SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section
13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 29, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-22048
STARCRAFT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1817634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 1903
1123 South Indiana Avenue
Goshen, Indiana 46526
(Address of principal executive offices/zip code)
Registrant's telephone number, including area code: 574/534-7827
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes: No: X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: July 31, 2003 - 4,776,802
shares of Common Stock, without par value.
STARCRAFT CORPORATION June 29, 2003
Form 10-Q
- INDEX -
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 29, 2003 (Unaudited) 1
and September 29, 2002 (Audited)
Consolidated Statements of Income and Comprehensive 2
Income (Unaudited) for the three and nine month periods
ended June 29, 2003 and June 30, 2002
Consolidated Statements of Cash Flow (Unaudited) 3
for the nine month periods ended June 29, 2003
and June 30, 2002
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial 9-14
Condition and Results of Operations
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17-18
CERTIFICATIONS 19-24
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
(Unaudited) (Audited)
CONSOLIDATED BALANCE SHEETS June 29, 2003 September 29, 2002
------------- ------------------
(Dollars in Thousands)
ASSETS
Current Assets
Cash and cash equivalents....................... $ 4,483 $ 284
Accounts receivable, trade less allowance for
doubtful accounts: $189 at June 29, 2003
and $288 at September 29, 2002............. 36,227 20,610
Tooling and engineering services................ 465 2,108
Notes receivable................................ 98 63
Inventories ................................... 9,316 8,204
Prepaid Expenses................................ 3,266 1,517
Other ................................... 31 347
------------- -------------
Total current assets........................ 53,886 33,132
Property and Equipment
Land, buildings, and improvements............... 5,803 3,820
Machinery and equipment......................... 6,764 4,540
------------- -------------
12,567 8,360
Less accumulated depreciation................... (3,725) (2,836)
------------- -------------
8,842 5,524
Other assets ................................... 723 436
------------- -------------
$ 63,451 $ 39,092
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to related parties................ $ 0 $ 1,474
Accounts payable, trade......................... 26,840 18,058
Accrued expenses:
Warranty.................................... 899 771
Compensation and related expenses........... 2,845 2,302
Taxes....................................... 3,015 440
Indemnification reserves.................... 0 346
Other....................................... 443 675
------------- -------------
Total current liabilities............................ 34,042 24,066
Long -Term Debt ................................... 11,639 12,704
Commitments and Contingencies........................ -- --
Minority Interest in Subsidiary...................... 8,133 1,991
Shareholders' Equity
Preferred Stock, no par value; authorized
but unissued 2,000,000 shares........... -- --
Common Stock, no par value;
10,000,000 shares authorized
4,776,752 shares issued as of June 29, 2003
and 4,679,519 shares as of September 29, 2002 15,083 14,850
Additional paid-in capital.................... 3,420 1,008
Accumulated deficit............................. (9,043) (15,527)
Accumulated other comprehensive gain ........... 177 0
------------- -------------
Total shareholders' equity................. 9,637 331
------------- -------------
$ 63,451 $ 39,092
============= =============
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - Unaudited
3 Months Ended 9 Months Ended
------------------------------------ ---------------------------------
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
Net Sales $ 62,117 $ 29,403 $ 149,170 $ 73,484
Cost of Goods Sold ......................... 46,910 21,832 114,625 55,083
------------- ------------- ------------- -------------
Gross profit ...................... 15,207 7,571 34,545 18,401
Operating Expenses
Selling and promotion ................. 526 490 1,377 1,369
General and administrative 3,695 3,536 12,206 9.220
------------- ------------- ------------- -------------
Operating Income 10,986 3,545 20,962 7,812
Nonoperating (Expense) Income
Interest, net ......................... (91) (133) (307) (369)
Other, net .......................... (1) 124 18 190
------------- ------------- ------------- -------------
(92) (9) (289) (179
------------- ------------- ------------- -------------
Income Before Income Taxes
and Minority Interest ............. 10,894 3,536 20,673 7,633
Income Taxes 2,680 99 3,121 261
