thisdeferred tax asset as it was uncertain as to whether it would be realized.  The Company had Canadian net operating lossesof approximately $6,600 and $4,600 as of December 31, 2007 and 2006,respectively, and recognized a deferred tax asset of**

 

57

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 

**approximately $2,150 and $1,850, respectively.  At December 31, 2007, the Companyrecorded a valuation allowance of approximately $800 against this deferred taxasset as it was uncertain as to whether it would be realized.  The Canadian net operating losses of $6,600will be carried back to prior years and the remaining amounts will be carriedforward for up to 20 years, with a significant majority being greater than 10years.**

** **

As of December 31,2006, we had recorded a tax liability of $979 related primarily to certainstate income tax exposures determined based on a FAS No. 5 analysis.  This liability was recorded withoutconsideration for the corresponding federal tax benefit.  In connection with the adoption of FIN 48,the Company recognized an  increase ofapproximately $658 related to state tax liabilities, and a correspondingfederal tax benefit of $437, for uncertain state income tax positions.  This was accounted for as a reduction toretained earnings totaling $221 as of January 1, 2007. As of January 1,2007, the Company had approximately $1,637 of unrecognized state income taxliabilities, and a corresponding federal tax benefit of $437.  The state income tax liability included $302of interest and penalties.  During thefourth quarter of 2007, the Company recorded an additional provision foruncertain state income tax positions of $955, and a corresponding federal taxbenefit of $286, related to prior year tax positions and a tax provision of$348, and a corresponding federal tax benefit of $129, related to current yeartax positions.

 

As of December 31,2007, the Company had approximately $2,940 of tax liabilities related touncertain state income tax liabilites, or $2,088 net of a federal tax benefitof $852.  The tax liability includes $689of interest and penalties.  If these uncertaintax positions are favorably resolved, $2,088 would reduce our income taxprovision in future periods.  Areconciliation of the beginning and ending unrecognized tax liability is asfollows:

** **
| ** **                                                | ** ** | **Liability for  Unrecognized Tax  Benefits** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|
| Balance at December 31, 2006                         |       | $                                             | 979        |   |
| FIN No. 48  adjustment                               |       | 658                                           |       |
| Balance at January 1, 2007                           |       | 1,637                                         |       |
| Additions based  on tax positions related to prior years  |       | 955                                           |       |
| Additions based  on tax positions related to current year |       | 348                                           |       |
| Balance at December 31, 2007                         |       | $                                             | 2,940      |   |

 

We are subject to U.S.federal income tax as well as income tax in Canada and multiple statejurisdictions. We have substantially concluded all U.S. federal income taxmatters for years through 2003. Substantially all material state and local income tax matters have beenconcluded for fiscal years through 2003. Currently, we are under audit by Revenue Canada for tax years 2001through 2004 and examination by the state of Wisconsin and Illinois.  The Company has provided for any knownpotential exposures for these examinations.

 

**14.    Common Stock**

 

As of December 31, 2007and 2006, there were 100,000 shares authorized and 3,059 shares issued andoutstanding of JBPCO common stock with a par value of $.01 per share.  JBPCO was incorporated in Delaware.  No other classes of common stock, preferredstock or common stock equivalents exist.

 

**15.    Employee Benefit Plans**

 

E*mployee Incentive Plans*. The Company has an incentivecompensation plan for members of upper management of each of the subsidiariesto provide for the payments of annual bonuses based upon the attainment ofperformance-based goals. Eligible employees are entitled to receive a bonus ifthe subsidiary attains or surpasses a stated percentage of that subsidiary’soperating income, with the amount of bonus being tied to the subsidiary’sactual pre-tax profits. Individual bonuses are then allocated among theeligible employees based upon their 

 

58

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

individual achievement of stated performance objectivesincluding working capital performance objectives. The Company incurred expensesrelated to this plan totaling $2,378, $3,125 and $1,539 for the years ended December 31,2007, 2006 and 2005, respectively.

 

*JBPCO 401(k) Defined Contribution Plan.* TheJBPCO-sponsored 401(k) savings plan allows participating employees tocontribute through salary deductions up to 100% of gross compensation andprovides for Company matching contributions up to 3.0% of the first 6.0% ofgross pay as well as the opportunity for an annual discretionarycontribution.  The Company increased thematching percentage to 3.0% from 2.5% effective June 1, 2005.  The Company has not made discretionarycontributions.  Vesting in the Companymatching contribution is 20% per year over the first five years.  The Company incurred related employermatching contribution and administrative expenses of $2,009,****$1,634 and $1,366 during the years ended December 31,2007, 2006 and 2005, respectively.

 

*Defined Benefit Plan.*****TruckAccessories assumed future sponsorship of a defined benefit plan (the “Plan”)covering hourly employees at its Gem Top division that was sold with all theemployees terminated effective February 28, 2003.  The Plan was frozen effective March 31,1996 and at December 31, 2007, the Plan was overfunded by approximately$33 compared to being underfunded by approximately $87 in 2006.  The Company’s funding policy for the Plan isto make the minimum annual contributions required by applicableregulations.  Minimum contributions forthe 2007 plan year totaled $39.

 

The Plan has invested its assets through a group annuity contract withan insurance company.  The targetedcomposition is set by the Company and is reallocated periodically.  The long-term portfolio is chosen based onthe duration of the Plan’s individual population and is set toward funding forbenefits payable in the future.  The fairvalue of the Plan’s assets was $461 and $314 as of December 31, 2007 and2006, respectively.  The pension expenserecognized was $5, $23 and $39 for the years ended December 31, 2007, 2006and 2005, respectively.  Based on theimmateriality of the Plan, management does not believe expanded disclosure isnecessary.

 

**16.**            Commitments andContingencies

** **

*Claims and Lawsuits.*  The Company is involved in certain claims andlawsuits arising in the normal course of business.  In the opinion of management, the ultimateresolution of these matters will not have a material adverse effect on thefinancial position or results of operations of the Company.

 

*Letters of Credit and Other Commitments.** ***The Company had $2,358 instandby letters of credit outstanding at December 31, 2007, primarilysecuring the Company’s insurance programs. During 2004, the Company deposited $5,520 into a trust account in favorof its insurance carrier (see Note 7). The funds held in trust were increased to $6,527 during 2007 and will beheld in trust to secure the Company’s insurance programs.  Income from the trust accrues to the Company.

 

The Company has an agreement with a key supplier, whereby it willexclusively purchase inventory from this supplier for five years, in return forfavorable pricing.  The Company estimatesthat it will purchase approximately $9,953 from this supplier in 2008.

 

*Consigned Chassis Inventories. *The Companyobtains vehicle chassis for certain units produced at Morgan directly from thechassis manufacturer under a bailment pool agreement with General MotorsAcceptance Corporation.  Chassis areobtained directly from the manufacturer based on orders from customers, whichare typically manufacturer dealers.  Theagreements generally provide that the Company is restricted to producingcertain conversions or up-fittings on these chassis.  The manufacturer does not transfer thecertificate of origin to the Company and, accordingly, the Company accounts forthe chassis as consigned inventory belonging to the manufacturer.  Under these agreements, if the chassis is notdelivered to a customer within a specified timeframe, the Company is requiredto pay a finance charge based on the value of the chassis.  The finance charges incurred 

 

59

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollarsin Thousands)**

 

onconsigned chassis inventories, included in interest expense in the consolidatedstatements of income totaled $49, $76 and $28 for the years ended December 31,2007, 2006 and 2005, respectively.  Totalconsigned chassis inventory totaled $1,433 and $1,020 at December 31, 2007and 2006, respectively.

 

*Environmental Matters*.*** ***The Company’s operations aresubject to a variety of federal, state and local environmental and health andsafety statutes and regulations, including those relating to emissions to theair, discharges to water, treatment, storage and disposal of waste, andremediation of contaminated sites. In certain cases, these requirements maylimit the productive capacity of itsoperations.Certain laws, including the Federal Comprehensive Environmental Response,Compensation and Liability Act of 1980, impose strict and, under certaincircumstances, joint and several liability for costs to remediate contaminatedsites upon designated responsible parties including site owners or operatorsand persons who dispose of wastes at, or transport wastes to, such sites. Someof the Company’s operations also require permits which may restrict itsactivities and which are subject to renewal, modification or revocation byissuing authorities. In addition, the Company generates non-hazardous wastes,which are also subject to regulation under applicable environmental laws.

