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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-24804
--------------------------------------------------------
Featherlite, Inc.
-----------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1621676
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Highways 63 & 9, P.O. Box 320, Cresco, IA 52136
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
563/547-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
6,535,104 Shares as of November 10, 2002
FEATHERLITE, INC.
INDEX
Page No.
--------
Index...................................................................... 2
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001..................... 3
Condensed Consolidated Statements of Income
Three Month and Nine Month Periods Ended
Sept. 30, 2002 and 2001...................................... 4
Condensed Consolidated Statements of Cash Flows
Three Month and Nine Month Periods Ended
Sept. 30, 2002 and 2001...................................... 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 11
Item 3. Quantitative & Qualitative Disclosures about Market Risk.. 22
Item 4. Control Procedures........................................ 23
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.......................... 23
Signatures................................................................. 23
Certifications............................................................. 24
Exhibit Index.............................................................. 26
2
PART I: FINANCIAL INFORMATION
ITEM 1:
FEATHERLITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
------- -------
Current assets
Cash $ 186 $ 247
Receivables 5,165 5,001
Refundable income taxes 616 2,755
Inventories
Raw materials 7,165 6,949
Work in process 11,233 12,129
Finished trailers/motorcoaches 23,593 25,008
Used trailers/motorcoaches 20,940 22,129
------- -------
Total inventories 62,931 66,215
Prepaid expenses 1,124 1,977
------- -------
Total current assets 70,022 76,195
------- -------
Property and equipment,net 16,147 17,024
Other assets 4,657 3,952
------- -------
$90,826 $97,171
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 7,514 $ 9,299
Bank line of credit 5,655 7,226
Checks issued, not yet presented 1,867 3,061
Wholesale financing and other notes payable 22,402 27,713
Subordinated convertible debt 1,474 --
Motorcoach shell costs payable 7,445 7,531
Accounts payable 2,724 5,902
Current portion of trade creditor repayment plan 2,736 3,253
Accrued liabilities 8,383 8,365
Customer deposits 1,934 2,204
------- -------
Total current liabilities 62,134 74,554
Long-term debt, net of current maturities 7,724 3,146
Trade creditor plan, net of current portion 2,752 4,240
Other long term liabilities 79 90
Commitments and contingencies (Note 6)
Shareholders' equity 18,137 15,141
------- -------
$90,826 $97,171
======= =======
See notes to unaudited condensed consolidated financial statements
3
FEATHERLITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 40,601 $ 51,566 $ 148,830 $ 173,659
Cost of sales 34,768 45,137 127,472 157,812
--------- --------- --------- ---------
Gross profit 5,833 6,429 21,358 15,847
Selling and administrative expenses 4,918 5,407 15,703 17,025
Restructuring charge -- -- -- 1,150
--------- --------- --------- ---------
Income (loss) from operations 915 1,022 5,655 (2,328)
Other income (expense)
Interest (688) (882) (2,281) (3,342)
Other, net (9) 1 215 380
--------- --------- --------- ---------
Total other expense (697) (881) (2,066) (2,962)
--------- --------- --------- ---------
Income (loss) before income taxes 218 141 3,589 (5,290
Provision for (benefit from) income taxes (535) 35 712 (1,323)
--------- --------- --------- ---------
Net income (loss) $ 753 $ 106 $ 2,877 $ (3,967)
========= ========= ========= =========
Net income (loss) per share -
Basic $ 0.12 $ 0.01 $ 0.44 $ (0.61)
--------- --------- --------- ---------
Diluted $ 0.10 0.01 $ 0.40 $ (0.61)
--------- --------- --------- ---------
Average common shares outstanding-
Basic 6,535 6,535 6,535 6,535
--------- --------- --------- ---------
Diluted 7,168 6,535 7,107 6,535
--------- --------- --------- ---------
See notes to unaudited condensed consolidated financial statements
4
FEATHERLITE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
2002 2001
------- -------
Cash provided by (used for) operating activities
Net income (loss) 2,877 $(3,967)
Depreciation & amortization 1,533 1,748
Non-cash restructuring charge -- 3,400
Other non-cash adjustments, net (482) 117
Decrease in refundable income taxes 2,139 --
Decrease (increase) in working capital items, net (1,218) 8,074
------- -------
Net cash provided by operating activities 4,849 9,372
------- -------
Cash provided by (used for) investing activities
Purchases of property and equipment, net (609) (415)
Proceeds from sale of other property, net 295 305
------- -------
Net cash (used for) investing activities (314) (110)
------- -------
Cash provided by (used for) financing activities
Repayment of short-term debt, net (6,882) (3,283)
Proceeds from long-term debt 7,370 886
Repayment of long-term debt (5,721) (7,0467
Payments on trade creditor plan (2,006) --
Repayment of Sanford mortgage and interest swap (3,856) --
Proceeds from Sanford sale/leaseback 5,000 --
Proceeds from subordinated debt and warrant 1,500 --
------- -------
Net cash used for financing activities (4,595) (9,444)
------- -------
Net cash (decrease) for period (60) (182)
Cash balance, beginning of period 246 331
------- -------
Cash balance, end of period $ 186 $ 149
======= =======
See notes to unaudited condensed consolidated financial statements
5
FEATHERLITE,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for
Featherlite, Inc. (the "Company") have been prepared, without audit, in
accordance with the instructions of Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Financial information as of December 31, 2001
has been derived from the audited financial statements of the Company, but does
not include all disclosures required by generally accepted accounting
principles. For further information refer to the consolidated financial
statements and notes to consolidated financial statements included in the
Company's Form 10-K Annual Report for the year ended December 31, 2001.
It is the opinion of management that the unaudited condensed financial
statements include all adjustments, consisting of normal recurring accruals,
necessary to fairly state the results of operations for the three months and
nine month periods ended September 30, 2002 and 2001. The results of interim
periods may not be indicative of results to be expected for the full fiscal
year.
Note 2. Going Concern Basis of Presentation
The auditor's report on the December 31, 2001 financial statements included an
uncertainty as to the Company's continuation as a going concern. The removal of
this uncertainty is dependent upon continued compliance with the terms and
covenants of the Company's amended loan agreements, continued compliance with
its Trade Creditor Repayment Plan, and ultimately the continued generation of
sufficient cash flow to meet its obligations on a timely basis.
The accompanying condensed consolidated financial statements for the three month
and nine month periods ended September 30, 2002 have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. During the nine months ended
September 30, 2002, the Company's operations provided net cash of $4.8 million,
which was used primarily to reduce line of credit and other borrowings. At
September 30, 2002, the Company had approximately $4.8 million available to
borrow on its two credit lines. The Company's operating cash flow and overall
liquidity was reduced during the three months ended September 30, 2002 as
finished trailer and motorcoach inventories increased by $5.7 million and line
of credit availability was reduced by $3.4 million as borrowings increased to
pay current obligations. Motorcoach shell payables increased by $1.4 million as
a result of past-due shell payments, on which the manufacturer subsequently
granted extended terms. At September 30, 2002, the current order backlog for
trailers had improved over levels at September 30, 2001 and December 31, 2001.
Motorcoach sales activity is down from last year at this time due in large part
to the closing of the Vogue facility in Pryor, Oklahoma. However, new and used
motorcoach inventories have been reduced by approximately $2.3 million during
2002.