------------- ------------- ------------- -------------
Income After Income Taxes
and Before Minority Interest....... 8,214 3,437 17,552 7,372
Minority Interest in Income of Subsidiary 4,161 1,500 8,641 3,463
------------- ------------- ------------- -------------
Net Income $ 4,053 $ 1,937 $ 8,911 $ 3,909
============= ============= ============= =============
Comprehensive Income $ 4,230 $ 1,937 $ 9,088 $ 3,909
============= ============= ============= =============
Basic Earnings Per Share $ 0.85 $ 0.42 $ 1.89 $ 0.86
============= ============= ============= =============
Dilutive Earnings Per Share $ 0.77 $ 0.36 $ 1.73 $ 0.76
============= ============= ============= =============
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited
9 Months Ended
----------------------------------------
June 29, 2003 June 30, 2002
------------- -------------
(Dollars in Thousands)
Operating Activities
Net income .......................... $ 8,911 $ 3,909
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization ......... 889 56
Undistributed minority interest........ 6,142 2,209
Change in operating assets and liabilities:
Receivables ...................... (14,009) (5,914)
Inventories ...................... (1,112) (703)
Other .......................... (1,434) (1,307)
Accounts payable .................. 8,782 2,437
Accrued expenses .................. 2,668 53
------------- -------------
Net cash from operating activities .... 10,837 740
------------- -------------
Investing Activities
Purchase of property and equipment (4,207) (305)
Other assets........................... (287) (392)
------------- -------------
Net cash from investing activities (4,494) (697)
------------- -------------
Financing Activities
Borrowings on credit agreements .... 4,658 0
Repayments on credit agreements .... (5,723) (203)
Payments on notes to related parties... (1,474) --
Issuance of common stock .............. 233 333
------------- -------------
Net cash from financing activities (2,306) 130
------------- -------------
Effect of exchange rate changes on cash..... 162 --
------------- -------------
Increase (Decrease) in Cash and Cash
Equivalents ........................... 4,199 173
Cash and cash equivalents at
beginning of period................. 284 300
------------- -------------
Cash and cash equivalents at
end of period....................... $ 4,483 $ 473
============= =============
NOTES TO FINANCIAL STATEMENTS
STARCRAFT CORPORATION
June 29, 2003
Note 1. Basis of Presentation
The accompanying unaudited financial statements of Starcraft
Corporation (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted pursuant to those rules and regulations. Reference is made
to the Company's audited financial statements set forth in its annual
report on Form 10-K for its fiscal year ended September 29, 2002.
In the opinion of the management of the Company, the unaudited
financial statements contain all adjustments necessary for a fair
statement of the results of operations for the three-month and
nine-month periods ended June 29, 2003 and June 30, 2002. The results
of operations for the nine months ended June 29, 2003 are not
necessarily indicative of the results which may be expected for the
year ending September 28, 2003.
Note 2. Principles of Consolidation
The Company has a 50% ownership interest in each of Tecstar, LLC and
Tecstar Manufacturing Canada Limited (collectively "Tecstar"). The
accounts of Tecstar are included in these consolidated financial
statements as the Company is deemed to exercise effective control over
Tecstar's financial policies through its representation on the Boards
of Managers, participation in policymaking processes, and interchange
of managerial personnel.
The Tecstar Board of Managers is made up of three members and has
powers and authorities similar to a corporation's board of directors.
The Company has appointed two of the three members (67%). In addition,
Starcraft Corporation executive officers also hold two key positions
within Tecstar; the Chairman and Chief Executive Officer and the Chief
Financial Officer. Each officer is actively involved in Tecstar's
policymaking decisions.
Note 3. Inventories
The composition of inventories is as follows (dollars in thousands):
(Unaudited) (Audited)
June 29, 2003 September 29, 2002
------------- ------------------
Raw Materials $ 8,622 $ 7,568
Finished Goods 1,353 723
--------- ---------
9,975 8,291
Allowance for slow-moving
and obsolete inventories (659) (87)
--------- ---------
Total $ 9,316 $ 8,204
========= =========
NOTES TO FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 29, 2003
Note 4. Comprehensive Income
Other comprehensive income consists of foreign currency translation
adjustments. Other comprehensive income for the three months and nine
months ended June 29, 2003 was $177. There were no foreign currency
transactions for the corresponding prior year periods.