 

From time to time, the Company has receivednotices of noncompliance with respect to its operations, which typically havebeen resolved by investigating the alleged noncompliance, correcting anynoncompliant conditions and paying fines, none of which individually or in theaggregate has had a material adverse effect on it.   The Companycannot ensure that it has been or will be at all times in compliance with allof these requirements, including those related to reporting or permitrestrictions, or that it will not incur material fines, penalties, costs orliabilities in connection with such requirements or a failure to comply withthem.  Additionally, the Companyexpects that the nature of its operations will continue to make it subject toincreasingly stringent environmental regulatory standards. Although the Companybelieves it has made sufficient capital expenditures to maintain compliancewith existing laws and regulations, future expenditures may be necessary ascompliance standards and technology change or as unanticipated circumstancesarise. Unforeseen and significant expenditures required to comply with new ormore aggressively enforced requirements or newly discovered conditions couldlimit expansion or otherwise have a material adverse effect on the Company’sbusiness and financial condition.

 

In September 2007, Specialty Manufacturing notified the UnitedStates Environmental Protection Agency (“USEPA”) that it was investigating thepossible need to file reports required pursuant to Section 313 of theEmergency Planning and Community Right-to-Know Act, and regulations promulgatedthereunder.  All necessary analyses andreports were filed with the USEPA by the end of November 2007.  In December 2007, the Company received aNotice of Determination from the USEPA and waived all penalties in this matter.

 

In August 2007, Morgan Olson was notified by the MichiganDepartment of Environmental Quality (“MDEQ”) that it had failed to providecertain reports related to its air permit. Morgan Olson subsequently filed the reports and is in discussions withthe MDEQ to settle these alleged violations. A penalty is likely but is not expected to have a material effect on theresults of operations of the Company.

 

In July 2005, Morgan notified the USEPA that it was investigatingthe possible need to file reports required pursuant to Section 313 of theEmergency Planning and Community Right-to-Know Act, and regulations promulgatedthereunder. All necessary reports were completed and filed with the USEPA by August 31,2005.  A letter from the USEPA requestingadditional information was received in December 2006 and a responsesubmitted.  Action by the USEPA isprobable and the financial impact of such enforcement action, if any, cannot beestimated but could be material.

 

**17.          Related Party Transactions**

** **

The Company was party to aManagement Services Agreement with Southwestern Holdings, Inc. (“Southwestern”),a corporation owned by Mr. Poindexter. The services agreement was terminated June 30, 2006 when Mr. Poindexterbecame an employee of the Company. Pursuant to the Management Services Agreement, 

 

60

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 

Southwestern providedservices to the Company, including those of Mr. Poindexter.  The Company paid to Southwestern a base feeof approximately $46 per month for these services, subject to annual automaticincreases based upon the consumer price index. The Company paid Southwestern $346 and $569 during 2006 and 2005,respectively, for all these services.

 

Southwestern is a named insured under the Company’s general liabilityand excess umbrella insurance policies.  During 2007, Southwestern becamethe defendant in a suit for damages resulting from a vehicle accident notinvolving the Company’s assets or any of its employees.  The outcome ofthe lawsuit or the amount of any settlement cannot be estimated, however, inthe event a settlement exceeds Southwestern’s separate insurance coverage,coverage will be provided by the Company’s policies and the Company will beliable up to the amount of the deductible or $300.  Any deductible amountsor increased premiums incurred by the Company will be reimbursed bySouthwestern.

 

***18.          Selected Quarterly Information(Unaudited)***

** **

***The Company’s accounting recordsare maintained on the basis of four 13 week quarters.  Shown below are the selected unauditedquarterly data.***

 
| ** **                                  | ** ** | **March  31, 2007** | ** ** | **June  30, 2007** | ** ** | **September  30, 2007** | ** ** | **December  31, 2007** | ** ** |
|---------------------------------------------|------------|---------------------|------------|--------------------|------------|-------------------------|------------|------------------------|------------|
| Net sales                                   |       | $                   | 213,154    |               | $          | 229,743                 |       | $                      | 179,855    |   | $ | 169,409 |   |
| Cost of sales                               |       | 188,339             |       | 200,568            |       | 164,801                 |       | 153,536                |       |
| Gross profit                                |       | 24,815              |       | 29,175             |       | 15,054                  |       | 15,873                 |       |
| Selling, general and administrative expense |       | 16,629              |       | 15,627             |       | 15,630                  |       | 17,028                 |       |
| Closed and excess facility costs            |       | 200                 |       | —             |       | —                  |       | (34                    | )          |
| Other expense (income)                      |       | —              |       | —             |       | (244                    | )          | (79                    | )          |
| Operating income (loss)                     |       | 7,986               |       | 13,548             |       | (332                    | )          | (1,042                 | )          |
| Interest expense, net                       |       | 4,519               |       | 3,912              |       | 4,938                   |       | 4,452                  |       |
| Income tax provision (benefit)              |       | 1,779               |       | 4,752              |       | (2,360                  | )          | (1,047                 | )          |
| Net income (loss)                           |       | $                   | 1,688      |               | $          | 4,884                   |       | $                      | (2,910     | ) | $ | (4,447 | ) |
| Depreciation and amortization               |       | $                   | 3,194      |               | $          | 3,442                   |       | $                      | 3,756      |   | $ | 4,671 |   |
| Amortization of debt issuance costs         |       | $                   | 199        |               | $          | 197                     |       | $                      | 198        |   | $ | 197 |   |

 

During the fourth quarter of2007, the Company recorded an additional provision for uncertain state incometax positions of $955, and a corresponding federal tax benefit of $286, relatedto prior year tax positions and a tax provision for uncertain state income taxpositions of $348, and a corresponding federal tax benefit of $129, related tocurrent year tax positions.

 

61

----

 

**J.B.POINDEXTER & CO., INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(Dollars in Thousands)**

 
| ** **                                  | ** ** | **March  31, 2006** | ** ** | **June  30, 2006** | ** ** | **September  30, 2006** | ** ** | **December  31, 2006** | ** ** |
|---------------------------------------------|------------|---------------------|------------|--------------------|------------|-------------------------|------------|------------------------|------------|
| Net sales                                   |       | $                   | 185,541    |               | $          | 226,046                 |       | $                      | 197,968    |   | $ | 185,824 |   |
| Cost of sales                               |       | 166,205             |       | 196,642            |       | 174,104                 |       | 164,160                |       |
| Gross profit                                |       | 19,336              |       | 29,404             |       | 23,864                  |       | 21,664                 |       |
| Selling, general and administrative expense |       | 15,140              |       | 15,569             |       | 16,127                  |       | 16,198                 |       |
| Closed and excess facility costs            |       | —              |       | —             |       | —                  |       | 2,678                  |       |
| Other expense (income)                      |       | (181                | )          | (4                 | )          | 10                      |       | (27                    | )          |
| Operating income                            |       | 4,377               |       | 13,839             |       | 7,727                   |       | 2,815                  |       |
| Interest expense, net                       |       | 4,469               |       | 3,826              |       | 4,244                   |       | 4,624                  |       |
| Income tax provision (benefit)              |       | (38                 | )          | 3,815              |       | 242                     |       | (649                   | )          |
| Net income (loss)                           |       | $                   | (54        | )                  | $          | 6,198                   |       | $                      | 3,241      |   | $ | (1,160 | ) |
| Depreciation and amortization               |       | $                   | 2,773      |               | $          | 2,988                   |       | $                      | 3,185      |   | $ | 3,071 |   |
| Amortization of debt issuance costs         |       | $                   | 128        |               | $          | 180                     |       | $                      | 129        |   | $ | 324 |   |

 

62

----

 

**Item 9.                    Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

** **

**None.**

** **

**Item 9a.                  Controlsand Procedures**

** **

**Management’s ConclusionsRegarding Effectiveness of Disclosure Controls and Procedures**

** **

As of December 31, 2007, the Company conducted an evaluation,under the supervision and participation of management including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures require remedial action as of December 31, 2007 as outlined inmanagement’s Report on Internal Controls over Financial Reporting as outlinedbelow.