On July 31, 2002 the Company amended and restated its credit agreements with its
principal lenders that extended their terms by two or more years and revised the
financial covenants based on the Company's financial plan for 2002. Although
there can be no assurance, the Company believes these amended and restated
credit agreements will provide it with sufficient working capital to meet its
liquidity requirements over the next 12 months. As of September 30, 2002, the
Company was in compliance with the financial covenants of the new agreements.
6
On June 28, 2002, the Company repaid the Wachovia/First Union Bank mortgage on
the Sanford, Florida facility with the proceeds of a $3.8 million deposit
received in connection with the planned sale/leaseback of the facility for $5.0
million, which was completed on July 31, 2002.
During the nine months ended September 30, 2002, the Company has continued to
make timely installment payments under the terms of its Trade Creditor Repayment
Plan. Despite these efforts, management cannot provide assurance that the
Company will continue to maintain successful operations.
Note 3: Restructuring Charge
In June 2001, the Company adopted a plan to close its Pryor, Oklahoma,
manufacturing facility and suspend development and manufacturing of the Vogue
6000 motorcoach. An accrual of $4.1 million was made in the financial statements
as of June 30, 2001, including $3.4 million for impairment losses on inventory,
property and equipment and $700,000 to provide for exit and other costs related
to this restructuring. An additional $422,000 was accrued in the fourth quarter
of 2001 for estimated lease and other costs to be incurred until this facility
could be subleased. As of September 30, 2002 approximately $81,000 of
restructuring costs remain accrued, principally for rent and other costs related
to holding this facility. This accrual will be exhausted in the fourth quarter
of 2002 the need for additional accruals will be evaluated at that time.
Note 4: Debt Financing Arrangements
As of June 30, 2002, the Company's was not in compliance with certain of its
financial covenants under its credit facility with U.S. Bank National
Association (U.S Bank) and its motorcoach financing agreement with Deutsche
Financial Services Corporation (Deutsche). However, on July 31, 2002, the
Company entered into amended and restated financing agreements with both U.S
Bank and Deutsche that provided, among other things, new financial covenants
that became effective as of June 30, 2002. As a result, both U.S. Bank and
Deutsche effectively waived the June 30, 2002 covenant violations that existed
under the old agreements with them.
The Company was in compliance with all covenants under each of these amended and
restated facilities as of September 30, 2002. However, the debt with respect to
these new agreements will continue to be classified as current liabilities until
the Company has additional experience and success in maintaining profitable
operations and demonstrating an ability to continue compliance with its
restrictive debt covenants for the remainder of 2002. See "Liquidity and Capital
Resources" elsewhere in the report for additional information on the Company's
amended and restated credit agreements
On June 28, 2002, the Company repaid the $3.7 million mortgage with Wachovia
Bank, N.A. (formerly First Union National Bank) on the Sanford, Florida property
and terminated a related interest rate swap agreement with a payment of
$149,000. These obligations were repaid with a $3.8 million advance deposit made
by GBNM Partnership for their July 31, 2002 purchase of the Company's sales and
service center in Sanford, Florida for $5.0 million, with the balance of $1.2
million received on August 1, 2002. The Company also entered into an agreement
with GBNM Partnership to lease back the facility beginning August 1, 2002 for an
initial term of 7 years plus a 3 year renewal option, at a rental rate of
$50,000 per month for the first 5 years. Since the Company has an option to
repurchase this facility for $5.4 million on August 1, 2005, this was recorded
as a sale/leaseback financing transaction.
The Company's motorcoach shell manufacturer has financed a number of shells
acquired by the Company for a four-month period that approximates the time
normally
7
required to perform the conversion process. Payment is required for these shells
at the time the shell is sold or at the end of the defined period, whichever
occurs sooner. The manufacturer has the right to demand payment or to repossess
shells for which payment is due at that time. At September 30, 2002, $7.4
million was owed to the shell manufacturer, including $1.4 million that is past
due. The manufacturer has subsequently extended payment terms on all past due
shells.
Note 5: Tax Benefit Resulting From Carryback Claim
The Job Creation and Workers Assistance Act of 2002 enabled the Company to amend
its 2001 Federal income tax return and claim additional deductions relating to
its self-insured employee medical plan. These deductions increased the 2001
income tax loss, which was then carried back to prior years resulting in refunds
of taxes paid in those years. In addition, law changes enabled the Company to
claim refunds for Alternative Minimum tax payments made in prior years. These
refunds, which totaled $616,000, were recorded as a reduction of the provision
for income taxes in the third quarter.
Note 6: Commitments and Contingencies.
Pursuant to trailer dealer inventory floor plan financing arrangements, the
Company may be required, in the event of default by a financed dealer, to
repurchase trailers from financial institutions or to reimburse the institutions
for unpaid balances, including finance charges plus costs and expenses. The
Company was contingently liable under these arrangements for a maximum of $9.7
million at September 30, 2002. During the nine months ended September 30, 2002,
the Company was required to make repurchases under these arrangements totaling
$248,000. In the opinion of management, no reserve is required for this
contingency because the aggregate amount of such repurchases on an annual basis
has been less than 1 percent of annual sales and the repossessed inventory has
been resold to other dealers without a loss. The Company has no motorcoach
dealers and accordingly, has no repurchase obligations with respect to
motorcoaches.
The Company is partially self-insured for a portion of certain health benefit
and workers' compensation insurance claims. The Company's maximum annual claim
exposure under these programs varies as follows: For health claims there is an
annual stop loss of $120,000 per claim but no aggregate loss limit. For workers
compensation claims, there is a $250,000 per occurrence limit and an aggregate
loss limit of $1.9 million. At September 30, 2002, $2.1 million was accrued for
estimated unpaid health and workers compensation claims and is classified in
accrued liabilities in the condensed consolidated balance sheet. The Company has
obtained irrevocable standby letters of credit in the amount of $2.4 million in
favor of the workers' compensation claim administrators to guaranty settlement
of claims. The Company may be required to obtain additional letters of credit in
connection with its workers compensation policy renewal in November 2002, which
would reduce availability on the U.S. Bank line of credit.
The Company, in the course of its business, has been named as a defendant in
various legal actions. These actions are primarily product liability or workers'
compensation claims in which the Company is covered by insurance subject to
applicable deductibles. Although the ultimate outcome of such claims cannot be
ascertained at this time, it is the opinion of management, after consulting with
counsel, that the resolution of such suits will not have a material adverse
effect on the financial position of the Company or its operating results for any
particular period.
The Company leases certain office and production facilities under various
operating leases that expire at varying dates through 2011. Aggregate rental
expenses under these operating leases are estimated to be $877,000 for 2002.
8
The Company has obtained fixed price commitments from certain suppliers for
about 98 percent of its expected aluminum requirements in 2002 and 55 percent in
2003 to reduce the risk related to fluctuations in the cost of aluminum, the
principal commodity used in the Company's trailer segment. In certain instances
there may be a carrying charge added to the fixed price if the Company requests
a deferral of a portion of its purchase commitment to the following year.
