United States
Securities and Exchange Commission
Washington, D.C. 20547
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 28, 2003.
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: 0-22048
STARCRAFT CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 34-1817634
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Post Office Box 1903, 1123 South Indiana Avenue, Goshen, Indiana 46526
(Address of Principal Executive Offices)
Registrant's telephone number including area code: (574) 534-7827
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ___ No X
Indicate by check mark whether the registrant is an accelerated, filer (as
defined in rule 126-2 of the Act). Yes X No ____
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 28, 2003, was $111,136,687.
The number of shares of the Registrant's Common stock, without par value,
outstanding as of December 5, 2003, was 4,881,127 shares.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10K into
Which the Document
Document is Incorporated
-------- ---------------------
Portions of the Proxy Statement for the Part III
2004 Annual Shareholders Meeting
STARCRAFT CORPORATION
Form 10-K
Index
PART 1
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Item 9a. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Account Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on form 8-K.
Signatures
PART I
ITEM 1. BUSINESS
OVERVIEW
Starcraft Corporation, including Tecstar, LLC and Tecstar Manufacturing Canada
Limited (the "Company" or "Starcraft"), an Indiana corporation founded in 1990,
is a second-stage manufacturer of motor vehicles, primarily pick-up trucks and
sport utility vehicles. The business is comprised of two segments: An original
equipment manufacturer ("OEM") automotive supply segment and an automotive parts
and products segment. The OEM Automotive Supply segment provides and installs
upfit appearance items on vehicles provided by and returned to OEM's. The
automotive parts and products segment is primarily aftermarket parts sold to
wholesale and retail customers to customize their vehicles.
BACKGROUND
Starcraft traces its history to 1903 when Star Tank Company was founded in
Goshen, Indiana as a maker of metal farm equipment. Over the course of the
century the Company's predecessor became a leading manufacturer of aluminum
boats and recreational vehicles and, in the late 1970's, led the automotive
conversion industry by producing luxury van conversions for middle and upper
income consumers. In 1987, the predecessor's management completed a leveraged
buyout and, in 1988, sold the boat manufacturing business. On January 18, 1991,
the Company purchased the assets of the automotive and recreational vehicle
divisions, and simultaneously sold the recreational vehicle division to a third
party.
In July 1994, the Company acquired substantially all of the assets of Imperial
Industries, Inc., another conversion vehicle manufacturer. In February 1997, the
Company purchased the assets of National Mobility Corporation in Elkhart,
Indiana, a manufacturer of vehicles for the mobility impaired. In October 1997,
the Company started an OEM Automotive Supply business with a partner called
Tecstar. The primary purpose of this business is to provide final exterior and
interior assemblies on vehicles directly to the OEM automobile manufacturers and
is currently the primary driver of the Company's OEM Automotive Supply segment.
In February 1998, the Company started manufacturing and marketing commercial
shuttle buses. In May 2001, the Company sold its unprofitable van conversion
business. In August 2001, the Company sold its bus and mobility business. The
results of these two businesses are recorded in the Company's financial
statements as discontinued operations in fiscal 2001. In May 2002, the Company
started Tecstar Manufacturing Canada Limited, an OEM Automotive Supply business,
similar to Tecstar.
The Company became a public company in July 1993 and its shares are currently
trading on the Nasdaq Small Cap Market under the ticker symbol "STCR."
SUBSEQUENT EVENT
On October 29, 2003, the Company and Wheel to Wheel Acquisition Company, LLC, an
Indiana limited liability company and a wholly owned subsidiary of the Company
(the "Acquisition Subsidiary"), entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Wheel to Wheel, Inc., a Michigan corporation
("Wheel to Wheel"), and the shareholders of Wheel to Wheel (the "Shareholders").
The Merger Agreement provides for the acquisition of Wheel to Wheel by the
Company pursuant to a merger of Wheel to Wheel with and into the Acquisition
Subsidiary (the "Merger"), with the Acquisition Subsidiary surviving the Merger
and continuing as a wholly owned subsidiary of the Company.
Wheel to Wheel owns 50% of Starcraft's joint venture subsidiaries Tecstar, LLC
and Tecstar Manufacturing Canada Limited. As a result of the Merger, the Company
will own directly or indirectly 100% of the equity interests in the Tecstar
entities and Wheel to Wheel.
In the Merger, and subject to the terms and conditions of the Merger Agreement,
the Shareholders of Wheel to Wheel collectively will receive 3,550,000 shares of
Starcraft common stock. The shares of Starcraft common stock will be allocated
to the Shareholders proportionally in accordance with the Shareholder's
ownership of Wheel to Wheel. The completion of the Merger is subject to the
approval of the issuance of shares required to effect the Merger by the
shareholders of Starcraft (as required by Nasdaq), receipt of necessary
approvals or expiration of any regulatory waiting period under United States
antitrust laws, and other customary closing conditions.
The Merger Agreement provides that the Company will enter into employment and
non-competition agreements with the three key executives of Wheel to Wheel when
the merger becomes effective. It further restricts transfer of the shares to be
issued in the merger for two years, with provisions for up to approximately
500,000 shares in 2004 and 300,000 shares in 2005 to be available for sale
without contractual restriction, subject to compliance with applicable
securities laws and Company policy.