 

**Changes in Internal Control Over Financial Reporting**

 

There have been no changes in our internal control over financialreporting that occurred during the year ended December 31, 2007 that havematerially affected, or are likely to materially affect, our internal controlsover financial reporting.

 

**Management’s Report on Internal Control over Financial Reporting**

 

Management of the Company is responsible for establishing and maintainingadequate internal control over financial reporting as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934. Internal control over financial reporting provides reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

 

The Company’s internal control over financial reporting includespolicies and procedures that: pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddisposition of the Company’s assets; provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat the Company’s receipts and expenditures are being made only in accordancewith authorizations of management; provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Management of the Company has assessed the effectiveness of the Company’sinternal control over financial reporting based on criteria established in theInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Management’s assessment included an evaluation of the design of theCompany’s internal control over financial reporting, and testing of theoperational effectiveness of the Company’s internal control over financialreporting.  Based on this assessment,management identified the following material weaknesses in the Company’sinternal controls:

 

·                  The Company restated its results ofoperations for the quarter ended March 31, 2007 and for the year ended December 31,2006, and the interim periods included therein, due to an error in theaccounting for inventory at the Company’s subsidiary, Morgan Olson.  As a result, as of December 31, 2006,the 

 

 

63

----

 

Company wrote down its inventory by $1,126,000 which reduced operatingincome from $29,884,000 to $28,758,000 for 2006.  Correspondingly, net income for 2006 wasreduced from $8,900,000 to $8,225,000. The Company also wrote down its inventory as of March 31, 2007 by$382,000, which reduced operating income from $8,368,000 to $7,986,000 for thequarter.  Correspondingly, net income forthe quarter was reduced from $1,917,000 to $1,688,000.  The error was related to a failure to performan adequate reconciliation of inventory records as a result of a combination ofinadequate internal control procedures and inventory tracking systems.  This weakness at Morgan Olson represented amaterial weakness in the internal controls over the financial reporting as of December 31,2006 and March 31, 2007.  TheCompany believes that this weakness has been corrected through personnelchanges and improved procedures at Morgan Olson.

 

·                  The timely oversight of the financialreporting of the business units and the work outsourced to third parties needsto be improved.  Specifically, moretimely oversight would likely have prevented an adjustment to record anadditional FIN No. 48 provision for uncertain state income tax positionsin the fourth quarter of 2007 (see Note 13 in the consolidated financialstatements) and should enable the Company to more timely report its financialresults.  Improvements, including theaddition of corporate and business unit personnel, are being evaluated and areexpected to be implemented in 2008.

 

The Company believes that the remedial action described above, onceimplemented, will satisfactorily address all matters identified as weaknessesby management.  The Company will continueto monitor the effectiveness of its internal controls and procedures on anongoing basis and will take further actions as appropriate.

 

This annual report does not include an attestation report of theCompany’s independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by the Company’sindependent registrant public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in the annual report.

 

**Item 9b.                  OtherInformation**

 

None.

 

**PART III**

** **

**Item 10.                 Directors,Executive Officers and Corporate Governance**

** **

The Company’s directors and executive officers areset forth below. All directors hold office until the next annual meeting oruntil their successors are duly elected and qualified. The executive officersare appointed by the Board of Directors annually and serve at the discretion ofthe Board of Directors.

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                  | ** ** |
|--------------------|------------|---------|------------|---------------------------------------------------------------|------------|
| John B. Poindexter |       | 63      |       | Chairman of the Board, President and Chief Executive  Officer |       |
| Stephen P. Magee   |       | 60      |       | Director                                                      |       |
| William J. Bowen   |       | 86      |       | Director                                                      |       |
| Robert S. Whatley  |       | 56      |       | Vice President Finance, Secretary and Treasurer               |       |
| Larry T. Wolfe     |       | 59      |       | Vice President Administration and Assistant  Secretary        |       |

 

John B. Poindexter has servedas Chairman of the Board of Directors since 1988 and Chief Executive Officersince 1994.  He was President from November 2002until September 2005 and again from November 2006 to present.

 

Stephen P. Magee has served asDirector since the Company was formed in 1988, as Treasurer from 1988 to 2001and as Chief Financial Officer from 1994 to 2001. Mr. Magee also serves asChairman of the Audit Committee of the Board of Directors.

 

 

64

----

 

William J. Bowen has served asDirector since 1988.  Mr. Bowenretired in 1992 as the Chairman of the Board of Transco Energy Company, adiversified energy company based in Houston, Texas. Mr. Bowen served asChief Executive Officer of Transco Energy from 1974 until his retirement fromthat position in 1987. Mr. Bowen serves on the Company’s Audit Committee.

 

Robert S. Whatley has served asVice President since June 1994. He is a Certified Public Accountant and amember of the Institute of Chartered Accountants in England and Wales.

 

Larry T. Wolfe has served asVice President of Administration since May 1995. He previously served asVice President of Human Resources and Administrative Services for TranscoEnergy Company.

 

**Audit Committee**

 

The Audit Committee is a standing committee of theBoard of Directors. The primary purpose of the Committee is to assist the Boardof Directors in fulfilling its oversight responsibility relating to (1) theintegrity of our financial statements and financial reporting process and oursystems of internal accounting and financial controls; (2) the performanceof the internal audit services function; (3) the annual independent auditof our financial statements, the engagement of the independent auditors and theevaluation of the independent auditors’ qualifications, independence andperformance; and (4) the compliance by the Company with legal andregulatory requirements, including disclosure controls and procedures. TheCommittee also reviews the Company’s critical accounting policies, annual andquarterly reports on Form 10-K and Form 10-Q, and earnings releasesbefore they are published. The Committee has sole authority to engage, evaluateand replace the independent auditor. The Committee also has the authority toretain special legal, accounting and other consultants it deems necessary inthe performance of its duties. The Committee meets regularly with ourmanagement, independent auditors and internal auditor to discuss internalcontrols and financial reporting process and also meets regularly with theindependent auditor and internal auditors in private.

 

The current members of the Audit Committee are Messrs. Magee(chairman) and Bowen. Since the Company is not a publicly traded company, on alisted exchange, the Board of Directors has not designated a member of theAudit Committee as an “audit committee financial expert” who is independent asthe term is used in Item 7(d)(3)(iv) of Schedule 14A under the ExchangeAct.

 

**Othersignificant persons**

** **

Although not an executive officer, each of the following persons is anofficer of the referenced subsidiary or division thereof and is an importantcontributor to operations:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                         | ** ** |
|----------------------|------------|---------|------------|--------------------------------------|------------|
| Nelson Byman         |       | 61      |       | President of Specialty Manufacturing |       |
| Bruce Freeman        |       | 54      |       | President of Truck Accessories       |       |
| Bill Flint, Jr. |       | 58      |       | President of EFP                     |       |
| Norbert Markert      |       | 47      |       | President of Morgan Truck Body       |       |
| Michael Ownbey       |       | 53      |       | President of Morgan Olson            |       |

 

Nelson Byman became Presidentof MIC Group in June 1998 and President of Specialty Manufacturing in January 2001.Previously, Mr. Byman was Vice President/General Manager of a domesticdivision of Weatherford/Enterra, a manufacturer of oilfield-related equipment.

 

Bruce Freeman was named SeniorVice President of Operations of J.B Poindexter & Co., Inc. on November 15,2001 and became President of Truck Accessories during July 2002.Previously, Mr. Freeman spent 20 years with the General ElectricCompany in a variety of operations and senior management assignments followedby four years as President of AEC Sterling and later as a Senior Vice Presidentwith Northwestern Growth Corporation.

 

 

65

----

 

Bill Flint, Jr. was namedPresident of EFP on October 6, 2003. Previously, Mr. Flint wasPresident and Chief Operating Officer of Flambeau Corporation, a plasticsmanufacturing company.