Note 7: Shareholders' Equity
Shareholders' equity may be further detailed as follows (in thousands):
Sept. 30, Dec. 31,
2002 2001
-------- --------
Common stock - without par value;
Authorized- 40 million shares;
Issued- 6,535 shares at Sept.30,2002
6,535 shares at Dec.31, 2001 $ 16,595 $ 16,595
Additional paid-in capital 4,156 4,062
Accumulated deficit (2,614 (5,492)
Accumulated other comprehensive loss -- (24)
-------- --------
Total Shareholders' equity $ 18,137 $ 15,141
======== ========
In the nine months ended September 30, 2002, the Company realized the
accumulated other comprehensive loss of $24,000 (and an additional loss of
$32,000) when the interest rate swap was terminated in the second quarter of
2002.
On January 31, 2002, the Company received $1.5 million from a private corporate
investor in the form of a convertible subordinated note and a warrant for
150,000 shares of the Company's common stock. This note is due in full on
January 2, 2003 or may be converted at that time to common stock at the option
of the holder. The conversion price is the lower of $3.00 per share or the
average closing market price of the Company's common stock between April 30,
2002 and October 31, 2002. The face amount of the convertible note was reduced
and paid-in capital increased by the fair value of $95,000 assigned to the
warrant using the Black-Sholes option-pricing model. This amount is being
amortized to interest expense over the 11 month term of the convertible note,
with $69,000 expensed in the nine months ended September 30, 2002. The warrant
may be exercised at any time before January 31, 2007 at a price of $2.00 per
common share.
Note 8: Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
Total comprehensive income (loss) is as follows for the three month and
nine month periods ended September 30, 2002 and 2001:
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net income(loss) $ 753 $ 106 $ 2,877 $ (3,967)
Cumulative effect of adjustment of
interest rate swap, net of tax -- 11
Income (loss) on interest rate swap,
net of tax -- (4) (24) (54)
-------- -------- -------- --------
Total comprehensive income(loss) $ 753 $ 102 $ 2,853 $ (4,010)
-------- -------- -------- --------
At September 30, 2002, there were no components of comprehensive income as the
interest rate swap had been terminated.
9
Note 9: Stock Option Plan
In accordance with the stock option plan established by the Company in July
1994, as amended in May 1998, the Board of Directors has granted options to
purchase Company common stock to certain employees and directors in the total
amount of 503,400 shares at September 30, 2002 and 835,400 at December 31, 2001.
These options were granted at prices ranging from $1.11- $10.00 per share, and
are exercisable at varying dates not to exceed 10 years from the date of grant.
During the nine months ended September 30, 2002, options totaling 36,000 were
granted at an average price of $3.05 per share, no options were exercised and
368,000 were forfeited. In February 2002, the Board of Directors authorized the
officers of the Company to cancel approximately 396,500 outstanding stock
options and replace them with an equal number of new stock options to be issued
with an exercise price equal to the fair market value of one share of common
stock as determined six months and one day from the effective date of
cancellation of such outstanding options. The exchange of stock options was
voluntary with respect to each holder of outstanding stock options and stock
options for 344,000 shares were cancelled. This exchange will be completed on
November 25, 2002 at the closing market price on that date.
Note 10: Net Income (Loss) Per Share
Following is a reconciliation of the weighted average shares outstanding used to
determine basic and diluted net income per share for the three months and nine
months ended September 30,2002 and 2001:
--Three months-- --Nine months--
----------------------------------------------------------------- ---------- ---------- ---------- -----------
2002 2001 2002 2001
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Net income available to common shareholders $ 753 $ 106 $ 2,877 $ (3,967)
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Weighted average number of shares outstanding- basic 6,535 6,535 6,535 6,535
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Dilutive effect of stock options/warrants 21 -- 28 --
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Dilutive effect of convertible note 612 -- 544
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Weighted average number of shares outstanding- dilutive 7,168 6,535 7,107 6,535
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Net income per share - basic $ 0.12 $ 0.01 $ 0.44 $ (0.61)
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Net income per share - diluted $ 0.10 $ 0.01 $ 0.40 $ (0.61)
----------------------------------------------------------------- ---------- ---------- ---------- ----------
Stock options for 482,300 shares at September 30, 2002 and 827,800 shares at
September 30, 2001 were excluded from the dilutive effect of stock options
because the exercise price of the options was greater than the market value of
the stock at those dates.
Note 11: Segment Reporting
The Company has two principal business segments that manufacture and sell
trailers and luxury motorcoaches and related parts, accessories and services to
many different markets, including recreational, entertainment and agriculture.
"Corporate and other" primarily includes the Company's limited aircraft
operations and corporate and administration expenses.
Management evaluates the performance of each segment based on income before
income taxes. During 2001, management adopted a policy of ceasing to charge
interest on intercompany borrowing balances and to retain all interest expense
related to the U.S.Bank line of credit in the Corporate and other division.
Prior year segment results have been restated to conform with this new policy,
which had no effect on consolidated net income (loss) before income taxes.
10
Information on business segment sales, income before income taxes and assets are
as follows for the three month and nine month periods ended September 30, 2002
and 2001 (in thousands):
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Corporate
Trailers Motorcoaches and other Total
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Three Months Ended September 30:
- ------------------------------------------------------- ------------ ------------ ------------ ------------
2002
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net sales to unaffiliated customers $ 25,529 $ 15,072 $ $ 40,601
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 1,412 (63) (561) 218
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Identifiable assets 28,517 55,842 6,467 90,826
- ------------------------------------------------------- ------------ ------------ ------------ ------------
- ------------------------------------------------------- ------------ ------------ ------------ ------------
2001
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net sales to unaffiliated customers $ 27,341 $ 24,225 $ $ 51,566
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 1,045 (320) (584) 141
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Identifiable assets 31,808 61,037 7,205 100,050
- ------------------------------------------------------- ------------ ------------ ------------ ------------
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Corporate
Trailers Motorcoaches and other Total
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Nine Months Ended September 30:
- ------------------------------------------------------- ------------ ------------ ------------ ------------
2002
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net sales to unaffiliated customers $ 81,851 $ 66,979 $ $ 148,830
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 4,464 564 (1,439) 3,589
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Identifiable assets 28,517 55,842 6,467 90,826
- ------------------------------------------------------- ------------ ------------ ------------ ------------
- ------------------------------------------------------- ------------ ------------ ------------ ------------
2001
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net sales to unaffiliated customers $ 84,757 $ 88,902 $ $ 173,659
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 2,446 (5,454) (2,282) (5,290)
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Identifiable assets 31,808 61,037 7,205 100,050
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion pertains to the Company's results of operations and
financial condition for the three month and nine month periods ended September
30, 2002 and 2001.
Results of Operations
Three months ended September 30, 2002 and 2001
On a consolidated basis, the Company's net income for the quarter ended
September 30, 2002, was $753,000 or $0.10 per diluted share, compared with net
income of $106,000 or $0.01 per diluted share, in the third quarter of 2001.
This increase in 2002 reflects: (1) an income tax refund of $616,000 as the
result of the Job Creation and Workers Assistance Act of 2002, (2) improved
gross profit margin percentages realized on sales in 2002 and (3) reduced
selling and administrative costs and lower interest expense in the third quarter
of 2002, as discussed further below.
Net sales for the quarter decreased by $11.0 million (21.3 percent) to $40.6
million in the third quarter of 2002 compared with $51.6 million in 2001.