FINANCIAL INFORMATION ABOUT REPORTABLE SEGMENTS
The following table sets forth for the percentage of net sales and operating
income for the Company's operating from each reportable segment for fiscal years
ended September:
Percent of Net Sales
-----------------------------------------------
2003 2002 2001
OEM Automotive Supply 98.9% 97.5% 89.3%
Automotive parts and products 1.1% 2.5% 10.7%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Percent of Operating Income
-----------------------------------------------
2003 2002 2001
OEM Automotive Supply (a) 105.5% 104.3% 26.1%
Automotive parts and products (5.5%) (4.3%) 73.9%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
(a) Includes minority interest in income of subsidiary
Financial information for the Company's reportable business segments is set
forth in Note 12 to the Consolidated Financial Statements appearing in Item 8 of
this report.
OEM Automotive Supply
In 1998, the Company started a new operation with Wheel to Wheel to supply
conversion vehicle type products directly to OEM automotive customers as a Tier
1 automotive supplier. In 2002, the Company invested in a similar operation in
Oshawa, Ontario, Canada with Wheel to Wheel. In October 2003, the Company and
Wheel to Wheel jointly acquired Tarxien Automotive Products, a paint and
injection molding business located in Ontario, Canada. The Company currently
owns 50% of these enterprises, which are collectively referred to as "Tecstar".
All of Tecstar's OEM Automotive Supply sales in 2003, 2002 and 2001 were to
General Motors Corporation ("GM") and its subsidiaries.
Tecstar's strategy is to provide OEM's with faster time to market, less costly,
high quality exterior and interior appearance packages. At September 28, 2003,
Tecstar operated four manufacturing facilities in close proximity to the OEM
vehicle assembly plants. Each facility is QS 9001 registered. Tecstar also
operates a parts distribution operation supplying parts for the H2 Hummer to OEM
dealers.
Tecstar receives vehicle chassis from the OEM and adds certain appearance items
such as ground effects, wheels and badging. Chassis are provided by the OEM on a
drop-ship basis and are not included in the sales of the Company. After
completing the final appearance assembly work, the vehicles are placed back into
the normal OEM distribution stream. The vehicles carry the full OEM warranty and
are marketed directly by the OEM through its dealerships. Tecstar engineers and
validates the products to OEM standards. Programs range from two to five years
and are backed by contractual agreements with the OEM. A summary of contract
lengths and sales is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, Item 7 of this report. Tecstar
provides a limited warranty of its products to the OEM, which is substantially
the same as the OEM warranty provided to the OEM's retail customers.
The major domestic market for Tecstar's products is highly competitive.
Competition is based primarily on price, product engineering and performance,
technology, quality and overall customer service, with the relative importance
of such factors varying among products. Tecstar's global competitors include a
large number of other well-established independent manufacturers.
The Company's OEM Automotive Supply sales are directly impacted by the size of
the automotive industry and GM's market share. Further, GM periodically reduces
production or closes plants for several months for model changeovers. During the
fourth quarter of fiscal year 2000 and continuing into the second quarter of
fiscal 2001, one of the Company's manufacturing facilities was substantially
shut down as a result of a GM vehicle model changeover. This adversely affected
the Company's 2000 and 2001 financial results. The facility was back in
production in the third quarter of fiscal 2001. Accordingly, a decline in sales
in the automotive market or in GM's automotive sales, or production cutbacks and
plant shut downs for model changeovers by GM, could have an adverse impact on
the Company's sales and profits. Sales of the automotive supply segment are
subject to long-term contracts with GM. The customer at its option may extend or
reduce the terms of such contracts depending upon market conditions and chassis
manufacturing plans. Continued sales and growth of this segment is subject to
the Company's ability to continue to satisfactorily perform and to obtain such
contracts over time.
At September 28, 2003, Tecstar's backlog of firm orders was $4.3 million
compared with a backlog of $3.6 million at September 29, 2002. The increase in
backlog is primarily due to the addition of the Ontario, Canada operation in
2003. Tecstar utilizes an independent manufacturer representative to market and
sell its services.
Automotive parts and products
The Company purchases for resale and manufactures conversion vehicle parts for a
variety of cars, conversion vans, pick-up trucks and sport utility vehicles
(SUVs). The Company also purchases and resells seats, carpeting, electronics,
ground effects and other items that enhance passenger comfort and safety.
Automotive parts and products are sold directly to vehicle owners and through
OEM automobile dealers and automotive repair shops. The Company sells these
products primarily in North America, but also exports to Northern Europe and
Asia.
Sales by the automotive parts and products segment declined in 2003, primarily
due to an overall decline in the domestic conversion vehicle industry over the
last several years. A primary factor for this decline is the increased
popularity of SUVs and pickup trucks. However, over one million conversion
vehicles have been manufactured over the last several years and a substantial
number are still in use. During the life of the conversion vehicle, many
conversion components, including exterior ground effects, wheels, seating,
electronics, carpet and wood trim are replaced. Based on this information, the
Company believes an opportunity exists to grow this segment of its automotive
parts and products business. However, because of the overall decline of the
conversion van market, and to offset any potential decline in sales of
conversion vehicle parts, the Company is broadening its product lines offered to
customers. One of the segments offering significant opportunity is in the sale
of vehicle parts to the youth market. The Company believes its Midwest location
and its strong brand name will provide a platform for growth. However, high
gasoline prices, a slowing economy, or higher interest rates may negatively
impact the growth of this business segment.