 

NorbertMarkert became the President and Chief Operating Officer of Morgan in November 2005.  Previously, he served two years as thePresident of Autoliv of North America after having been the President ofPilkington Automotive North America for four years.

 

MichaelOwnbey became the President of Morgan Olson on December 10, 2007.  Prior to joining Morgan Olson, Mr. Ownbeywas Vice President of Operations for Honda Motor Company’s largest subsidiaryin North America, Yachiyo Manufacturing of Alabama, LLC.

 

**Code of Ethics**

 

The Board of Directors hasadopted a code of ethics that applies to its executive officers. Managementdoes not believe that a code of ethics is a substitute for an obligation toalways act in an honest and ethical fashion. The code of ethics is incorporated by reference to the 2006 Form 10-K.

 

 

66

----

 

**Item 11.                **ExecutiveCompensation

 

**Overviewof Compensation Program**

 

TheChairman of the Board of Directors (the “Chairman”) along with other Boardmembers and Company senior executives (for the purpose of this discussion, the “Committee”)has the responsibility for establishing, implementing and monitoring adherenceto the Company’s compensation program. The Committee ensures that the total compensation paid to executives isfair, reasonable and competitive.

 

**CompensationPhilosophy and Objectives**

 

TheCommittee believes that the most effective executive compensation program isone that is designed to reward the achievement of specific goals and whichaligns the executive’s interests with those of the Company. The Committeeevaluates both performance and compensation to ensure that it maintains itsability to attract and retain superior employees in key positions and thatcompensation provided to key employees remains competitive relative to thecompensation paid to executives at similar companies.  To that end, the Committee believes executivecompensation provided by the Company to its executives, including the namedexecutive officers, should include a combination of competitive base salariesand performance-driven incentive plans.

 

**Role ofExecutive Officers in Compensation Decisions**

 

TheCommittee participates in compensation assessments and recommendations for theexecutive officers of the Company and the Chairman reserves the right of finalapproval.  The Chairman further reservesthe right to exercise discretion in modifying any recommended adjustments orawards.

 

**SettingExecutive Compensation**

 

TheCommittee has structured the Company’s annual and long-term incentive-basedexecutive compensation to motivate executives to achieve the financial goalsset by the Company and reward executives for achieving such goals.  In furtherance of these objectives, theCommittee periodically engages the services of outside executive compensationconsultants to provide relevant market data and alternatives to consider whenmaking compensation decisions.

 

Inmaking compensation decisions, the Committee compares the total compensationopportunity of executives as compared to a nationwide survey of similar-sizedcompanies from a cross section of manufacturing industries.  This data is updated annually and ispresented to the Company by a third-party firm expressed as 25th, 50th and 75th percentiles. The Company strives to manage the base and incentive compensation to the50th percentile which is further influenced byindividual performance, Company performance and an executive’s length ofservice.

 

Asignificant portion of total compensation is provided as incentive compensationrealized by the executives as a result of the Company achieving established objectives.  Historically, and in fiscal 2006, incentiveawards were reflective of both the Company’s achievement of establishedobjectives and the individual executive’s performance.

 

**2007Executive Compensation Components**

 

Forthe fiscal year ended December 31, 2007, the principal components ofcompensation for named executive officers were:

 

·                  Base salary

·                  Performance-based annual incentivecompensation

·                  Performance-based long-term incentivecompensation

 

 

67

----

 

TheCompany does not provide any executives with any form of noncash compensationsuch as retirement plans or perquisites.

 

**BaseSalary**

 

TheCompany provides executive officers with a base salary to compensate them forservices rendered during the fiscal year. Salary ranges for each executive are determined based on their positionand responsibility and by using market data. The Company strives to manage an executive’s base salary compensation tothe 50th percentile of the market data provided by an outsideconsultant.  Salary levels are typicallyconsidered annually as part of the Company’s performance review process as wellas upon a promotion or other change in job responsibility.  Merit-based increases for executives are aresult of recommendations made by the Committee and subject to the finalapproval of the Chairman.

 

**Performance-BasedAnnual Incentive Plan**

 

TheAnnual Management Incentive Plan (the “Annual Plan”) was established in themid-1990s to provide an annual incentive opportunity to senior executivesthroughout the Company.  The purpose ofthe Annual Plan is to align the interests of the executives with the financialperformance at either their subsidiary or the parent.  At the beginning of each calendar year, theChairman reviews and approves each participant’s eligibility in the Annual Planand his incentive target which is expressed as a proportion of base salaryearnings for the year.

 

Participantsin the Annual Plan at the parent level have their performance measured by theconsolidated earnings performance of the Company in relationship to theearnings budget established at the beginning of each calendar year.  Participants in the Annual Plan at thesubsidiary level have their performance measured by a combination of theirsubsidiary’s performance to an established earnings budget and the managementof working capital targets.  Performanceto the earnings budget accounts for 75% to 80% of the incentive award and themanagement of working capital accounts for 20% to 25%.  However, if the earnings budget is notachieved at least at the threshold level, no incentive awards are paid.

 

Thethreshold level is set at 80% of budgeted earnings.  Once the annual audit is complete and theearnings performance verified at both the parent and subsidiary level by theCompany’s outside auditors, the percent of performance to budget isestablished.  If the performance exceeds80%, that number is squared to determine what percent of a participant’s awardis paid. (Example:  If 90% earningsperformance is achieved, then 90 x 90 = 81% of a participant’s incentive targetaward is paid.)  The Annual Plan maximumpayout is achieved when the earning’s performance is 130% of budgeted earningsand 169% of a participant’s incentive target.

 

Inany calendar year where the Company’s or a subsidiary’s performance falls belowthe threshold performance level, the Committee may make modest discretionaryawards to certain Annual Plan participants to reward exceptional performance.

 

In2007, the income thresholds under the Annual Plan were reduced to offsetnegative industry trends that were not anticipated when the grants under theAnnual Plan were established, resulting in greater awards under the Annual Planthan would have been the case if those adjustment had not been made.

 

**Long-TermPerformance Plan**

 

TheLong-Term Performance Plan (“LTPP”) was established in 1999 and was designed toalign the interests and performance goals of the most senior executives in theCompany with the long-term financial performance of the Company.  Each element of the LTPP has a three-yearduration and awards are paid only at the end of the three-year cycle, dependingupon performance versus established goals.

 

Eachyear, the Committee designates participants in the LTPP and provides them witha letter which outlines their participation, their targeted award and theperformance criteria.  Because of thethree-year cycle, a regular 

 

 

68

----

 

participantin the LTPP will have three cycles in progress simultaneously, one cycle willbe in its first year, one in the second year and one in the third year.  Targeted participant awards are expressed asa percent of their base annual salary at the end of the three-year cycle.

 

Performanceof the LTPP is determined by the cumulative Profit Before Tax (“PBT”) financialperformance of the Company over each three-year period as measured against thebudgeted PBT for the same time period. Threshold performance is achieved when the Company’s cumulative PBTachieves 80% of budgeted PBT for the same period.  A scale is used to determine a participant’saward so that at the threshold, or 80% performance, a participant receives 20%of the established award.  The maximumaward is achieved when PBT is 130% or greater than plan which, based on thescale, equates to a payment of 200% of a participant’s established award.  Awards are paid at the conclusion of eachthree-year cycle, following the audit of the Company’s results of operations.

 

Forany calendar year that the Company’s performance fails to reach at least the80% threshold level, an 80% achievement factor is used for that year.  The Chairman has the authority to modify aparticipant’s award once the Company’s performance has become known for thethree-year cycle, by between 80% to 200%, of the calculated award based on theparticipant’s individual performance and contribution.  The Board has the authority to amend, modifyor cancel the Plan at any time.

 

**NonqualifiedDeferred Compensation Plan**

 

TheCompany sponsors a nonqualified deferred compensation plan that allows eligibleemployees to elect to defer a portion of their annual compensation for taxpurposes.  There is no company match anddeferred amounts are invested in funds managed by an independent investment company.  The funds earn market rates of return and aresubject to normal market risk.  The fundsare not subject to a trust arrangement and therefore may not be available inthe future to pay the liability to the employee.