Motorcoach segment sales were down $9.2 million or 37.8 percent, including a
11
decrease of 51 percent in sales of new motorcoaches and a 16 percent decrease in
sales of used coaches. These reductions were due, in part, to discontinuing
production and sale of Vogue coaches in Pryor, Oklahoma in 2001. If Vogue sales
of $4.7 million are excluded from 2001 net sales during the quarter, net
consolidated sales for the quarter in 2002 decreased by 13.4 percent and
motorcoach segment sales declined by 22.9 percent. The Company believes another
contributing factor to this decrease is the impact on potential luxury
motorcoach customers of the general economic uncertainty and the sluggish
economy during the quarter. Trailer segment sales in the third quarter of 2002
decreased by $1.0 million or 4 percent compared to 2001. Sales of horse,
livestock, and car trailers were up in the third quarter of 2002 compared to
2001 and all other categories of trailers decreased.
Consolidated gross profit decreased by $596,000 to $5.8 million in the third
quarter of 2002 from $6.4 million for the same period in 2001, primarily as the
result of decreased sales as discussed above. As a percentage of sales, gross
profit margin for the quarter was 14.4 percent in 2002 compared to 12.5 percent
in 2001. This margin improvement primarily reflects trailer sales, which have a
higher margin percentage than motorcoaches, being a larger percentage of total
sales for the third quarter in 2002 than the same quarter in 2001. Trailer gross
profit margins were essentially unchanged from 2001. Motorcoach gross profit
margins in the third quarter of 2002 improved slightly compared to the same
quarter of 2001 as higher margins were realized on sales of new and used units
and no market value adjustment was required for motorcoaches in inventory in
2002. In the third quarter of 2001, an adjustment of $177,000 was made to write
down the carrying value of certain used motorcoaches.
Selling and administrative expenses decreased in the third quarter of 2002 by
$49,000, a 9.0rcent decrease from the same period in 2001. As a percentage of
sales, these expenses increased to 12.1 percent in the third quarter of 2002
from 10.5 percent for the same period in 2001. Trailer segment expenses
decreased by 5.0 percent due to decreases in promotion related expenses.
Motorcoach segment expenses decreased by 19.3 percent due in part to reductions
in on going marketing and administrative costs as well as savings resulting from
the closing the Pryor, Oklahoma facility in 2001. Corporate expenses were
reduced by a $100,000 reduction in accrued management bonuses due to reduced
operating performance during the quarter, which was offset by a $100,000
provision for market value decline in the Company's aircraft.
Interest expense decreased by $194,000 in the third quarter of 2002 compared to
the same period in 2001 due to lower average levels of debt in 2002 as well as
lower average interest rates in 2002. Other expense, net, increased by $109,000
in 2002, primarily as the result of a $100,000 provision for market value
decline in the Company's aircraft.
Income before taxes (IBT) increased by $77,000 in the third quarter of 2002
compared to the same quarter last year. The closing of the Pryor, Oklahoma
facility in 2001 eliminated a $262,000 loss at that facility in the third
quarter of 2001. This savings was offset by a loss of $185,000 in 2002 from the
Company's ongoing operations, primarily due to lower gross margins from reduced
sales partially offset by lower selling, administrative expense and interest
expenses as discussed above.
The provision for income taxes was 37 percent for the third quarter of 2002
before the impact of the tax benefit resulting from a carryback claim compared
to 41 percent for the same period in 2001. In the third quarter of 2002, the
provision rate was reduced by a $616,000 income tax refund due to carryback
claims resulting from the Job Creation and Workers Assistance Act of 2002. The
reduced provision rate in 2002 also reflects anticipated benefits due to
utilization of state income tax loss carry forwards from prior years.
12
Nine months ended September 30, 2002 and 2001
On a consolidated basis, the Company's net income for the nine month period
ended September 30, 2002, was $2.9 million or $0.40 per diluted share, compared
with a loss of $4.0 million, or $0.61 per diluted share, in the first nine
months of 2001. This significant improvement in profitability for the first nine
months of 2002 reflects: (i) the non-recurrence of a $4.1 million restructuring
charge incurred in the first nine months of 2001 in closing the Pryor, Oklahoma
facility; (ii) higher gross profit (despite lower sales); and (iii) reduced
selling and administrative costs and lower interest expense, as discussed
further below.
Net sales decreased by $24.8 million (14.3 percent) to $148.8 million for the
first nine months of 2002 compared with $173.7 million for the same period in
2001. This included a 3.4 percent decrease in sales of specialty trailers and
transporters. Motorcoach segment sales were down 24.6 percent with a $19.4
million reduction in sales from the Pryor, Oklahoma facility, which was closed
during the first nine months of 2001. Sales of new motorcoaches were down 31
percent and sales of used coaches were down 15.5 percent compared to the same
period in 2001. If the effect of Vogue sales is excluded, net consolidated sales
decreased by 3.5 percent and motorcoach segment sales decreased 3.5 percent,
which the Company believes is reflective of a sluggish economy.
Consolidated gross profit increased by $5.5 million to $21.3 million in the
first nine months of 2002 from $15.8 million for the same period in 2001. As a
percentage of sales, gross profit was 14.4 percent in the first nine months of
2002 compared to 9.1 percent for the same period in 2001. This improvement in
gross profit reflects a $2.9 million increase as a result of the non-recurrence
of the restructuring charge included in cost of sales in 2001 (which reduced the
2001 gross margin by 1.7 percentage points) as well as improved margins realized
on sales in both the trailer and motorcoach segments. Trailer margins were 3.2
percentage points higher in the first nine months of 2002 due to lower material
costs and improved labor and overhead utilization compared to 2001 when the
Nashua plant closure reduced inefficiencies and resulted in other cost
increases. Motorcoach gross profit margins improved slightly as higher margins
realized on sales of used units, were offset by lower margins realized on new
motorcoach sales as non-current models were sold at reduced prices and an
accrual of $445,000 was made for estimated warranty costs on Vogue motorcoaches.
Selling and administrative expenses decreased in the first nine months of 2002
by $1.3 million, an 7.8 percent decrease from the same period in 2001. As a
percentage of sales, these expenses increased to 10.6 percent in 2002 from 9.8
percent in 2001. Trailer segment expenses remained essentially unchanged while
motorcoach segment expenses decreased by 20.6 percent due primarily to reduced
marketing and administrative costs resulting from the closing the Pryor,
Oklahoma facility in the first nine months of 2001. A restructuring charge of
$1.2 million in 2001 included the estimated payroll, severance and other costs
paid in connection with closing the Pryor, Oklahoma facility in 2001. No such
charges were incurred in 2002. Corporate expenses remained unchanged as
decreased aircraft expenses offset a $200,000 increase in management bonus
accruals in 2002.
Interest expense decreased by $1.1 million in the first nine months of 2002
compared to the same period in 2001 due to lower average levels of debt in 2002
as well as lower average interest rates in 2002. Other income (expense), net,
decreased by $165,000 as the result of financial advisory fees related to
investigating strategic financing alternatives and reductions in other
miscellaneous income items in 2002.
13
Income before taxes (IBT) for the nine month period increased by $8.9 million in
2002 compared to the same period last year. This improvement reflects an
increase in trailer segment IBT of $2.5 million, a decrease in corporate net
expense by $54,000 and an improvement of $6.3 million in motorcoach segment IBT
for the reasons discussed above.