The Company also purchases conversion kits in the United States and ships the
kits to a vendor in Mexico. The kits are installed on van chassis and then sold
to approximately 20 automobile dealers throughout Mexico. The Company started
its conversion kit assembly business in Mexico in the fiscal 2000 as part of a
strategy to expand its conversion vehicle business into Central and South
America. The Company does not believe it has any significant competition in this
market. Sales may be negatively impacted by the Mexican economy, a disruption in
the supply of kits and the availability of OEM chassis. The Company recorded a
$400,000 expense in 2003 to reserve for the potential closing of this operation
in 2004.
During the second quarter of fiscal 2003, the Company discontinued the cargo
trailer division. This operation did not achieve its expected results and its
prospects for improvement were not sufficient to continue its operation. The
division lost $177,000 for the fiscal year, including a $75,000 reserve against
earnings to cover potential future costs associated with this action. Management
has deemed the results of this operation to be immaterial. Therefore, the
division's operations are not reflected as discontinued operations in the
Company's consolidated financial statements.
At September 28, 2003, the automotive parts and products segment had a backlog
of $33,000 compared with a backlog of $158,000 at September 29, 2002. The
backlog declined from prior year levels, primarily due to the closing of the
cargo trailer division. The Company considers such backlog orders to be
reasonably firm. All of the Company's products are subject to seasonal sales
influences and sales tend to be stronger during March through October.
In conjunction with the sale of the conversion vehicle business, the Company was
obligated to repurchase certain obsolete inventory. In 2003, the Company offset
this obligation against future license fees. Further, the Company has
indemnified the purchaser of the bus and mobility business if warranty expenses
exceed amounts assumed by the purchaser. The Company believes it had recorded
adequate reserves at September 28, 2003. However, there is no assurance that
these reserves will be sufficient to offset actual obligations assumed under
these agreements.
Competition in the automotive parts and products segment is very strong. The
Company competes with conversion vehicle manufacturers and other automotive
parts suppliers. There is no assurance that the Company will be able to retain
its current customers or add new customers in the future.
PATENTS AND TRADEMARKS
Trademarks. The Company's predecessor manufactured boats, motor homes and other
recreational vehicles under the name "Starcraft." The boat manufacturing
business was sold by the Predecessor to Brunswick Corporation in 1988 which
subsequently sold the business. The Company initially acquired the recreational
vehicle business in the Predecessor's 1991 reorganization proceeding, but
immediately sold it to an RV company. The Predecessor's Canadian conversion
business was acquired by a Canadian firm. A corporation in the boating industry
has independently registered and owns the "Starcraft" and related trademarks for
use with boats and marine products and thus the Company has no control over the
quality of boats produced and sold under the "Starcraft" mark. The Company
retains ownership of "Starcraft" and related registered marks for use with
automotive, recreational vehicle products, conversion vans, shuttle buses and
mobility vans. It licenses the use of the "Starcraft" brand to owners of the
Predecessor's RV business, as well as the purchasers of its conversion and bus
and mobility businesses. While it has some control over the quality of its
licensees' products, it does not control all aspects of their businesses. The
agreement for the sale of the Company's conversion vehicle business requires the
purchaser to pay royalties of $100 for each conversion vehicle unit sold for the
five years beginning April 2002. These royalties will be partially offset by
obsolete inventory that was returned to the Company under the 2001 Agreement to
sell the van conversion business.
MANUFACTURING
OEM automotive supplier segment manufacturing facilities have been established
in Louisiana, Texas and New Jersey in the United States and in Oshawa, Ontario,
Canada. All facilities are located near GM assembly plants. Tecstar also has an
engineering and a parts distribution operation near of Detroit, Michigan. In
addition, Tecstar operates a tooling and plastics manufacturer in Rochester
Hills, Michigan and a paint and injection plastics molder in Ontario Canada.
Most automotive parts and products are purchased for resale. Certain wood parts
are manufactured at the Company's Goshen, Indiana facility.
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 experienced some financial difficulties.
To date, no supply problems have been encountered. However, to mitigate any
potential supply disruptions, Tecstar has established relationships with
additional suppliers. The primary components for automotive parts and products
are also purchased from outside suppliers. The principal raw materials used in
the manufacturing process are fabric and plywood. The Company's products are
generally produced to firm orders and are designed and engineered by the
Company. However, from time to time the Company may experience delays in
delivery of certain components or materials from suppliers.
SAFETY AND REGULATION
The manufacture, distribution and sale of the Company's products are subject to
governmental regulations in the United States at the federal, state and local
levels. The most extensive regulations are promulgated under the National
Traffic and Motor Vehicle Safety Act which, among other things, empowers the
National Traffic and Motor Vehicle Safety Administration ("NHTSA") to require a
manufacturer to remedy vehicles containing "defects related to motor vehicle
safety" or vehicles which fail to conform to all applicable federal motor
vehicle safety standards.