 

**401(k) Plan**

 

TheCompany sponsors a 401(k) savings plan that allows participating employeesto contribute a portion of their gross compensation up to 100% and provides forCompany matching contributions up to 3.0% of the first 6.0% of gross pay, aswell as the opportunity for an annual discretionary contribution.  The Company has not made a discretionarycontribution to date.  Vesting in theCompany’s matching contribution is 20% per year over the first five years.

 

**Perquisitesand Other Personal Benefits**

 

TheCompany does not provide any form of perquisite, executive benefit program orpersonal benefits to any of the named executives or any other senior managementmember at the parent or subsidiary Company level.

 

**COMMITTEEREPORT**

 

TheCommittee of the Company has reviewed this Compensation Discussion and Analysisand, based on such review, the Committee recommended to the Board that thisCompensation Discussion and Analysis be included in this 10-K.

 

The Committee

 

John Poindexter — Chairman, President & CEO

Stephen Magee — Member, Board of Directors

Larry Wolfe — Vice President of Administration

Robert Whatley — Vice President Finance & Treasurer

 

 

69

----

 

The following table sets forthcertain information regarding the compensation paid to the Company’s PrincipalExecutive Officer, the Company’s Principal Financial Officer, the Company’sthree most highly compensated executive officers (including executive officersof the Company’s subsidiaries) other than the Principal Executive Officer andPrincipal Financial Officer for each of the last two completed fiscal years,and an executive officer that would have been included in the above but for thefact that he was no longer employed by the Company at the end of the year(collectively, the “named officers”).

 

**Summary Compensation Table**

 
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**     | ** ** | ** **       | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive Plan** | ** ** | **All Other**    | ** ** | ** ** | ** ** |
| **Name and principal position**    | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Compensation**   | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| John B. Poindexter(a)              |       | 2007       |       | $          | 593,016    |               | —     |             | $          | 6,750      |       | $ | 600,516 |   |
| Principal Executive Officer        |       | 2006       |       | $          | 296,508    |               | —     |             | $          | 352,200    |       | $ | 648,708 |   |
|                               |       |       |       |       |       |               |       |             |       |       |       |
| Robert Whatley(b)                  |       | 2007       |       | $          | 220,377    |               | $          | 48,000           |       | $          | 6,750      |   | $ | 272,877 |   |
| Principal Financial Officer        |       | 2006       |       | $          | 201,500    |               | $          | 63,362           |       | $          | 6,100      |   | 270,962 |   |
|                               |       |       |       |       |       |               |       |             |       |       |       |
| Norbert Markert(c)                 |       | 2007       |       | $          | 337,012    |               | $          | 132,184          |       | $          | 164,086    |   | $ | 633,282 |   |
| President, Morgan                  |       | 2006       |       | $          | 326,848    |               | $          | 136,975          |       | $          | 7,500      |   | $ | 471,323 |   |
|                               |       |       |       |       |       |               |       |             |       |       |       |
| Nelson Byman(d)                    |       | 2007       |       | $          | 248,654    |               | $          | 216,015          |       | $          | 40,525     |   | $ | 505,193 |   |
| President, Specialty Manufacturing |       | 2006       |       | $          | 229,901    |               | $          | 155,535          |       | $          | 7,500      |   | $ | 392,936 |   |
|                               |       |       |       |       |       |               |       |             |       |       |       |
| Larry Wolfe(e)                     |       | 2007       |       | $          | 270,000    |               | $          | 155,000          |       | $          | 6,750      |   | $ | 431,434 |   |
| Vice President of Administration   |       | 2006       |       | $          | 240,866    |               | $          | 104,167          |       | $          | 6,600      |   | $ | 351,633 |   |

 

----

(a) Mr. Poindexterbegan receiving a salary from the Company beginning July 2006. He does notreceive a bonus and does not participate in either the Annual Plan or LTPP.Through June 2006, Mr. Poindexter was compensated through aManagement Services Agreement between Southwestern Holdings, Inc. and theCompany. (Southwestern Holdings, Inc. is owned by Mr. Poindexter.)For all services, the Company paid Southwestern Holdings, Inc. $346,000 in2006. The Company matched $6,750 and $6,200 of Mr. Poindexter’scontributions to the Company’s 401(k) Plan in 2007 and 2006, respectively.

 

(b) Mr. Whatleywas paid $48,000 pursuant to the Annual Plan that was accrued in 2007 but paidin 2008. Mr. Whatley does not participate in the LTPP Plan. The Companymatched $6,750 and $6,100 of Mr. Whatley’s contributions to the Company’s401(k) Plan in 2007 and 2006, respectively.

 

(c) Mr. Markertwas paid $132,184 pursuant to the Annual Plan that was accrued in 2007 but paidin 2008 and received no payment under the LTPP Plan. The Company matched $8,081and $7,500 of Mr. Markert’s contributions to the Company’s 401(k) Planin 2007 and 2006, respectively.  TheCompany reimbursed Mr. Markert $156,005 for interest paid on his unsoldprivate residence.

 

(d) Mr. Bymanwas paid $155,535 pursuant to the Annual Plan that was accrued in 2007 but paidin 2008 and received $60,480 under the LTPP Plan. The Company matched $6,750and $7,500 of Mr. Byman’s contributions to the Company’s 401(k) Planin 2007 and 2006, respectively.

 

(e) Mr. Wolfewas paid $155,000 pursuant to the Annual Plan that was accrued in 2007 but paidin 2008 and received no payment under the LTPP Plan. The Company matched $6,750and $6,600 of Mr. Wolfe’s contributions to the Company’s 401(k) Planin 2007 and 2006, respectively.

 

 

70

----

 

**Estimated Future Payouts Under**

**Non-Equity Incentive Plan Awards**

 
| **Name**              | ** ** | **Grant Date**       | ** ** | **Plan**    | ** ** | **Threshold** | ** ** | **Target** | ** ** | **Maximum** | ** ** |
|-----------------------|------------|----------------------|------------|-------------|------------|---------------|------------|------------|------------|-------------|------------|
| John B. Poindexter(a) |       | —               |       | —      |       | —        |       | —     |       | —      |       |
|                  |       |                 |       |        |       |          |       |       |       |        |       |
| Robert Whatley(b)     |       | January 1, 2008 |       | Annual Plan |       | $             | 50,624     |       | $          | 79,100      |       | $ | 133,679 |   |
|                  |       |                 |       |        |       |          |       |       |       |        |       |
| Norbert Markert(c)    |       | January 1, 2008 |       | Annual Plan |       | $             | 107,844    |       | $          | 168,506     |       | $ | 284,775 |   |
|                  |       | January 1, 2008 |       | LTPP        |       | $             | 49,000     |       | $          | 245,136     |       | $ | 490,000 |   |
|                  |       |                 |       |        |       |          |       |       |       |        |       |
| Nelson Byman(d)       |       | January 1, 2008 |       | Annual Plan |       | $             | 86,400     |       | $          | 135,000     |       | $ | 228,150 |   |
|                  |       | January 1, 2008 |       | LTPP        |       | $             | 34,000     |       | $          | 172,426     |       | $ | 345,000 |   |
|                  |       |                 |       |        |       |          |       |       |       |        |       |
| Larry Wolfe(e)        |       | January 1, 2008 |       | Annual Plan |       | $             | 61,600     |       | $          | 96,250      |       | $ | 162,663 |   |
|                  |       | January 1, 2008 |       | LTPP        |       | $             | 30,000     |       | $          | 152,164     |       | $ | 304,000 |   |

 

----

(a) Mr. Poindexteris not eligible to participate in either the Annual Plan or the LTPP.

 

(b) Mr. Whatleywas granted an award under the Annual Plan with an earnings target of $40.1million for the Company for 2007. He was eligible for the threshold amount ifthe Company reached 80% of that target and for the maximum amount if the Companyreached 130% of that target. Mr. Whatley does not participate in the LTPP.

 

(c) Mr. Markertwas granted an award under the Annual Plan with an earnings target of $18.4million for Morgan for 2007. He was eligible for the threshold amount if Morganreached 80% of that target and for the maximum amount if Morgan reached 130% ofthat target. During 2007, Mr. Markert was given a performance target underthe LTPP that makes him eligible for an award beginning in 2008.  The PBT earnings target for 2007 was $21.9million.  The target PBT for theremaining years in the cycle will be determined at a later date.