The provision for income taxes was 20 percent in 2002 compared to 25 percent in
2001. The reduced provision rate in 2002 reflects a $616,000 reduction for a
$616,000 income tax refund as a result of the Job Creation and Worker Assistance
Act of 2002 and anticipated benefits due to utilization of state income tax loss
carry forwards from prior years. The 2001 provision rate reflects a reduction
due to the anticipated benefit from the carry back of annual book losses to
prior year's Federal income tax returns for a refund.
Liquidity and Capital Resources
The Company's liquidity is primarily measured by its cash flow from operations
together with amounts available to borrow on its approved lines of credit with
U.S Bank and with Deutsche. During the nine month period ended September 30,
2002, the Company's operating activities provided net cash of $4.8 million,
after a decline of $3.3 million in the third quarter. This decline was primarily
caused by an increase in trailer and motorcoach finished unit inventories during
the quarter as the number of units completed exceeded sales during the third
quarter. At September 30, 2002, the Company had approximately $4.8 million
available to borrow on its credit lines compared to $8.2 million at June 30,
2002 and $4.6 million at December 31, 2001, a decline of $3.4 million since June
30, 2002 as borrowing increased to cover the operating cash flow deficit during
the third quarter.
During the fourth quarter, the Company will have several significant payables
and accruals which require payment, including: Trade Creditor Plan payables of
$639,000, dealer holdback payments of $576,000, past due motorcoach shell
payments of $1.4 million, insurance renewal deposits of $300,000, final payments
of $500,000 on equipment on order, and estimated income tax deposits of
$600,000. These payments, which total approximately $4.0 million are expected be
funded by collection of the tax refund receivable of $616,000, estimated
borrowings on the capital expenditure term note with U.S.Bank in amount of
approximately $1.0 million, with the balance of about $2.4 million provided by
cash flow from operations during the fourth quarter and availability on the
existing credit lines. Management cannot provide assurance that these sources of
funds will be adequate to allow the Company to meet all of these and other
obligations on a timely basis.
On July 31, 2002 the Company amended and restated the credit agreements with its
principal lenders and completed the sale/leaseback of its sales and service
center in Sanford, Florida. Following is a summary of these new agreements:
1. The Amended and Restated Loan Agreement (Agreement) with U.S. Bank
is in an aggregate amount of $23.3 million, including $14 million in an
asset-based revolving credit commitment, $7.2 million in term loans on existing
real estate and equipment and the remaining $2.0 million as a term loan for new
equipment purchases. The Agreement also provides a special advance of $1.0
million for any 60 day period requested by the Company until July 31, 2003. This
Agreement is for a three-year period with annual interest accruing at prime plus
0.50 percent on outstanding balances. The proceeds from the $7.2 million term
notes were used to repay $4.4 million of existing term notes with the balance of
$2.8 million reducing borrowings on the revolving credit note. The $7.2 million
term notes are repayable over 36 months with aggregate monthly principal
payments of $120,000 plus interest with the remaining unpaid balance due on June
30, 2005. Repayment of advances on
14
the new equipment term note will be based on a 60 month amortization with the
unpaid balance due on June 30, 2005. Advances under the revolving credit
commitment range from 70 to 85 percent on eligible accounts receivable and from
30 to 70 percent on eligible inventory. As of September 30, 2002, net
availability on the revolving credit line was $7.9 million with about $5.7
million outstanding. The Agreement requires the Company to notify the Bank of
material adverse changes in its operations and financial condition, among other
matters, and to comply with the following financial covenants through December
31, 2003: maintain a minimum consolidated fixed charge coverage ratio of 1.05 to
1.0 as of the end of each fiscal quarter for the year to date period then ended,
commencing with the fiscal quarter ended June 30, 2002; not to exceed a maximum
consolidated total liabilities to consolidated tangible net worth ratio of 4.25
to 1.0 as of the last day of each quarter commencing with the quarter ended June
30, 2002; achieve a minimum consolidated EBITDA of $9 million during each fiscal
year and not to exceed aggregate capital expenditures of $2 million in any
fiscal year. The Company was in compliance with the amended covenant
requirements as required for the quarter ended September 30, 2002.
2. The Amended Wholesale Financing Agreement(Agreement) with Deutsche
provides for aggregate financing of $25 million on new and used motorcoaches
held as inventory by the Company. This is a two-year agreement, which expires in
July 2004, with interest on borrowings at prime rate or if the prime rate is
less than 6.5 percent, then interest will be at prime rate plus 0.25 percent.
Advances under the Agreement are based on 90 percent of the cost of eligible new
inventory and 70 percent of the defined value of eligible used inventory. After
July 31, 2003, the Agreement reduces the advance rate on new coaches more than
360 days old from 90 percent to 70 percent and provides no financing on new or
used coaches more than 720 days old or older than 10 model years. This could
reduce future aggregate availability under this Agreement. At September 30,
2002, the Company had $6.4 million of used motorcoach inventory that would be
ineligible for funding and $1.4 million of new inventory eligible only at a
reduced rate after July 31, 2003. As of September 30, 2002, the aggregate
availability under this Agreement was $25.0 million with $22.4 million
outstanding. The Agreement requires compliance with the following financial
covenants: maintain a minimum defined tangible net worth and subordinated debt
of $13 million for the fiscal quarter ended June 30, 2002, $14 million for the
quarters ended September 30 and December 31, 2002 and $15 million for each
fiscal quarter ended March 31, 2003 and thereafter; not to exceed a maximum
ratio of debt minus subordinated debt to tangible net worth and subordinated
debt of 6.0 to 1.0 for the quarter ended June 30, 2002 and 5.0 to 1.0 for the
quarter ended September 30, 2002 and each quarter ended thereafter; achieve a
minimum ratio of defined current tangible assets to current liabilities of not
less than 1.0 to 1.0 as of the end of the fiscal quarter ended June 30, 2002 and
1.2 to 1.0 as of the end of the fiscal quarter ended September 30, 2002 and for
each quarter ended thereafter; achieve 80 percent of the Company's projected net
income for each quarter of 2002 beginning June 30, 2002, and achieve monthly net
income greater than zero. The Company was in compliance with these amended
covenants for the quarter ended September 30, 2002.
3. On June 28, 2002 the Company satisfied in full its $3.7 million
mortgage with Wachovia Bank on the Company's Sanford, Florida sales and service
center and terminated a related interest rate swap agreement with a payment of
$149,000. These obligations were paid-off with a $3.8 million advance deposit
made by GBNM Partnership in connection with their July 31, 2002 purchase of the
sales and service center in Sanford, Florida for $5.0 million, with the balance
of $1.2 million received on August 1, 2002. The Company entered into an
agreement with GBNM Partnership to lease the Sanford facility beginning August
1, 2002 for an initial term of 7 years plus a 3 year renewal option, at a rental
rate of $50,000 per month for the first 5 years. Since the Company has an option
to repurchase this facility for $5.4 million on August 1, 2005, this has been
recorded as a sale/leaseback financing transaction.
15
The Company continues to make payments under a Trade Creditor Repayment Plan
(the Plan) according to the schedule worked out with its trade creditors in
November 2001. According to the payment option chosen by each creditor, the
Company will repay $2.8 million in 2002, $2.3 million in 2003 and $2.2 million
in 2004. Four quarterly installments under the Plan were paid in 2002 beginning
on January 31, 2002 and every three months thereafter. There are no interest or
service charges in connection with this arrangement. Vendors under the Plan have
been continuing to supply the Company with materials; however, they frequently
require prepayments at the time of order or payment on delivery of the
materials. A number of vendors have extended the Company more normal credit
terms again as they receive payments under the Plan.