Federal Motor Vehicle Safety Standards are promulgated by the NHTSA. Many of the
Company's components are affected by these standards. The Company engages
various testing companies, which also performs testing for NHTSA, to test the
Company's components. The Company's components subject to these standards were
determined to meet or exceed them. Promulgation of additional safety standards
in the future could require the Company to incur additional testing and
engineering expenses which could adversely affect the Company's results of
operations. NHTSA can require automotive manufacturers to recall products. The
Company has not experienced any material recalls.
The Company's international sales are subject to foreign tariffs and taxes,
changes in which are difficult to predict and which can adversely affect sales.
Starcraft's products must also comply with government safety standards imposed
in its foreign markets.
Both federal and state authorities have various environmental control standards
relating to air, water and noise pollution that affect the business and
operations of the Company. The Company believes that it has complied in all
material respects with applicable environmental regulations and standards and
does not currently expect that any failure of compliance will have any material
adverse effect on the Company.
Like other automotive manufacturers, the Company may be subject to claims that
its products caused or contributed to damage or injury sustained in vehicle
accidents or may be required to recall products deemed unsafe. Any such claims
in excess of the Company's insurance coverage or material product recall
expenses could adversely affect the Company's financial condition and results of
operations.
EMPLOYEES
As of September 28, 2003, the Company employed 419 people. Of these, 325
were production line associates and 94 were salaried sales, engineering and
administrative staff. In addition, Tecstar utilized 198 contract laborers in its
plants in addition to its employee personnel. During peak production periods,
the Company may increase its work force. Historically, the available labor force
has been adequate to meet such periodic requirements. The Company considers its
relationships with its personnel to be satisfactory.
ITEM 2. PROPERTIES
The following table summarizes the Company's properties as of September 28,
2003:
Size of Owned or Lease Term
Location Facility Leased Remaining Type of Operation
-------- -------- -------- --------- -----------------
Goshen, Indiana 5,000 s.f. Leased 3 Years Executive and Administrative
Offices
Goshen, Indiana Owned N/A Parts warehouse, Offices and
10,000 s.f. Manufacturing, Automotive
Parts and Products Segment
Shreveport, Louisiana 38,000 s.f. Leased Month-to- Month Manufacturing and Assembly,
OEM Automotive Supply Segment
Manufacturing and Assembly,
4 Years OEM Automotive Supply Segment
Haslett, Texas* 200,000 s.f. Leased
Bridgewater, NJ 38,000 s.f. Leased Month-to-Month Manufacturing and
Assembly, OEM
Automotive Supply
Segment
Madison Heights, MI 40,000 s.f. Leased 3 Years Offices, Engineering and
Production Development,
OEM Automotive Supply Segment
Parts Warehouse and Offices,
Livonia, MI 25,000 s.f. Leased 4 Years OEM Automotive Supply Segment
Manufacturing and
Assembly, OEM
Oshawa, 79,000 s.f. Leased 10 Years Automotive Supply
Ontario, Canada Segment
Tooling and RIM plastics
manufacturing, OEM Automotive
Rochester Hills, MI 24,000 s.f. Leased 6 Months Supply Segment
Paint and injection molding
manufacturing, OEM Supply
Vaughan, Ontario, 67,000 s.f. Leased 4 Years Segment
Canada
Engineering and specialty car
manufacturing, OEM Automotive
Walled Lake, MI 20,000 s.f. Leased 3 Years Supply Segment
* The Haslett, Texas lease is ten years with an option to cancel at five
years.
ITEM 3. LEGAL PROCEEDINGS
The Company does not anticipate that any pending legal proceeding to which it is
party will have any material adverse effect on its financial conditions or
results of operations. The Company maintains product liability insurance which
it currently considers adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Starcraft's Common Stock is quoted on the Nasdaq Stock Market, Inc. ("Nasdaq"),
Small Cap Market. As of November 28, 2003, there were 48 shareholders of record
of Starcraft's Common Stock. The Company believes its shares are owned
beneficially by approximately 2,050 beneficial owners.
The following table sets forth the high and low closing prices per share of
Common Stock for the quarters ended as quoted on the Nasdaq.
Quarter Ended
High Low
December 30, 2001 $4.00 $2.14
March 31, 2002 4.86 3.62
June 30, 2002 5.90 3.47
September 29, 2002 7.48 4.61
December 29, 2002 7.71 6.19
March 30, 2003 12.72 6.61
June 29, 2003 23.50 9.70
September 28, 2003 38.65 19.10
Dividend Policy. 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 Company has paid no cash dividends since
its initial public offering. The Company currently intends to retain earnings
for use in the operation and expansion of its business and, therefore, does not
anticipate paying cash dividends on Common Stock in the foreseeable future. The
payment of dividends is within the discretion of the Board of Directors and will
be dependent, among other things, upon earnings, capital requirements, any
financing agreement covenants and the financial condition of the Company.
Anti-Takeover Provisions. Indiana law and the Company's Articles of
Incorporation and Code of By-laws contain provisions that restrict the
acquisition of control of the Company. Such provisions can affect the rights of
shareholders acquiring substantial interests in the Company's shares. For
example, a shareholder who acquires more than 10% of the Company's shares
without prior board approval will be limited in the timing and terms of any
transaction it may enter into with the Company and will be subject to related
provisions.