Note 5. Earnings Per Share
The computation of basic and dilutive earnings per share follows (in
thousands, except share and per share amounts):
3 Months Ended (Unaudited) 9 Months Ended (Unaudited)
--------------------------------- ---------------------------------
June 29, 2003 June 30, 2003 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Basic earnings per share
Net income available
to common stockholders $ 4,053 $ 1,937 $ 8,911 $ 3,909
============= ============= ============= =============
Weighted average common
shares outstanding 4,753 4,592 4,725 4,525
============= ============= ============= =============
Basic earnings per share $ 0.85 $ 0.42 $ 1.89 $ 0.86
============= ============= ============= =============
Dilutive earnings per share
Net income available
to common stockholders $ 4,053 $ 1,937 $ 8,911 $ 3,909
============= ============= ============= =============
Weighted average common
shares outstanding 4,753 4,592 4,725 4,525
Add: Dilutive effects of
incentive stock options 482 766 431 625
------------- ------------- ------------- -------------
Weighted average potential
dilutive common shares outstanding 5,235 5,358 5,156 5,150
============= ============= ============= =============
Dilutive earnings per share $ 0.77 $ 0.36 $ 1.73 $ 0.76
============= ============= ============= =============
During the second fiscal quarter of 2003, the Company declared and issued a
5% Common Stock dividend. As a result, the Company issued 225,460
additional shares of common stock. The number of basic and dilutive shares,
along with the basic and dilutive earnings per share shown above reflect
this stock dividend for all periods shown above.
NOTES TO FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 29, 2003
Note 6. Stock-Based Compensation
During the second quarter ended March 30, 2003, the Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure."
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair market value of the shares at the date of
grant. The Company accounts for the stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, the Company recognizes no compensation expense for
the stock options.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement No. 123 "Accounting for Stock-Based
Compensation.
3 Months Ended 9 Months Ended
------------------------------------ ---------------------------------
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
Net Income - as reported $ 4,053 $ 1,937 $ 8,911 $ 3,909
Deduct: total stock-based employee
compensation expense determined under
fair value based methods for all awards 17 57 112 205
------------- ------------- ------------- -------------
Net income - pro forma $ 4,036 $1,880 $ 8,799 $ 3,704
============= ============= ============= =============
Earnings per share - as reported
Basic Earnings per share $ 0.85 $ 0.42 $ 1.89 $ 0.86
============= ============= ============= =============
Dilutive earnings per share $ 0.77 $ 0.36 $ 1.73 $ 0.76
============= ============= ============= =============
Earnings per share - pro forma
Basic Earnings per share $ 0.85 $ 0.41 $ 1.86 $ $0.82
============= ============= ============= =============
Dilutive earnings per share $ 0.77 $ 0.35 $ 1.71 $ 0.72
============= ============= ============= =============
NOTES TO FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 29, 2003
Note 7. Operating Segment Information
The tables below present information about segments used by the chief
operating decision maker of the Company for the three month and nine month
periods ended June 29, 2003 and June 30, 2002. (Dollars in thousands)
3 Months (Unaudited) 9 Months (Unaudited)
---------------------------------- -----------------------------------
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net sales by operating segment:
OEM automotive supply $ 61,636 $ 28,875 $ 147,526 $ 71,530
Automotive Parts and Products: 481 528 1,644 1,954
------------- ------------- ------------- -------------
Total $ 62,117 $ 29,403 $ 149,170 $ 73,484
============= ============= ============= =============
Operating income (loss):
OEM automotive supply $ 6,773 a $ 1,662 a $ 11,834 a $ 3,922 a
Automotive Parts and Products (52) (193) (282)b (334)
------------- ------------- ------------- -------------
$ 6,721 $ 1,469 $ 11,552 $ 3,588
============= ============= ============= =============
a Includes minority interest in income of subsidiary.
b Includes $75 reserve for termination of the cargo trailer
operation, which was shut down during the second quarter of
fiscal 2003.
The following provides a reconciliation of segment information to
consolidated information:
3 Months (Unaudited) 9 Months (Unaudited)
---------------------------------- -----------------------------------
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
Operating income: $ 6,721 $ 1,469 $ 11,552 $ 3,588
Non-operating expenses (92) (9) (289) (179)
Federal and state income tax expense (2,680) (99) (3,121) (261)
Unallocated corporate income 104 576 769 761
------------- ------------- ------------- -------------
Net income $ 4,053 $ 1,937 $ 8,911 $ 3,909
============= ============= ============= =============
(Unaudited) (Audited)
June 29, 2003 September 29, 2002
Total Assets:
OEM automotive supply $ 60,369 $ 36,026
Automotive Part and Products 3,082 3,066
------------- -------------
$ 63,451 $ 39,092
============= =============
NOTES TO FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 29, 2003
Note 8. Notes Payable to Related Parties
On September 25, 2002, the Company reached an agreement to redeem and
cancel 360,000 outstanding warrants and 500,000 outstanding stock options
previously issued to two individuals, both of whom are currently directors
and one of whom is an officer of the Company. The total cost of the
redemption was $2.5 million, consisting of $1.0 million in cash and $1.5
million in notes payable. The notes were fully paid at June 29, 2003.