The Company's liquidity is generally reflected by a number of key indicators.
The Company's ratio of current assets to current liabilities was 1.13 to 1 at
September 30, 2002, compared with a ratio of 1.02 to 1 at December 31, 2001.
This ratio is expected to continue to improve as the financing arrangements
described above have been completed and portions of the debt included in current
liabilities in the accompanying consensed consolidated balance sheets are
expected to be reclassified to long-term debt. This will occur when the Company
has additional experience and success in maintaining profitable operations and
demonstrating an ability to continue its compliance with its restrictive debt
covenants for the remainder of 2002. The ratio of total debt to shareholders'
equity decreased to 2.77 to 1 at September 30, 2002 from 3.62 to 1 at December
31, 2001. During the nine months ended September 30, 2002, total debt declined
by almost $4.6 million.
The Company's liquidity and results of operations have improved during the nine
months ended September 30, 2002. Many of the factors regarding financing that
were uncertain at December 31, 2001 have been resolved and the uncertainty about
the Company's ability to continue as a going concern have been somewhat reduced.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Following is a discussion of the principal components of the Company's cash flow
for the nine month period ended September 30, 2002, as reflected in the
unaudited condensed consolidated statements of cash flows:
Operating activities provided net cash of $4.8 million. The Company's net income
of $2.9 million was increased by adjustments for depreciation and amortization
of $1.5 million and decreased by other non-cash items in an aggregate net amount
of $482,000. Net changes in receivables, inventories and other current assets
provided cash of $5.8 million, including an income tax refund of $2.8 million
received in the first quarter of 2002. Substantially all of the remainder of
this change resulted from decreased inventories, in large part related to the
motorcoach segment, where the number of units in inventory were reduced, with
raw materials and work in process decreasing $900,000, new motorcoach inventory
decreasing by $1.7 million and the used motorcoach inventory decreasing by
$860,000. Net decreases in accounts payable, customer deposits and other current
liabilities used cash of $4.9 million. These changes include, among other items:
a decrease of $3.3 million in trade accounts payable, and checks issued but not
presented for payment increased by $1.2 million. Customer deposits decreased by
$270,000 as deposits received on pending sales of trailers and motorcoaches in
prior periods were applied to sales completed in the current period.
Increased expenditures for working capital items may be required to support
production levels in excess of sales from time to time. To maintain a level
production schedule, production may begin on coaches before an order has been
received from a specific buyer. As of September 30, 2002, approximately 82
percent
16
of the coaches in production and to be completed over the next four months have
not been sold to specific customers. For the nine months ended September 30,
2002, total units produced exceeded units sold by 2 units. While it is the
Company's expectation that substantially all of these motorcoaches will be sold
to specific customers before production is completed, or shortly thereafter,
there is no assurance this will occur. Accordingly, this could adversely impact
the liquidity of the Company.
The Company's motorcoach shell manufacturer has financed a number of shells
acquired by the Company for a four-month period that approximates the time
normally required to perform the conversion process. Payment is required for
these shells at the time the shell is sold or at the end of the defined period,
whichever occurs sooner. The manufacturer has the right to demand payment or to
repossess shells for which payment is due at that time. At September 30, 2002,
$7.4 million was owed to the shell manufacturer, including $1.4 million that is
past due. The manufacturer has extended payment terms on all past due and other
units until December 31, 2002.
The Company's investing activities for the nine months ended September 30, 2002
provided cash of $314,000, net of proceeds of $295,000 received from the sale of
equipment and idle land during the period. The Company's capital expenditures
for plant and equipment were $609,000 for the nine-month period ended September
30, 2002. On July 31, 2002 U.S. Bank renewed the availability of a capital
expenditure financing under a $2.0 million Capital Expenditure Term Note to
finance the Company's planned capital expenditures on machinery and equipment in
2002. There were no borrowings against this term note at September 30, 2002;
however, equipment in the amount of $819,000 is on order and is expected to be
installed in the fourth quarter of 2002. Borrowing requests for 75 percent of
the Company's total capital expenditures in 2002 will be submitted to the Bank
in the fourth quarter of 2002; the Company expects to borrow approximately $1.0
million as a result of these requests.
The Company leases certain office and production facilities under various
operating leases that expire at varying dates through fiscal year 2011. Minimum
lease payments for 2002 will total $877,000. In addition, the Company accrued as
a restructuring charge liability at December 31, 2001, $400,000 of estimated
rent to be paid on the Pryor, Oklahoma facility in 2002 until it is subleased.
In 2001, the Company decided not to lease a new sales and service center in
North Carolina but as consideration for being released from this obligation, is
paying an aggregate amount of $302,000 in monthly installments over a three year
period beginning in March, 2002, to Clement Properties, an entity owned by
certain of the majority shareholders of the Company.
As discussed above, the Company entered into an agreement with GBNM Partnership
to lease the sales and service center facility in Sanford, Florida beginning
August 1, 2002 for an initial term of 7 years plus a 3 year renewal option, at a
rental rate of $50,000 per month for the first 5 years. Since the Company has an
option to repurchase this facility for $5.4 million on August 1, 2005, this was
recorded as a sale/leaseback transaction.
The Company's financing activities in the nine months ended September 30, 2002
used net cash of $4.6 million, including $6.9 million for net reductions in line
of credit borrowings, $3.8 million for the repayment of the Sanford facility
mortgage, $5.7 million for refinanced real estate and equipment term notes and
other long-term debt reductions and $2.0 million for Trade Creditor Repayment
Plan payments. The reductions were financed by proceeds of $5.0 million from the
sale/leaseback of the Sanford Sales and Service Center, $7.4 million primarily
from refinancing real estate and equipment with U.S. Bank as described above and
the $1.5 million in proceeds received from Bulk Resources, Inc., an unrelated
private investor, in the
17
form of a subordinated convertible note. This note is due January 2, 2003 or may
be converted together with interest accrued thereon at the rate of 6.5 percent
per annum into shares of the Company's common stock at $3.00 per share or the
average closing price of the Company's common stock between April 30, 2002 and
October 30, 2002. The option must be exercised by January 15, 2003. A detachable
warrant for 150,000 shares of common stock at $2.00 per share was issued in
conjunction with the convertible note, which must be exercised by January 31,
2007, and was assigned a fair value of $95,000 as discussed in Note 6 to
condensed consolidated financial statements.
As discussed in Note 5 to the condensed consolidated unaudited financial
statements, the Company is contingently liable under certain trailer dealer
floor plan arrangements. These arrangements relate to inventory financing
provided to Featherlite trailer dealers by financial institutions. The Company
would be required to repurchase trailer inventory if the financial institution
repossesses it and it is in saleable condition. No reserve has been provided for
this contingency because the aggregate amount of such repurchases has
historically been less than one percent of sales and repossessed inventory has
been resold to other dealers without a loss. These contingent liabilities total
approximately $9.7 million at September 30, 2002. Also, the Company is partially
self-insured for a portion of certain health benefit and workers' compensation
insurance claims. For health claims there is an annual stop loss limit of
$120,000 per claim but no aggregate loss limit. For workers compensation claims,
there is a $250,000 per occurrence limit and an aggregate limit of $1.9 million.