SHAREHOLDER RIGHTS PLAN
In August 1997, the Company adopted a Shareholders Rights Plan issuing one right
for each outstanding share of common stock. Each right entitles the registered
holder to purchase from the Company one share of common stock at $15 per share,
subject to adjustment. The rights become exercisable if a person or group (other
than certain related persons) acquires or announces a tender offer for
prescribed percentages of the Company's shares or is declared an "adverse
person" by the Company's Board of Directors. In these events, each right holder
may purchase shares with a value equal to twice the exercise price. Furthermore,
if the Company engages in certain mergers or similar business combinations a
right holder may purchase shares of the acquiring company with a value of two
times the purchase price of the right. The rights expire on August 12, 2007.
SALES OF UNREGISTERED SECURITIES
In 2003, Starcraft Corporation sold 9,250 shares of common stock to independent
sales representatives in connection with the exercise of a non-qualified stock
option for a total of $13,502. Such issuance was exempt from registration under
Section 4(2) because the issuance of the shares to the representative was
effected without any public offering.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes the number of shares issuable under Starcraft's
equity compensation plans, the weighted-average exercise price and the number of
shares available for issuance, as of September 28, 2003.
C)
Number of securities
(A) (B) remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price equity compensation
of outstanding options, for outstanding options, plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders(1)(2) 686,525 $6.50 132,217
Equity compensation plans
not approved by security holders(2) 1,050 1.43 26,000
Total 687,575 $6.49 158,217
- ----------------------------------------------------------------------------------------------------------
(1) The foregoing information is provided for previously approved plans before
giving effect to proposed amendments presented herein for approval at the
annual meeting. Of such shares, (i) 256,725 options remained exercisable at
year-end under the 1993 Incentive Plan, but no further awards may be made
under that plan; and, of those, only 204,225 remain exercisable at the date
hereof; (ii) 424,425 options were outstanding at year-end under the 1997
Incentive Plan, and an additional 132,217 shares are currently available
for issuance thereunder, either as options or as awards of shares, as
described above; and (iii) up to 30,000 additional shares may be awarded to
directors under the Directors Share Plan, under which directors are
permitted to receive shares of stock in lieu of current or deferred fees
for board service.
(2) Includes awards of options to Mr. Rose and Mr. Schoeffler for 79,525 and
27,750 shares, respectively, in excess of the current limit on awards to an
individual awardee under the 1997 Incentive Plan, as described above.
Shareholders are being asked to approve an amendment increasing such limit
at the 2004 annual meeting.
(3) The only equity compensation plan not approved by shareholders is the
Starcraft Corporation Sales Representatives Option Plan which provides for
the issuance of options for restricted shares to certain independent sales
representatives of Starcraft.
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousand, except per share data) Year Ended
- ---------------------------------------------------------------------------------------------------------------------
Income Statement Data Sept. 28, Sept. 29, Sept. 30, Oct. 1, Oct. 3,
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Net Sales:
Domestic $191,401 $ 104,422 $ 48,647 $ 75,176 $ 36,102
Export 701 262 287 139 281
Total Net Sales 192,102 104,684 48,934 75,315 36,383
Cost of Goods Sold 147,835 79,748 38,184 56,719 28,105
Gross Profit 44,267 24,936 10,750 18,596 8,278
Operating Expenses 19,163 15,515 9,898 8,336 4,444
Compensation Expense From Warrant
and Option Redemption --- 2,096 --- --- ---
Operating Income 25,104 7,325 852 10,260 3,834
Interest Expense (457) (476) (547) (864) (719)
Other Income, Net 33 589 293 82 115
Income Before Minority 24,680 7,438 598 9,478 3,230
Interest and Income Taxes
Minority Interest 10,832 4,087 70 4,918 2,448
Income Tax Expense (Credit) 2,060 388 26 379 (21)
Income from Continuing Operations 11,788 2,963 502 4,181 803
Loss from Discontinued Operations --- --- (3,679) (8,528) (281)
Net Income (Loss) $ 11,788 $ 2,963 $(3,177) $ (4,347) $ 522
Weighted Average Common
Shares Outstanding* 4,738 4,543 4,457 4,425
4,367
Basic Earnings (Loss) Per Share* $ 2.49 $ 0.65 $ (0.71) $ (0.98) $ 0.12
Diluted Earnings (Loss) Per Share* $ 2.25 $ 0.55 $ (0.71) $ (0.98) $ 0.11
Balance Sheet Data
- ---------------------------------------------------------------------------------------------------------------------
Working Capital $ 21,959 $ 9,066 $ 2,040 $ 2,165 $ 10,192
Total Assets 58,730 39,092 22,010 34,994 43,781
Long-Term Debt 9,148 12,704 8,092 9,957 13,506
Shareholders' Equity (Deficit) 12,640 331 (2,703) 77 4,186
Book Value per Share 2.63 0.07 (0.64) 0.02 1.00
*Retroactively adjusted for 5% stock dividend issued in March 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The consolidated statements of income summarize operating results for the last
three years. This section of Management's Discussion highlights the main factors
affecting the changes in operating results during the three-year period.