Note 9. Warranty Expense
The Company's OEM Automotive Supply segment provides products to Original
Equipment Manufacturers ("OEM") under warranty terms similar to terms
offered by the OEM to its customers, which are generally 3 years or 36,000
miles. The Company accrues an estimated liability for potential warranties
at the time products are sold, based on past experience.
Note 10. Subsequent Events
In July 2003, the OEM Automotive Supply segment purchased the assets of
Troy Tooling, Inc., a low volume specialty manufacturer of RIM and plastic
products for interior and exterior applications primarily for automotive
customers. Troy Tooling, located in Rochester Hills, Michigan, operates in
a 24,000 square foot facility generating approximately $2 million in annual
sales with ten employees. The purchase price of $1.5 million includes an
option to buy the real estate. Troy Tooling is expected to become an
integral part of the Company's aftermarket parts strategy.
Effective August 1, 2003, the Company and Tecstar amended their existing
credit agreements. The amended credit agreements mature on October 1, 2004
and as a result, all borrowings at June 29, 2003 are classified as
long-term debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STARCRAFT CORPORATION
STARCRAFT CORPORATION
RESULTS OF OPERATIONS
Comparison of the three months ended June 29, 2003
(Third Quarter Fiscal Year 2003) to the three
months ended June 30, 2002 (Third Quarter Fiscal
Year 2002)
Net sales for the quarter ended June 29, 2003 increased $32.7 million to $62.1
million from $29.4 million for the quarter ended June 30, 2002. OEM Automotive
Supply sales increased $32.7 million to $61.6 million from $28.9 million. All
four of the OEM Automotive Supply plants and the H2 Hummer parts supply business
were in operation during the third quarter of fiscal 2003. During the comparable
period in fiscal 2002, only three production plants were in production and the
H2 Hummer parts supply business had not begun operation. Automotive parts and
products sales were $0.5 million, basically unchanged from the year-earlier
period.
Gross profits increased to $15.2 million (24.5% of sales) for the fiscal 2003
quarter from $7.6 million (25.7% of sales) for the fiscal 2002 quarter. The
increase in gross profit dollars is attributable to the higher sales level in
the OEM Automotive Supply segment. The slight decrease in gross profit margin
percentage was primarily due to sales of the H2 Hummer parts in the current
quarter. The H2 Hummer parts supply business accounted for 10.9% sales in the
quarter and has a lower profit margin than the Company's main product lines.
There were no sales associated with the H2 Hummer parts supply business or sales
from the fourth production plant located in Canada in the year earlier quarter.
Selling and promotion expense was $0.5 million for the fiscal 2003 quarter,
basically unchanged from the fiscal 2002 quarter. General and administrative
expense was $3.7 million for the fiscal 2003 quarter compared to $3.5 million
for the fiscal 2002 quarter. The increase was primarily attributed to higher
salary and wage related expenses incurred in the OEM Automotive Supply segment
to support higher sales and production levels and prototype expenses related to
the development of new programs. During the quarter, the Company recorded a $1.3
million currency gain related to transactions in its Canadian operations, which
reduced general and administrative expenses. There were no such currency related
transactions in the year earlier period.
Interest expense was lower than a year ago, reflecting lower interest rates on
lower borrowing levels. Minority interest results from the Company owning 50% of
the OEM Automotive Supply segment. The Company does not have U.S. federal income
tax expense at this time due to existing operation loss carry forwards generated
from prior year losses that were fully reserved. However, the Company is
incurring foreign income tax expense attributed to its operation in Canada.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
STARCRAFT CORPORATION
RESULTS OF OPERATIONS
Comparison of the nine months ended June 29, 2003
(Third Quarter Fiscal Year 2003) to the nine
months ended June 30, 2002 (Third Quarter Fiscal
Year 2002)
Net sales for the nine months ended March 30, 2003 increased $75.7 million to
$149.2 million from $73.5 million for fiscal 2002 period. OEM Automotive Supply
sales increased $76.0 million to $147.5 million from $71.5 million. Three of the
OEM Automotive Supply plants and the H2 Hummer parts supply business were in
operation during the nine months of fiscal 2003. A new fourth production plant,
located near Toronto, Canada, began commercial operation in the second fiscal
quarter of 2003. During the comparable period in fiscal 2002, three production
plants were in production and the H2 Hummer parts supply business had not begun
operation. The H2 Hummer parts supply business did not begin operation until the
fourth quarter of fiscal 2002. Automotive parts and products sales were $1.6
million, a decrease of $0.3 million from prior year levels, primarily attributed
to lower sales associated with the kit business in Mexico.