At September 30, 2002, $2.1 million was accrued for estimated unpaid claims. The
Company has obtained irrevocable standby letters of credit in the amount of $2.4
million in favor of the workers' compensation claim administrators to guarantee
payment of claims. The Company may be required to increase its letter of credit
during the next policy year beginning in November 2002. This would reduced
amounts available to borrow on it credit line with U.S. Bank.
Assuming continued improvement in the national economy and the sale of a
substantial portion of the motorcoaches which will ineligible for financing by
Deutsche after July 31, 2003, the Company believes that its current cash
balances, cash flow generated from operations and available borrowing capacity
will be sufficient to fund continued operations and capital requirements for the
next twelve months. As described above, the Company has agreements with its two
major lenders to continue funding in 2002 and beyond.
For the foreseeable future, the Company does not plan to pay dividends but
instead will follow the policy of reinvesting any earnings in order to finance
the expansion and development of its business. The Company is a party to certain
loan agreements that prohibit the payment of dividends without the lenders'
consent.
Critical Accounting Policies
Inventories: Inventories are stated at the lower of cost, as determined on a
first-in, first-out (FIFO) basis, or market and include materials, labor and
overhead costs. Raw materials consist of the cost of materials required to
produce trailers and complete motorcoach conversions and to support parts sales
and service. Work in process consists of costs related to materials, bus
conversion shells, labor and overhead related to the production process.
Revenue Recognition: The Company recognizes revenue from the sale of trailers
and motorcoaches when risks of ownership are transferred to the customer, which
often is upon shipment or customer pick-up. Alternatively, a customer may be
invoiced prior to shipment or customer pick-up if the customer has made a fixed,
written commitment to purchase, the trailer or motorcoach has been completed and
is
18
available for pick-up or delivery, and the customer has requested the Company to
hold the trailer or motorcoach until the customer determines the most economical
means of taking physical possession. Upon such a request, the Company has no
further obligation except to segregate the trailer or motorcoach and hold the
trailer or motorcoach for a short period of time as is customary in the
industry, until pick-up or delivery. Products are built to customer
specification and no rights of return or exchange privileges are granted.
Accordingly, no provision for sales allowances or returns is recorded.
Long-lived Assets: The Company assesses long-lived assets for impairment under
SFAS Statement No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of." Under those rules, property and
equipment, goodwill associated with assets acquired in purchase business
combinations, and any other long-lived assets are included in the impairment
evaluations when events or circumstances exist that indicate the carrying amount
of those assets many not be recoverable. In the fourth quarter of 2000, the
Company determined that unamortized goodwill in the amount of $8.3 million
associated with the acquisitions of Vogue in 1998 and Vantare in 1996 was
impaired, and wrote it off. The write-off of the goodwill was based on an
analysis of projected undiscounted cash flows, which were no longer deemed
adequate to support the goodwill associated with these businesses. Impairment
reviews of the long-lived assets of certain business units in the trailer
segment also resulted in the write-down of goodwill and other long-lived assets
by $431,000 in 2001. These write-downs were based on projected cash flows that
were not adequate to support goodwill associated with an acquired business and
the reduction of the net book value of related land and buildings to an amount
deemed realizable based on previous experience.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with SFAS No. 142. Other
intangible assets will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. The Company adopted SFAS No. 142 effective January
1, 2002. The adoption of this SFAS had no effect on 2002 operations because the
Company has no unamortized goodwill or other intangibles.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS No. 144 supersedes previous guidance for financial accounting and
reporting for the impairment or disposal of long-lived assets and for segments
of a business to be disposed of. SFAS No. 144 is effective for the Company
beginning on January 1, 2002. Adoption of the statement is not expected to have
a material impact.
In June 2002, the FASB approved Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
No. 146). SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF
No. 94-3). SFAS No. 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF No. 94-3. SFAS No.
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002.
19
The Company believes the adoption of SFAS No. 146 will not have a material
effect on its financial position or results of operations.
Forward-looking Information and Risks
Certain statements in this report, and in the Company's Form 10-K and other
filings with the SEC, are forward-looking in nature and relate to trends and
events that may affect the Company's future financial position and operating
results. Forward-looking statements broadly involve our current expectations for
future results. The words "believe," "estimate," "expect," "intend," "may,"
"could," "will," "plan," "anticipate'" and similar words and expressions are
intended to identify forward-looking statements. Any statement that is not a
historical fact, including statements involving estimates, projections, future
trends and the outcome of future events are forward-looking statements. These
statements speak only as of the date of this quarterly report, are based on
current expectations, are inherently uncertain, are subject to risks, and should
be viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as the result of many factors, including but not
limited to: product demand and acceptance of products in each segment of the
Company's markets, fluctuations in the price of aluminum, competition,
facilities utilization, the availability of additional capital as may be
required to finance any future net liquidity deficiency, national economic
trends and other unanticipated events and conditions. It is not possible to
foresee or identify all such factors. The Company makes no commitment to update
any forward-looking statement or to disclose any facts, events, or circumstances
after the date hereof that may affect the accuracy of any forward-looking
statement, other than as required by law.
While consolidated sales levels for the first nine months of 2002 have declined
compared to the same period last year, in large part due to the closure of the
Vogue facility in the second quarter of 2001, they are consistent with the
Company's sales plan for 2002. The order backlog for trailers of $13.8 million
at September 30 2002 compared with $12.1 million at September 30, 2001 and $12.8
million at December 31, 2001. The motorcoach backlog was $6.1 million at
September 30, 2002 compared with $2.0 million at September 30, 2001 and $3.1
million at December 31, 2001. The number of new motorcoach units held in
inventory has decreased since December 31. The Company is encouraged by its
improved profitability in 2002, despite reduced revenue from a sluggish economy.
The Company will continue its aggressive measures to promote sales and manage
costs. Management expects that sales will continue to increase as national
economic business conditions improve and expects gross margins will remain at
current levels or improve slightly. There is continuing focus by the Company on
the sales and marketing related activities that have been effective in
increasing sales in the past but there is no assurance they will be successful
in increasing order levels to maintain or exceed 2001 sales volume.
The Company believes its name recognition and close affiliation with the
motorsports industry will continue to have a positive impact on its sales of
specialty trailers, transporters and luxury motorcoaches. With more than 75
percent of its revenue from end users in motorsports and leisure and
entertainment categories, which also includes horse trailers, and with its
strong position in the livestock trailer market, the Company believes it is
strategically well-positioned to continue to benefit from these markets. The
Company introduced 35 new and enhanced models of trailers in 2002 and added
motorcoach models with multiple slide-out features.
The Company's future operating results are subject to a number of risks,
including the following:
20
1. The Company has made increased use of leverage and incurred greater interest
and related expenses in two of the three years ended December 31, 2001.
Increased debt was incurred in connection with financing operations and
facilities expansions at the Motorcoach Division as well as financing its
increased working capital requirements through the year ended December 31, 2000.
In 2001 and through September 30, 2002, debt reductions have been made and
interest costs reduced as a result of decreases in Motorcoach Division
inventories. As described above, the Company has signed long-term agreements
with its lenders with new financial covenants, which the Company is in
compliance with as of September 30, 2002. The Company believes it will achieve
the requirements of these covenants in the future. However, if the Company is
unable to obtain waivers of future covenant defaults and secure sufficient
additional financing to fund its liquidity shortfalls, the Company's business
will be harmed.