2003 VERSUS 2002
(Dollars in Thousands) 2002 to
2003
2003 2002 Change
------------------------------------------------------- ----------
Net sales $ 192,102 100.0% $ 104,684 100.0% 83.5%
Cost of goods sold 147,835 77.0% 79,748 76.2% 85.4%
Gross profit 44,267 23.0% 24,936 23.8% 77.5%
Selling and promotion expenses 1,866 1.0% 2,014 1.9% (7.3%)
General and administrative expenses 17,297 9.0% 13,501 12.9% 28.1%
Compensation expense from redemption
of warrants and options --- 2,096 2.0% (100.0%)
Operating income 25,104 13.0% 7,325 7.0% 242.7%
Interest expense (457) (.2%) (476) (.5%) (4.0%)
Other income 33 0% 589 .6% (94.4%)
Income before income taxes
and minority interest 24,680 12.8% 7,438 7.1% 231.8%
Minority interest (10,832) (5.6%) (4,087) (3.9%) 165.0%
Income tax expense (2,060) (1.1%) (388) (.4%) 430.9%
Net Income $ 11,788 6.1% 2,963 2.8% 297.8%
Net sales increased 83.5% to $192 million in 2003.
The OEM Automotive Supply segment sales increased $88.0 million in 2003,
primarily due to an increase in demand for its products from its OEM customer,
increased capacity expansion in the Texas facility resulting from increased
product demand, the addition of the H2 parts program for the Hummer sport
utility vehicle and the start-up of the Ontario, Canada program.
Sales of the automotive parts and products segment declined $0.6 million,
primarily due to the continued deterioration of the van conversion parts market,
both domestically and internationally and the closing of the cargo trailer
operation.
The increased sales generated $19.3 million more gross profit in 2003 compared
to 2002 primarily due to the increased sales. Gross profit as a percentage of
sales slightly decreased from 23.8% in 2002 to 23.0% in 2003 due to increased
product mix of the H2 parts business which carries a lower margin.
General administrative expenses increased $3.8 million in 2003 due to higher
support requirements for the increased sales, primarily for the increased
capacity in Texas and the new plant in Canada. The Company incurred a $1.1
million foreign currency gain in 2003 which reduced general and administrative
expense, which was partially offset by merger related costs and a provision for
asset impairment. General and administrative expenses as a percentage of sales
decreased to 9.0% in 2003 because the fixed expenses did not increase
proportionately with the sales growth.
In 2002, the Company reached agreement to redeem and cancel 360,000 warrants and
500,000 options to purchase shares of common stock, previously issued to two
individuals, both of whom are directors and one of whom is an officer of the
Company, as incentive for their partial guarantee of the Company's debt. The
Company incurred a one-time expense of $2.1 million in 2002.
Other income in 2002 included $332 related to the cancellation of debt owed to a
former vendor of the van conversion business.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Minority interest results from the Company owning 50% of the OEM Automotive
Supply business. Income tax expense for 2003 is comprised of state tax expense
and Canadian tax on the profits of the new operation in Canada, net of $1.3
million of deferred tax credit arising from the reduction of the valuation
allowance for the NOL carryforward deferred tax asset. The Company did not
record any U.S. federal income tax expense in 2003 due to net operating loss tax
carry forwards generated from losses in prior years and the reduction in the
valuation allowance for deferred tax assets. Income tax expense in 2002 was
comprised only of state taxes as the Canadian operation had not begun
operations.
Federal income tax expense was impacted by the elimination of our deferred tax
asset valuation allowance in 2003 by $1.3 million. This deferred tax asset, of
which the majority is attributable to the $3.2 million dollars in NOL
carryforwards at September 30, 2003, was fully reserved in previous years due to
uncertainties in eventual recognition of the benefit of this asset. The Company
does anticipate utilizing the remaining NOL carryforwards in 2004, thus
eliminating the deferred tax asset related to the carryforwards. See Note 5 of
notes to consolidated financial statements for further information on income
taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
2002 VERSUS 2001
(Dollars in Thousands) 2001 to
2002
2002 2001 Change
------------------------------------------------------- ----------
Net sales $ 104,684 100.0% $ 48,934 100.0% 113.9%
Cost of goods sold 79,748 76.2% 38,184 78.0% 108.9%
Gross profit 24,936 23.8% 10,750 22.0% 132.0%
Selling and promotion expenses 2,014 1.9% 1,209 2.5% 66.6%
General and administrative expenses 13,501 12.9% 8,689 17.8% 55.4%
Compensation expense from redemption
of warrants and options 2,096 2.0% --- ---% ---%
Operating income 7,325 7.0% 852 1.7% 759.7%
Interest expense (476) (.5%) (547) (1.1%) (13.0%)
Other income 589 .6% 293 .6% 101.0%
Income before income taxes
and minority interest 7,438 7.1% 598 1.2% 1,143.8%
Minority interest (4,087) (3.9%) (70) (.2%) ---%
Income tax expense (388) (.4%) 26 -- ---%
Income from continuing operations $ 2,963 2.8% $ 502 1.0% 490.2%
Continuing Operations:
Net sales increased $55.8 million and 113.9% to $104.7 million in 2002.
The OEM Automotive Supply segment sales increased $58.4 million in 2002,
primarily due to an increase in demand for its products from its OEM customer
and operation of all of its facilities in 2002. In fiscal 2001, revenues were
adversely affected due to an extended shutdown of the Company's Texas facility
for the first half of fiscal 2001. Conversion vehicle parts sales declined $2.6
million to $2.6 million in 2002, primarily due to the sale of the conversion van
business and lower international sales.