Gross profit increased to $34.5 million (23.2% of sales) for the fiscal 2003
period from $18.4 million (25.0% of sales) for the comparable fiscal 2002
period. The increase in gross profit dollars is attributable to the higher sales
levels in the OEM Automotive Supply Segment. The decrease in gross profit margin
percentage was primarily due to sales of the H2 Hummer parts supply business in
the current nine-month period and expenses incurred for the start-up of the
Canadian production operation. The H2 Hummer parts supply business accounted for
16.3% sales in the current nine-month period and has a lower profit margin than
the Company's main product lines. The Company also incurred $0.9 million of
start-up expenses in the current nine-month period related to the start-up of
the new production facility in Canada. There were no H2 Hummer parts or Canadian
sales in the year earlier nine-month period.
Selling and Promotion expense was $1.4 million for the fiscal 2003 period,
comparable to the year earlier period. General and administrative expense was
$12.2 million for the fiscal 2003 period compared to $9.2 million for the
comparable 2002 period. This increase is primarily attributed to higher salary
and wage related expenses incurred in the OEM Automotive Supply segment to
support higher sales and production levels. During the period, the Company
recorded a $1.3 million currency gain related to transactions in its Canadian
operations, which decreased general and administrative expenses. There were no
such transactions in the year earlier period. Interest expense was $0.3 million,
lower than year earlier levels, attributed to lower interest rates.
SEASONALITY AND TRENDS
The Company's OEM automotive supply business sales and profits are dependent on
the automotive markets in the United States. The business is influenced by a
number of factors including OEM plant shutdowns, model year changeovers,
atypical weather for any sales region, interest rates, gasoline prices, and OEM
programs affecting price and supply.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
In the ordinary course of business, the OEM Automotive Supply segment has
entered into multiple contracts of varying size and duration with General Motors
(GM). At the end of these contracts, the Company seeks to replace the expiring
contracts with similar contracts. However, the Company can provide no assurances
it will be able to continue to do so in the future. To mitigate this potential
exposure, the Company structures its facility leases and vendor supply contracts
to correspond with the terms of its GM contracts.
LIQUIDITY AND CAPITAL RESOURCES
Funds available from operations and under the Company's revolving credit
agreement were adequate to finance operations and provide for capital
expenditures during the nine months ended June 29, 2003. Long-term debt was
$11.6 million at June 29, 2003, compared to $12.7 million at September 29, 2002.
The decrease reflects management's decision to retain profits to strengthen the
balance sheet and grow the business.
Operations generated $10.8 million of cash in the first nine months of fiscal
2003 compared to generating $0.7 million in the comparable fiscal 2002 period.
Trade receivables at June 29, 2003 were $15.6 million higher than September 29,
2002, due to the higher sales volume.
Inventory balances at June 29, 2003 were $9.3 million, up $1.1 million from
levels at September 29, 2002, primarily due to the new production facility in
Canada. Other current assets were $3.3 million at June 30, 2003 compared to $1.9
million at September 29, 2002; this increase is primarily attributed to the
investment in potential new sales programs by the OEM Automotive Supply segment
and timing of tooling and engineering reimbursements from customers.
In February 2002, the Company's OEM Automotive Supply segment ("Tecstar")
entered into a $10 million revolving credit agreement with a lending institution
with an original maturity date of April 1, 2004. In May 2002 and again in April
2003, the facility was amended to increase the size of the facility to
accommodate growth in Tecstar's business. Advances under the amended agreement
are limited to a specified percentage of eligible receivables and inventories,
subject to a maximum of $20.0 million. At June 29, 2003, Tecstar had $10.5
million of outstanding advances under its revolving facility. The advances bear
interest subject to a margin table with ranges of 1/2% below the prime rate to
1/2% above the prime rate, dependent upon Tecstar's tangible net worth. The
borrowings are collateralized by substantially all of Tecstar's assets. This
facility is subject to various loan covenants with which Tecstar is in
compliance as of June 29, 2003. Subsequent to the end of this reporting period,
on August 1, 2003, the facility was amended to extend its maturity date to
October 1, 2004. As a result, borrowings under the facility are classified as
long-term debt.