 

(d) Mr. Bymanwas granted an award under the Annual Plan with an earnings target of $11.1million for MIC Group for 2007. He was eligible for the threshold amount if MICGroup reached 80% of that target and for the maximum amount if MIC Groupreached 130% of that target.  During2007, Mr. Byman received $60,480 under the LTTP plan for the three yearsended December 31, 2007.  During2007, Mr. Byman was given a performance target under the LTPP that makeshim eligible for an award beginning in 2008 at the same threshold and maximumpercentages.  The PBT earnings target for2007 was $21.9 million.   The target PBTfor the remaining years in the cycle will be determined at a later date.

 

(e) Mr. Wolfewas granted an award under the Annual Plan with an earnings target of $40.1million for the Company for 2007. He was eligible for the threshold amount ifthe Company reached 80% of that target and for the maximum amount if it reached130% of that target. During 2007, Mr. Wolfe received $75,000 under theLTTP plan for the three years ended December 31, 2007.  During 2007, Mr. Wolfe was given aperformance target under the LTTP that makes him eligible for an awardbeginning in 2008.  The PBT earningstarget for 2007 was $21.9 million.  Thetarget PBT for the remaining years in the cycle will be determined at a laterdate.

 

**NonqualifiedDeferred Compensation**

 

Mr. Byman and Mr. Wolfewere the only two named executives to elect to defer a portion of their annualcompensation under the Nonqualified Deferred Compensation Plan.  The balance of Mr. Byman’s account at December 31,2007 and 2006 was $236,848 and $173,928, respectively.  Thebalance of Mr. Wolfe’s account at December 31, 2007 and 2006 was $169,101and $63,722, respectively.

 

 

71

----

 

**Director’sCompensation**

 

Directors who are officers oremployees do not receive fees for serving as directors. The Company pays$20,000 per year as director’s fees to each outside director. Additionally, Mr. Mageereceives $8,000 per year as Chairman of the Audit Committee of the Board ofDirectors.

 
| ** **       | ** ** | **Fees Earned or** | ** ** | **Non-Equity Incentive** | ** ** | **All Other**    | ** ** | ** ** | ** ** |
|------------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|------------|------------|
| **Name**         | ** ** | **Paid in Cash**   | ** ** | **Plan Compensation**    | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| William J. Bowen |       | $                  | 20,000     |                     | —     |             | —     |       | $          | 20,000 |   |
|             |       |               |       |                     |       |             |       |       |       |
| Stephen Magee(a) |       | $                  | 28,000     |                     | —     |             | $          | 207,600    |       | $ | 235,600 |   |
|                  |            |                    |            |                          |            |                  |            |            |            |  |  |  |

 

----

(a) Mr. Magee is notan employee of the Company and the amount in the All Other Compensation columnrepresents payments made to him as an independent contractor on a variety ofconsulting assignments.

 

**Item12.**                                                    SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

** **

The following table sets forth information regardingbeneficial ownership of the Company’s common stock as of December 31,2007.  No class of the Company’ssecurities is registered pursuant to Section 13 or 15(d) of theExchange Act.

 
| ** **                                                         | ** ** | ** **         | ** ** | **Beneficial** | ** ** | **Ownership**  | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                                                         | ** ** | ** **         | ** ** | **number of**  | ** ** | **percent of** | ** ** |
| **Directors, officers and 5%  stockholders**                       | ** ** | **Title of Class** | ** ** | **shares**     | ** ** | **class**      | ** ** |
| John Poindexter (director and named executive  officer)            |       | Common Stock       |       | 3,059          |       | 100            | %          |
| All other directors and executive officers as a  group (6 persons) |       | —             |       | —         |       | —         |       |

 

Mr. Poindexter has sole voting power withrespect to all shares of common stock that he beneficially owns and is the onlyperson who beneficially owns common stock. His address is 600 Travis St., Suite 200, Houston, Texas 77002.

 

The Company has not reserved any equity shares forissuance under any equity compensation plans.

 

**Item13.                 Certain Relationshipsand Related Transactions, and Directors Independence**

** **

Of the Company’s threedirectors, only Mr. Bowen is independent under NASDAQ’s independencestandards. Mr. Magee is chairman of the audit committee and is notindependent under the standards applicable to audit committee members by theSEC or NASDAQ.

 

The Company hadentered into a Management Services Agreement until June 2006 withSouthwestern Holdings, Inc., which is owned by Mr. Poindexter and ofwhich Mr. Magee, one of the Company’s directors, serves as President. Pursuant to the Management ServicesAgreement, Southwestern Holdings, Inc. provided services to theCompany, including those of Mr. Poindexter.The Company paid to SouthwesternHoldings, Inc. approximately $46,000 per month for these services, subjectto annual automatic increases based upon the consumer price index. TheCompany may pay a discretionary annual bonusto Southwestern Holdings, Inc. or raise the annual increases above normaladjustments subject to certain limitations. For all services, theCompany paid Southwestern Holdings, Inc.,$569,000 in 2005, $346,000 in 2006 and $-0- in 2007. In addition to theconsulting fee, 

 

 

72

----

 

Mr. Poindexter is coveredunder the Company’s employee medical insurance plan; he participates in the 401(k) planand is reimbursed for travel and other miscellaneous expenses.

 

Southwestern is a named insuredunder the Company’s general liability and excess umbrella insurancepolicies.  During 2007, Southwestern became the defendant in a suit fordamages resulting from a vehicle accident not involving the Company’s assets orany of its employees.  The outcome of the lawsuit or the amount of anysettlement cannot be estimated, however, in the event a settlement exceedsSouthwestern’s separate insurance coverage, coverage will be provided by theCompany’s policies and the Company will be liable up to the amount of thedeductible or $300,000.  Any deductible amounts or increasedpremiums incurred by the Company will be reimbursed by Southwestern

 

Mr. Magee provided the Company consulting services in 2005, 2006 and 2007. TheCompany paid $180,955, $99,629 and $235,600in 2005, 2006 and 2007, respectively, for directors’ fees and for consultingservices.  In addition, the Companyreimbursed Mr. Magee for related business expenses.

 

The Company does not have an established procedurefor the review, approval or ratification of related-party transactions. Priorto entering into any such transaction, however, the executive officers of theCompany determine whether the transaction is permitted by the terms of theCompany’s 8.75% Notes indenture, the credit facility agreement and otherrelevant contractual obligations.

 

**Item14.                 Principal AccountantFees and Services**

** **

**Thefollowing table sets forth the fees billed to us by our independent auditors,Crowe Chizek and Company LLC (“CCC”):**

 

| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees         |       | $        | 350,000    |     | $          | 296,500 |   |
| Audit-related Fees |       | 51,875   |       | 8,000    |       |
| Tax Fees           |       | —   |       | —   |       |
| Other Fees         |       | 208,225  |       | —   |       |
| Total Fees         |       | $        | 610,100    |     | $          | 304,500 |   |

** **

***Audit Fees.***

** **

**Auditfees are the charges billed by CCC during the year in connection with theconclusion of the prior year audit and the current year audit of ourconsolidated financial statements as well as reviews of our quarterly reportson Form 10-Q.**

** **

**Audit-relatedfees are the charges billed by CCC for assurance and related services,including accounting advice related to the restatement of the Company’s 2006consolidated financial statements and other matters.**

** **

**Otherfees were comprised mainly of assistance with due diligence conducted on theCompany’s acquisitions during the year.**

** **

**Thesefees were pre-approved by the Audit Committee under the procedures describedbelow.**

** **

**Pre-Approval Procedures**

** **

**TheCompany’s Audit Committee is responsible for the engagement of the independentauditors and for approving, in advance, all auditing services and permittednon-audit services to be provided by the independent auditors. The AuditCommittee maintains a policy governing the engagement of independent auditorsthat is intended to maintain the independence from the Company of theindependent auditors. In adopting this policy, the**

** **

** **

**73**

----

** **

**Company’sAudit Committee considered the various services that independent auditors havehistorically performed or may be needed to perform for the Company. Under thispolicy, which is subject to review and re-adoption annually by the AuditCommittee:**

** **

**·**                                          The AuditCommittee approves the performance by the independent auditors of audit-relatedservices, subject to restrictions in certain cases, based on the AuditCommittee’s determination that this action would not be likely to impair theindependence of the independent auditors from the Company;

** **

**·**                                          TheCompany’s management must obtain the specific prior approval of the Company’sAudit Committee for each engagement of the independent auditors to perform anyauditing or permitted non-audit services; provided however, that specific priorapproval by the Company’s Audit Committee is not required for any auditingservices that are within the scope of a pre-approved engagement and that areconsistent with other services provided by the auditor in the past; andprovided further that specific prior approval is not required for permittednon-audit services that:

** **

**(i)**                                     in the aggregate do not total more than $25,000;

** **

**(ii)**                                  were not recognized by the Company at the time of the engagement to benon-audit services; and

** **

**(iii)**                               are promptly brought to the attention of the Company’s Audit Committeeand approved by the Audit Committee in accordance with this policy prior to thecompletion of the audit.