The OEM Automotive Supply sales generated $14.4 million more gross profit in
2002 compared to 2001. Gross profit from automotive parts and products decreased
slightly in 2002 compared to 2001.
In 2002, the Company reached agreement to redeem and cancel 360,000 warrants and
500,000 options to purchase shares of common stock, previously issued to two
individuals, both of whom are directors and one of whom is an officer of the
Company, as incentive for their partial guarantee of the Company's debt. The
total cost of the redemption was $2.5 million. Of this amount, the Company
incurred a one-time expense of $2.1 million in 2002. Previously, in 2001, the
Company recorded $0.4 million of compensation expense for stock options issued
in December 2000.
Selling expenses increased $0.8 million and general and administrative expenses
increased $4.8 million primarily due to higher product demand and expansion of
the business in Texas and Canada.
Minority interest results from the Company owning 50% of the OEM Automotive
Supply business. Tax expense for 2002 and 2001 is comprised of state income
taxes. The Company did not record any federal income tax expense in 2002 and
2001 due to net operating loss tax carry forwards generated from losses in prior
years and the reduction in the valuation allowance for deferred tax assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Discontinued Operations:
The conversion vehicle and bus and mobility vehicle businesses were discontinued
in 2001 and reported losses of $3.7 million for 2001. The conversion vehicle
segment was sold in May 2001 and the bus and mobility businesses were sold in
August 2001. The $3.7 million loss for 2001 is net of a gain on the sale of the
bus and mobility business of $0.4 million, including a gain of $0.3 million from
the early extinguishments of term debt. No material gain or loss was recognized
upon the sale of the conversion vehicle segment.
SEASONALITY AND TRENDS
The Company's OEM Automotive Supply business sales and profits are dependent on
the automotive markets, primarily located in North America. The business may be
influenced by a number of factors including OEM programs affecting price and
supply, interest rates, gasoline prices, atypical weather for any sales region,
OEM plant shutdowns and model year changeovers. The OEM Automotive Supply
segment is dependent upon long-term contracts.
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 generally structures its facility leases and vendor supply
contracts to correspond with the terms of its GM contracts. Due to the lack of
availability of suitable buildings, the Oshawa, Ontario, Canada lease is ten
years compared to a five year program life for the other plants.
The Company is currently dependent upon one customer and contractual agreements
with this customer. The terms of the agreements are tied to the customer's
anticipated life of the vehicle chassis. Following is a summary of existing
program lives and the percentage of 2003 sales attributable to each plant. The
program lives are tied to contractual agreements, but may be shortened or
extended based upon market conditions and chassis manufacturing plans at the
option of the customer. Historically, the customer has continued programs upon
the introduction of a new vehicle chassis.
Plant Estimated Percentage of
Location (a) Program Life 2003 Sales
------------ ------------ -------------
Shreveport, LA (b) (b) 4.6%
Haslett, TX - Tahoe July 2006 39.1%
Haslett, TX - Suburban July 2006 14.4%
Bridgewater, NJ July 2005 8.3%
Livonia, MI (c) N/A 14.8%
Oshawa, Ontario, Canada July 2007 17.6%
Goshen, IN (c) N/A 1.2%
(a) The Company's plants typically have several different programs being
manufactured on the same vehicle chassis.
(b) The S-10 Xtreme program ended in September 2003. All of Shreveport's sales
in 2003 were attributable to the S-10 Xtreme program and will not continue
in 2004. The Company will maintain this facility to manufacture the ESV
program in 2004.
(c) Parts distribution. No determinable program life. The Company intends to
continue to focus on its OEM Automotive Supply business and automotive
parts and products businesses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The OEM Automotive Supply segment program related to the Shreveport, Louisiana
facility ended in September 2003. Sales for this program accounted for 4.6% of
the Company's sales in fiscal year 2003. The Company will continue to maintain
the facility with the new ESV program starting in January 2004 and the
maintenance of certain service parts.
In July 2003, the OEM Automotive Supply segment purchased the assets of Troy
Tooling, Inc., a low volume specialty manufacturer of RIM (reaction injection
molding) 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 includes an option to buy
the real estate and totals $1.5 million. Troy Tooling will be an integral part
of the Company's aftermarket parts strategy.
During the fourth quarter of 2003, the Company's OEM Automotive Supply segment
received several new contracts for engineering, design and installation services
for the 2004 model year, which began in September 2003. The contracts include
installation of ZR2 model upfit packages for specific models of the Chevrolet
Blazer at its plant in Bridgewater, New Jersey. In addition, the Company will
offer a 20" wheel to GM dealers. The 20" 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.
REDEMPTION OF WARRANTS AND OPTIONS
On September 25, 2002, the Company reached an agreement to redeem and cancel
360,000 outstanding warrants and 500,000 stock options previously issued to two
individuals, both of whom are directors and one of whom is an officer of the
Company, as incentive for their partial guarantee of certain of the Company's
debt. The total cost of the redemption was $2.5 million. Of this amount, the
Company recorded $2.1 million of compensation expense in fiscal 2002; in fiscal
2001, the Company had recorded $0.4 million of compensation expense for stock
options issued in December 2000.