In June 2002, the Company entered into a $2 million revolving credit with an
original maturity date of April 1, 2004. The facility was provided by the same
lending institution that provided Tecstar's credit facility. At June 29, 2003,
the Company had $1.1 million of outstanding borrowings under its revolving
credit facility. Advances under the revolving credit agreement bear interest at
a rate of 1% over the prime rate and are collateralized by substantially all of
the Company's assets. In addition, a portion of the credit facility is
guaranteed by an individual who is a director and officer of the Company. The
facility is subject to various loan covenants, with which the Company is in
compliance as of June 29, 2003. Subsequent to the end of this reporting period,
on August 1, 2003, the facility was amended to extend its maturity date to
October 1, 2004. As a result, borrowings under the facility are classified as
long-term debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
In February 2003, the Company entered into an office lease agreement with a
company owned by a group of investors. Two of the members of the ownership group
are currently directors / officers of the Company. Costs associated with the
lease were based on similar arms-length transactions and approximates fair
market value. The lease has an initial term of three years and provides for
initial rental of $6,250 per month. It is being accounted for as an operating
lease.
The Company believes that future cash flows from operations and funds available
under its revolving credit agreement will be sufficient to satisfy its
anticipated operating needs and capital requirements for 2003. The Company also
believes that its objectives for growth over the next few years can be
accomplished with minimal capital investment and that its internal resources and
existing or refinanced credit facilities will provide sufficient liquidity for
such purposes.
MANUFACTURING AND OPERATING TRENDS
All components for the OEM automotive supply segment are purchased from outside
suppliers. The primary raw material used in the components is plastic that the
Company believes is readily available from several sources. One of Tecstar's
primary plastics vendors has recently filed for reorganization under the
Bankruptcy Code. To date, no supply problems have been encountered. However, to
mitigate any potential supply disruptions, the Company has established
relationships with additional suppliers.
The OEM Automotive Supply segment program related to the Shreveport, Louisiana
facility is due to end in September 2003. Sales for this program accounted for
5.4% of total Company sales for the first nine months of 2003. GM has announced
plans to introduce a replacement vehicle to be produced in its Shreveport,
Louisiana facility. During the quarter, the Company was informed it would not be
awarded the primary contract on the replacement vehicle. However, GM has
expressed an interest in having the Company provide other services out of the
Shreveport facility. The Company will defer any decision regarding the
Shreveport facility until the first quarter of fiscal 2004.
In July 2003, the OEM Automotive Supply segment purchased the assets of Troy
Tooling, Inc., a low volume specialty manufacturer of RIM and plastic products
for interior and exterior applications primarily for automotive customers. Troy
Tooling, located in Rochester Hills, Michigan, operates in a 24,000 square foot
facility generating approximately $2 million in annual sales with ten employees.
The purchase price of $1.5 million includes an option to buy the real estate.
Troy Tooling is expected to become an integral part of the Company's aftermarket
parts strategy.
During the quarter, the Company's OEM Automotive Supply segment received several
new contracts for engineering, design and installation services for the 2004
model year, which begins in September 2003. The contracts include installation
of ZR2 model upfit packages for specific models of the Chevrolet Blazer at its
plant in Bridgewater, N.J. In addition, the Company will offer a 20" wheel to GM
dealers. The wheel will be engineered to GM's specifications and distributed
through GM's parts subsidiary directly to GM dealers for installation. The
custom wheel will fit GM's 800 series trucks including Suburbans, Tahoes,
Silverados, Yukons and Escalades. The OEM Automotive supply segment was also
awarded a contract to engineer the components for new special edition vehicles
on the Chevrolet Trailblazer and GMC Envoy. GM expects to implement production
vehicles for these new modesl in the mid-2004 or early 2005 model years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
The Company's OEM Automotive Supply segment provides products to Original
Equipment Manufacturers under warranty terms similar to those offered by the OEM
to its customers. The Company accrues an estimated liability for potential
warranties at the time products are sold, based on past claims experience.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
In the course of normal business and in the preparation of its consolidated
financial statements in accordance with accounting principles generally accepted
in the United States, management is required to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results
could differ from those estimates. The significant policies under which such
estimates and assumptions are made include:
Revenue Recognition: The Company generally manufactures products based on
specific orders from customers. Shipments are generally made by common carrier
after receiving authorization from the customer, and revenue is recognized upon
shipment under FOB factory terms.