** **

**·**                                          Theperformance by the independent auditors of certain types of services(bookkeeping or other services related to the accounting records or financialstatements of the Company; financial information systems design andimplementation; appraisal or valuation services, fairness opinions orcontribution-in-kind reports; actuarial services; internal audit outsourcingservices; management functions or human resources; broker or dealer, orinvestment adviser or investment banking services; legal services and expertservices unrelated to the audit; and any other service that the applicablefederal oversight regulatory authority determines, by regulation, isimpermissible) is prohibited due to the likelihood that their independencewould be impaired.

** **

**Anyapproval required under this policy must be provided by the Company’s AuditCommittee, by the chairman of the Audit Committee in office at the time, or byany other Audit Committee member to whom the Audit Committee has delegated thatauthority. The Company’s Audit Committee will not delegate its responsibilitiesto approve services performed by the independent auditors to any member ofmanagement.**

** **

**Thestandard applied by the Company’s Audit Committee in determining whether togrant approval of an engagement of the independent auditors is whether theservices to be performed, the compensation to be paid for such services andother related factors are consistent with the independent auditor’sindependence under guidelines of the Securities and Exchange Commission andapplicable professional standards. Relevant considerations include, but are notlimited to, whether the work product is likely to be subject to, or implicatedin, audit procedures during the audit of the Company’s financial statements;whether the independent auditors would be functioning in the role of managementor in an advocacy role; whether performance of the service by the independentauditors would enhance the Company’s ability to manage or control risk orimprove audit quality; whether performance of the service by the independentauditors would increase efficiency because of their familiarity with theCompany’s business, personnel, culture, systems, risk profile and otherfactors; and whether the amount of fees involved, or the proportion of the totalfees payable to the independent auditors in the period that is for tax andother non-audit services, would tend to reduce the ability of the independentauditors to exercise independent judgment in performing the audit.**

** **

** **

**74**

----

** **

**Part IV**

 

**Item15.                 Exhibits and FinancialStatement Schedules**

 

1.             Financial Statements:

 

Thefollowing financial statements are included within the text of this report:

** **

**Financial Statement**

 

Consolidated Balance Sheetsas of December 31, 2007 and 2006

Consolidated Statements ofIncome for the years ended December 31, 2007, 2006 and 2005

Consolidated Statements ofStockholder’s Equity (Capital Deficiency) for the years endedDecember 31,2007, 2006 and 2005

Consolidated Statements ofCash Flows for the years ended December 31, 2007, 2006 and 2005

Notes to ConsolidatedFinancial Statements

 

2.             Financial Statement Schedules:

 

Valuationand Qualifying Accounts disclosures have been incorporated in the Notes toConsolidated Financial Statements.

 

3.             Exhibits

 

Thefollowing exhibits are included with this report:

** **
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                        |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 3.1 (1)     |       | Second Restated Certificate of Incorporation of J.B.  Poindexter & Co., Inc. dated January 21, 1994.                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 3.2  (2)    |       | Certificate of First Amendment to the Second  Restated Certificate of Incorporation of J.B. Poindexter &  Co., Inc. dated December 29, 1994.                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 3.3  (2)    |       | Amended and Restated Bylaws of J.B.  Poindexter & Co., Inc. dated July 29, 1994                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 4.1(4)      |       | Indenture dated as of March 15, 2004, with  respect to J.B. Poindexter & Co., Inc.’s 8.75% Senior Notes due  2014, among J.B. Poindexter & Co., Inc., the subsidiary  guarantors named therein and Wilmington Trust Company, as trustee.                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 4.2(5)      |       | Form of 8.75% Senior Note due 2014.                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 4.3(5)      |       | Form of Senior Note Guarantee of 8.75% Senior  Notes due 2014.                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                              |
| 4.4(5)      |       | First Supplemental Indenture dated  December 14, 2004, to the Indenture dated as of March 15, 2004,  with respect to J.B. Poindexter & Co., Inc.’s 8.75% Senior  Notes due 2014, among J.B. Poindexter & Co., Inc., the  subsidiary guarantors named therein and Wilmington Trust Company, as trustee. |

 

 

75

----

 
| 4.5(4)   |   | Registration Rights Agreement dated March 15,  2004, among J.B. Poindexter & Co., Inc., certain guarantors  listed therein, J.P. Morgan Securities Inc. and certain initial purchasers  listed therein.                                                                                                                                            |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.6(5)   |   | Registration Rights Agreement dated May 17,  2004, among J.B. Poindexter & Co., Inc., certain guarantors  listed therein and J.P. Morgan Securities Inc.                                                                                                                                                                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.7(5)   |   | Registration Rights Agreement dated  January 27, 2005, among J.B. Poindexter & Co., Inc.,  certain guarantors listed therein and J.P. Morgan Securities Inc.                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.8(7)   |   | Second Supplemental Indenture dated June 10,  2005, to the Indenture dated as of March 15, 2004, with respect to J.B.  Poindexter & Co., Inc.’s 8.75% Senior Notes due 2014, among  J.B. Poindexter & Co., Inc., the subsidiary guarantors named  therein and Wilmington Trust Company, as trustee.                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.9(8)   |   | Third Supplemental Indenture dated January 9,  2006, to the Indenture dated as of March 15, 2004, with respect to J.B.  Poindexter & Co., Inc.’s 8.75% Senior Notes due 2014, among  J.B. Poindexter & Co., Inc., the subsidiary guarantors named  therein and Wilmington Trust Company, as trustee.                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.10(8)  |   | Fourth Supplemental Indenture dated April 17,  2006, to the Indenture dated as of March 15, 2004, with respect to J.B.  Poindexter & Co., Inc.’s 8.75% Senior Notes due 2014, among  J.B. Poindexter & Co., Inc., the subsidiary guarantors named  therein and Wilmington Trust Company, as trustee.                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.11(9)  |   | Fifth Supplemental Indenture dated  September 30, 2006, to the Indenture dated as of March 15, 2004,  with respect to J.B. Poindexter & Co., Inc.’s 8.75% Senior  Notes due 2014, among J.B. Poindexter & Co., Inc., the  subsidiary guarantors named therein and Wilmington Trust Company, as trustee.                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 4.12(10) |   | Sixth Supplemental Indenture dated  September 4, 2007, to the Indenture dated as of March 15, 2004,  with respect to J.B. Poindexter & Co., Inc.’s 8.75% Senior  Notes due 2014, among J.B. Poindexter & Co., Inc., the  subsidiary guarantors named therein and Wilmington Trust Company, as trustee.                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1(4)  |   | Loan and Security Agreement dated March 15,  2004, among J.B. Poindexter & Co., Inc., certain subsidiaries  thereof, certain other loan parties signatories thereto and LaSalle Bank  National Association, a national banking association, for itself, as a  lender, and as the agent for the lenders.                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2(4)  |   | First Amendment to Loan and Security Agreement  dated May 13, 2004, among J.B. Poindexter & Co., Inc.,  certain subsidiaries thereof, certain other loan parties signatories thereto  and LaSalle Bank National Association, a national banking association, for  itself, as a lender, and as the agent for the lenders.                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3(5)  |   | Limited Consent and Second Amendment to Loan and  Security Agreement dated November 3, 2004, among J.B.  Poindexter & Co., Inc., certain subsidiaries thereof, certain  other loan parties signatories thereto and LaSalle Bank National Association,  a national banking association, for itself, as a lender, and as the agent for  the lenders. |
|     |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4(5)  |   | Third Amendment to Loan and Security Agreement  dated January 20, 2005, among J.B. Poindexter & Co., Inc.,  certain subsidiaries thereof, certain other loan parties signatories thereto  and LaSalle Bank National Association, a national banking association, for  itself, as a lender, and as the agent for the lenders.                       |