2. There is a risk related to losing a major supplier of aluminum. In the past
this risk has been relatively nominal as there have been alternate sources of
supply. In recent years, the number of alternate sources of supply has been
reduced due to mergers within the aluminum industry. Also, additional time may
be required to replace an extruded aluminum supplier due to the fact that dies
are required and would have to be made. The Company routinely tries to keep at
least three suppliers of each shape so it has a backup supplier if necessary.
However, if the number of suppliers of aluminum is further reduced, or if the
Company is otherwise unable to obtain its aluminum requirements on a timely
basis and on favorable terms, the Company operations would be harmed.
3. There is a risk related to the loss or interruption in the supply of bus
conversion shells from the Company's sole supplier of these shells. The Company
purchases all of its bus conversion shells from Prevost Car Company located in
Canada. Although the Company has insurance to cover certain losses it may
sustain due to fire or other catastrophe at Prevost's plant, the Company may not
be able to obtain conversion shells from another manufacturer on favorable terms
or at all. Additionally, if the Company is unable to maintain a good working
relationship with Prevost, it may be required to locate a new supplier of its
conversion shells. In the event of any significant loss or interruptions in the
subcontractor's ability to provide such services may harm the Company's
operations.
4. The Company uses one subcontractor to provide paint and graphic design work
to meet customer specifications on certain custom trailers and specialty
transporters. There is a risk to the timely delivery of these trailers in the
event of an unforeseen interruption in the subcontractor's ability to provide
these services or if the customer delays providing the specifications to the
subcontractor. Any long-term interruptions in the subcontractor's ability to
provide such services may harm the Company's operations.
5. The Company begins production of most of the luxury motorcoaches before a
customer order is received. While it is the Company's expectation that
substantially all of these motorcoaches will be sold to specific customers
before production is completed, or shortly thereafter, there is no assurance
this will occur. Failure to sell these motorcoaches on a timely basis at
prevailing prices could further decrease the liquidity of the Company.
6. The Company takes trade-ins on both new and used motorcoach sales. These
trade-in units are marketed on a retail basis to other customers. In 2001 and
2000, the Company experienced a significant decline in the market value of
trade-in units and certain non-current new models and wrote down the carrying
value of the used inventory by $3.0 million and $1.7 million, respectively, in
order to facilitate their sale. There is a risk that additional write-downs of
this inventory will occur if these trade-in units are not sold at current
selling prices, which could
21
adversely impact the Company's future operating results. Advances under the
Company's financing agreement with Duestche are based on 90 percent of the cost
of eligible new inventory and 70 percent of the defined value of eligible used
inventory. After July 31, 2003, the Agreement reduces the advance rate on new
coaches more than 360 days old from 90 percent to 70 percent and provides no
financing on new or used coaches more than 720 old or older than 10 model years.
This could reduce future aggregate availability under this agreement.
7. The accompanying unaudited condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
However, the Report of Independent Public Accountants on the December 31, 2001
financial statements states that the Company is unable to ascertain whether it
will have sufficient liquidity available under its existing lines of credit to
fund operations or whether the Company will meet various covenant requirements
contained in its financing agreements. While progress has been made to reduce
these uncertainties, these matters still raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
8. In August 2001, the Company transferred to The Nasdaq Smallcap Market because
its common stock had failed to maintain the minimum market value of public float
required for continued listing on the Nasdaq National Market. In 2001, Nasdaq
expressed concern that the Company may not be able to sustain compliance with
the continued listing requirements of The Nasdaq Stock Market because of the
"going concern" opinion expressed in the Report of Independent Accountants on
the Company's December 31, 2001 and 2000 consolidated financial statements.
There is no assurance the Company will be able to satisfy Nasdaq regarding its
ability to meet these continued listing requirements, and the Company's common
stock may be delisted from Nasdaq. In such an event, the market for the
Company's common stock may become more illiquid, and you may have a more
difficult time selling the Company's common stock.
9. As discussed in Note 3 to condensed consolidated financial statements, the
Company shut down its Pryor, Oklahoma manufacturing facility. It has accrued the
estimated rental and other costs of holding this facility through December 31,
2002. In the event the facility cannot be subleased or other uses found for the
facility by December 31, 21002, the Company may be required to continue to
accrue additional costs related to this facility until it is subleased. This
could have an adverse impact on the Company's future operating results and
liquidity.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company is exposed to market risks related to changes in the cost of
aluminum. Aluminum is a commodity that is traded daily on the commodity markets
and fluctuates in price. The average Midwest delivered cash price per pound for
ingot aluminum during the three years ended December 31, 2001, as reported to
the Company by its suppliers was $0.69 in 2001, $0.75 in 2000, and $0.66 in
1999. The Company's cost of aluminum varies from these market prices due to
vendor processing charges, timing of purchases, and contractual commitments with
suppliers for specific prices and other factors. The Company has obtained
commitments from suppliers to provide, at an agreed upon fixed price, about 98
percent of its anticipated requirements for 2002 and 55 percent for 2003, which
reduces a portion of the risk of aluminum cost fluctuations for the year. If the
Company is unable to obtain such commitments from suppliers or otherwise reduce
the price risk related to the balance of the purchases to meet its requirements
in the years beyond 2002, this could have an adverse impact on the Company's
operating results if the cost of aluminum increases significantly above levels
in 2002.
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The Company is exposed to market risks related to changes in U.S and
international interest rates. Substantially all of the Company's debt bears
interest at a variable rate. The Company managed interest rate risk on one of
its term loans through the use of an interest rate swap. This swap was
terminated on June 28, 2002 in connection with the payment in full of the
related loan. An interest rate increase by one percentage point would reduce the
Company's future annual net income by approximately $200,000 at based upon the
Company's debt levels as of September 30, 2002.
Item 4. Control Procedures
(a) Evaluation of disclosure controls and procedures. Our chief
executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure
controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14c and 15-d-14(c)) as of a
date (the " Evaluation Date") within 90 days before the filing
date of this quarterly report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were
adequate and designed to ensure that material information
relating to us and our consolidated subsidiary would be made
known to them by others within those entities.
(b) Changes in internal controls. There were no significant
changes in our internal controls or to our knowledge, in other
factors that could significantly affect our internal controls
and procedures subsequent to the Evaluation Date.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits. See Exhibit Index.
(b) Form 8-K. On August 2, 2002, the Registrant filed a Form 8-K to
report a change in the Registrant's certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEATHERLITE, INC.
(Registrant)
Date: November 14, 2002 /S/ CONRAD D. CLEMENT
-----------------------
Conrad D. Clement
President & CEO
Date: November 14, 2002 /S/ JEFFERY A. MASON
-----------------------
Jeffery A. Mason
Chief Financial Officer
23
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Conrad D. Clement, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Featherlite, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14,2002 /s/ Conrad D. Clement
Chief Executive Officer
24
CERTIFICATION PURSUAN TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey A. Mason, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Featherlite, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Jeffrey A. Mason
Chief Financial Officer
25
EXHIBIT INDEX
Form 10-Q
Quarter ended September 30, 2002
Exhibit No. Description
- --------------------------------------------------------------------------------
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
- --------------------------------------------------------------------------------
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
- --------------------------------------------------------------------------------
26