Warranties: The Company follows the policy of accruing an estimated liability
for warranties at the time the warranted products are sold. The estimate is
generally based on past claims experience.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed principally by the straight-line method over the estimated useful
lives of the assets. The Company is depreciating buildings over periods of 15 to
50 years, building improvements over periods of 5 to 20 years, and equipment
over periods of 3 to 12 years
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
INCOME TAXES
At this time, the Company does not have U.S. federal income tax expense due to
existing operating loss carryforwards generated from prior year losses that were
fully reserved. The Company is incurring Canadian taxes related to its operation
in Canada.
At some point in the future, as the operating loss carryforwards are utilized,
the Company will begin recording U.S. federal income taxes, along with Canadian
taxes. At June 29, 2003, the estimated operating loss carryforwards were
estimated to be $5.2 million. Management believes the proforma information
presented below is useful to enable a reader to determine the impact income
taxes would have on earnings, if the Company had not incurred the operating loss
carryforwards in prior years. The following table illustrates the effect on net
income and earnings per share as if the Company were incurring income tax
expenses at a 40% effective tax rate for the quarterly and nine-month periods
ended June 29, 2003 and June 30, 2002, respectively.
3 Months Ended 9 Months Ended
------------------------------------ ---------------------------------
June 29, 2003 June 30, 2002 June 29, 2003 June 30, 2002
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
Net Income - as reported $ 4,053 $ 1,937 $ 8,911 $ 3,909
Deduct: pro-forma provision for
income taxes 772 745 2,578 1,471
------------ -------------- ----------- -------------
Net income - pro forma $ 3,281 $ 1,192 $ 6,333 $ 2,438
============= ============= ============= =============
Earnings per share - as reported
Basic Earnings per share $ 0.85 $ 0.42 $ 1.89 $ 0.86
============= ============= ============= =============
Dilutive earnings per share $ 0.77 $ 0.36 $ 1.73 $ 0.76
============= ============= ============= =============
Earnings per share - pro forma
Basic Earnings per share $ 0.69 $ 0.26 $ 1.34 $ 0.54
============= ============= ============= =============
Dilutive earnings per share $ 0.63 $ 0.22 $ 1.23 $ 0.47
============= ============= ============= =============
The foregoing discussion contains forward-looking statements regarding the
Company's business operations and outlook, including projections of revenues and
earnings. Investors are cautioned that actual results may differ materially from
such forward-looking statements. Forward-looking statements involve risks and
uncertainties including, but not limited to, domestic and international economic
trends, the level of customer demand for the Company's products, competitive
pressures, integrating acquisitions, labor and operational issues, dependence on
and compliance with GM customer contracts, and the prospects of Management's
operating strategies, all of which are subject to a number of important factors,
which may cause the Company's projections to be materially inaccurate. Some of
such factors are described in the Company's Form 10-K for the year ended
September 29, 2002, under the subsection entitled ""Discussion of
Forward-Looking Information" which is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
STARCRAFT CORPORATION
Starcraft carried out an evaluation, under the supervision and with the
participation of Starcraft's management, including Starcraft's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of Starcraft's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, at June 29, 2003, Starcraft's disclosure
controls and procedures are effective in accumulating and communicating to
management (including such officers) the information relating to Starcraft
(including its consolidated subsidiaries) required to be included in Starcraft's
periodic SEC filings.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with the report:
4.1. Amendment to the Loan Agreement between Starcraft
Corporation and Comerica Bank, dated August 1, 2003.
4.2 Amendment to the Loan Agreement between Tecstar, LLC and
Comerica Bank, dated August 1, 2003.
4.3 Amendment to the Loan Agreement between Tecstar
Manufacturing Canada, Ltd and Comerica Bank, dated August 1,
2003.
31.1 Certification by Chief Executive Officer required by Rule
13a-14(a) or 15d-14(a).
31.2 Certification by Chief Financial Officer required by Rule
13a-14(a) or 15d-14(a).
32 Certification required by Rule 13a-14(b)or 15d-14(b).
(b) No reports on Form 8-K were filed by the registrant for the
Period covered by this report.
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.
STARCRAFT CORPORATION
(Registrant)
August 6, 2003 By: /s/ Timothy L. Burke
---------------------------
Timothy L. Burke
Chief Financial Officer