 

 

76

----

 
| 10.5(4)    |   | Sales Agreement dated October 1, 2004 between  E. I. du Pont de Nemours and Company and Morgan Trailer Mfg. Co.                                                                                                                                                                                                                                      |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.6(4)    |   | Sales Agreement dated October 1, 2004 between  E. I. du Pont de Nemours and Company and Truck Accessories Group, Inc.                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.7  (1)  |   | Form of Incentive Plan for certain employees  of the subsidiaries of J.B. Poindexter & Co., Inc.                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.8  (1)  |   | Morgan Trailer Mfg. Co. Long-Term Management  Equity Appreciation Program dated May 10, 1990.                                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.9(5)    |   | Management Services Agreement dated as of  May 23, 1994, between J.B. Poindexter & Co., Inc. and  Southwestern Holdings, Inc.                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.10  (3) |   | Management Services Agreement effective as of  December 19, 2003, between J.B. Poindexter & Co., Inc.,  Morgan Trailer Mfg. Co., and Morgan Olson.                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.11  (6) |   | Fourth Amendment to Loan and Security Agreement  dated April 25, 2005, among J.B. Poindexter & Co., Inc.,  certain subsidiaries thereof, certain other loan parties signatories thereto  and LaSalle Bank National Association, a national banking association, for  itself, as a lender, and as the agent for the lenders.            |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.12  (9) |   | Limited Consent, Joinder and Fourth Omnibus  Amendment dated October 10, 2006, among J.B. Poindexter &  Co., Inc., certain subsidiaries thereof, certain other loan parties signatories  thereto and LaSalle Bank National Association, a national banking  association, for itself, as a lender, and as the agent for the lenders.    |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.13(10)  |   | 10.13 Limited Consent, Joinder and Fifth Omnibus  Amendment dated April 30, 2007, among J.B. Poindexter &  Co., Inc., certain subsidiaries thereof, certain other loan parties  signatories thereto and LaSalle Bank National Association, a national banking  association, for itself, as a lender, and as the agent for the lenders. |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.14(10)  |   | Limited Consent, Joinder and Sixth Omnibus  Amendment dated August 22, 2007, among J.B. Poindexter &  Co., Inc., certain subsidiaries thereof, certain other loan parties  signatories thereto and LaSalle Bank National Association, a national banking  association, for itself, as a lender, and as the agent for the lenders.      |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.15(10)  |   | Limited Consent, Joinder and Seventh Omnibus  Amendment dated September 4, 2007, among J.B. Poindexter &  Co., Inc., certain subsidiaries thereof, certain other loan parties  signatories thereto and LaSalle Bank National Association, a national banking  association, for itself, as a lender, and as the agent for the lenders.  |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 12*        |   | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 14(9)      |   | Code of Ethics                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                      |
| 21*        |   | List of subsidiaries of J.B. Poindexter &  Co., Inc.                                                                                                                                                                                                                                                                                        |

 

 

77

----

 
| 31.1*  |   | Rule 13(a)-14(a)/15d-14(a) Certificate  of the Chief Executive Officer. |
|--------|--------|-----------------------------------------------------------------------------------|
|   |   |                                                                              |
| 31.2*  |   | Rule 13(a)-14(a)/15d-14(a) Certificate  of the Chief Financial Officer  |
|   |   |                                                                              |
| 32.1*  |   | Section 1350  Certificate of the Chief Executive Officer                     |
|   |   |                                                                              |
| 32.2*  |   | Section 1350  Certificate of the Chief Financial Officer                     |

 

----

| #      | Management contracts or compensatory plans.                                                                                                                                                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                       |
| *      | Filed herewith.                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                       |
| (1)    | Incorporated by reference to J.B. Poindexter & Co., Inc.’s  Registration Statement on Form S-1 (No. 33-75154) as filed with the  SEC on February 10, 1994                                |
|   |                                                                                                                                                                                                                       |
| (2)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Annual Report on Form 10-K for the year ended  December 31, 1994, as filed with the SEC on March 31, 1995.              |
|   |                                                                                                                                                                                                                       |
| (3)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003, as filed with the SEC on November 14,  2003.   |
|   |                                                                                                                                                                                                                       |
| (4)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Registration Statement on Form S-4  (No. 333-123598) as filed with the SEC on March 25, 2005.                                |
|   |                                                                                                                                                                                                                       |
| (5)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Registration Statement as amended on Form S-4A  (No. 333-123598) as filed with the SEC on April 7, 2005.                     |
|   |                                                                                                                                                                                                                       |
| (6)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2005, as filed with the SEC on November 14,  2005.   |
|   |                                                                                                                                                                                                                       |
| (7)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2005, as filed with the SEC on March 31, 2006.                   |
|   |                                                                                                                                                                                                                       |
| (8)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Quarterly Report on Form 10-Q/A for the quarter ended  September 30, 2006, as filed with the SEC on September 5,  2007. |
|   |                                                                                                                                                                                                                       |
| (9)    | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2006, as filed with the SEC on April 2, 2007.               |
|   |                                                                                                                                                                                                                       |
| (10)   | Incorporated by reference to J.B. Poindexter &  Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007, as filed with the SEC on November 20,  2007.   |

 

 

78

----

 

SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| ** **                                                                                                                                                                                                             | ** ** | **J.B.  POINDEXTER & CO., INC.**     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|
|                                                                                                                                                                                                                   |       |                                          |   |
| Date:  April 3, 2008                                                                                                                                                                                              |       | By                                            | /s/  John B. Poindexter |
|                                                                                                                                                                                                                   |       | John  B. Poindexter, Chairman of the Board,   |
|                                                                                                                                                                                                                   |       | Chief  Executive Officer and President        |
|                                                                                                                                                                                                                   |       | (Principal  Executive Officer)                |
|                                                                                                                                                                                                                   |       |                                          |   |
| Pursuant  to the requirements of the Securities Exchange Act of 1934, this report has  been signed below by the following persons on behalf of the registrant and in  the capacities and on the dates indicated.  |
|                                                                                                                                                                                                                   |       |                                          |   |
| Date:  April 3, 2008                                                                                                                                                                                              |       | By                                            | /s/  John B. Poindexter |
|                                                                                                                                                                                                                   |       | John  B. Poindexter, Chairman of the Board,   |
|                                                                                                                                                                                                                   |       | Chief  Executive Officer and President        |
|                                                                                                                                                                                                                   |       | (Principal  Executive Officer)                |
|                                                                                                                                                                                                                   |       |                                          |   |
| Date:  April 3, 2008                                                                                                                                                                                              |       | By                                            | /s/  Stephen P. Magee |
|                                                                                                                                                                                                                   |       | Stephen  P. Magee, Director                   |
|                                                                                                                                                                                                                   |       |                                          |   |
| Date:  March 28, 2008                                                                                                                                                                                             |       | By                                            | /s/  William J. Bowen |
|                                                                                                                                                                                                                   |       | William  J. Bowen, Director                   |
|                                                                                                                                                                                                                   |       |                                          |   |
| Date:  April 3, 2008                                                                                                                                                                                              |       | By                                            | /s/  Robert S. Whatley |
|                                                                                                                                                                                                                   |       | Robert  S. Whatley, Vice President Finance,   |
|                                                                                                                                                                                                                   |       | Secretary  and Treasurer                      |
|                                                                                                                                                                                                                   |       | (Principal  Financial and Accounting Officer) |

 

 

----