SUBSEQUENT EVENTS
On October 29, 2003, the Company and Wheel to Wheel Acquisition Company, LLC, an
Indiana corporation and a wholly owned subsidiary of the Company (the
"Acquisition Subsidiary"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Wheel to Wheel, Inc., a Michigan corporation ("Wheel to
Wheel"), and the shareholders of Wheel to Wheel (the "Shareholders"). The Merger
Agreement provides for the acquisition of Wheel to Wheel by the Company pursuant
to a merger of Wheel to Wheel with and into the Acquisition Subsidiary (the
"Merger"), with the Acquisition Subsidiary surviving the Merger and continuing
as a wholly owned subsidiary of the Company.
Wheel to Wheel owns 50% of Starcraft's joint venture subsidiaries Tecstar, LLC
and Tecstar Manufacturing Canada Limited. As a result of the Merger, the Company
will own directly or indirectly 100% of the equity interests in the Tecstar
entities and Wheel to Wheel.
In the Merger, and subject to the terms and conditions of the Merger Agreement,
the Shareholders of Wheel to Wheel collectively will receive 3,550,000 shares of
Starcraft common stock. The shares of Starcraft common stock will be allocated
to the Shareholders proportionally in accordance with the Shareholder's
ownership of Wheel to Wheel. The completion of the Merger is subject to the
approval of the issuance of shares required to effect the Merger by the
shareholders of Starcraft (as required by Nasdaq), receipt of necessary
approvals or expiration of any regulatory waiting period under United States
antitrust laws, and other customary closing conditions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The Merger Agreement provides that Starcraft will enter into employment and
non-competition agreements with the three key executives of Wheel to Wheel when
the merger becomes effective. It further restricts transfer of the shares to be
issued in the merger for two years, with provisions for up to approximately
500,000 shares in 2004 and 300,000 shares in 2005 to be available for sale
without contractual restriction, subject to compliance with applicable
securities laws and Company policy.
Wheel to Wheel provides design, engineering, validation and testing of
automotives and automotive components and also manufactures show and specialty
vehicles and pace cars.
Wheel to Wheel currently is the sole provider of engineering, design and
validation services to Tecstar. Tecstar could be significantly harmed if Wheel
to Wheel no longer provided these services. The merger of the Company and Wheel
to Wheel enables the Company to control this critical aspect of Tecstar's
business.
In addition, Wheel to Wheel will generate incremental revenues of approximately
$5 million per year in the specialty vehicle and automotive engineering markets.
The acquisition of Wheel to Wheel will be treated as a purchase for financial
reporting purposes. This means that the purchase price will first be allocated
to the fair value of assets received, net of assumed liabilities. The remaining
purchase price will then be allocated to any identifiable intangible assets,
which in this case, includes a customer relationship and several supply
contracts, with the remainder allocated to goodwill. The identifiable intangible
assets, estimated to be $17.5 million, will be amortized to expense over the
expected lives of the assets ranging from one to three years. Goodwill will not
be amortized to expense, but will be evaluated annually for any impairment in
the carrying value, and adjusted accordingly through the income statement.
Unaudited Pro Forma Financial Information giving effect to the acquisition is
presented in the definitive proxy statement related to the Company's 2004 Annual
Meeting of Shareholders.
In October 2003, Starcraft and Wheel to Wheel jointly acquired the assets of
Tarxien Automotive in Ontario, Canada. Tarxien, with $3 million in annual sales,
was acquired for its OEM-compliant, highly efficient horizontal paint line, and
its plastic injection molding facilities that will further support Starcraft's
ongoing automotive aftermarket initiatives.
In November 2003, the Company also agreed to acquire the assets of Classic
Design Concepts, Inc. of Walled Lake, Michigan. Classic Design provides design
and engineering services, concepting and show car development for automotive
OEMs, primarily Ford Motor Company. Classic also develops and markets
aftermarket parts. Classic Design's senior staff brings additional expertise in
direct sales and corporate relationships.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $10.7 million in cash in 2003 compared to
consuming $0.7 million in cash in 2002. Cash generated in 2003 before working
capital usage was $21.5 million compared to $7.6 million in 2002. Cash used for
accounts receivable, inventories and accounts payable in 2003 to fund the sales
growth was $6.8 million compared to $8.5 million used in 2002. In 2003, the
Company utilized $5.6 million of cash to fund tooling and engineering programs
and the timing of customer tooling reimbursements.
The Company invested $5.5 million in property and equipment during 2003
primarily attributed to growth of the OEM Automotive Supply business,
particularly its expansion in Texas ($0.5 million), start-up of operations in
Canada ($2.2 million) and tooling investment for new programs ($1.3 million).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
As discussed in Note 4 of the notes to consolidated financial statements, the
Company and its subsidiaries, have three bank lines of credit which provide for
$22 million of credit of which $9.2 million was outstanding at September 28,
2003.
The Company believes that future cash flows from operations and funds available
under its revolving credit facilities will be sufficient to satisfy its
anticipated operating needs and capital requirements for 2004. The Company also
believes that its objectives for growth over the next few years can be
accomplished with minimal capital investment and that its expected operating
cash flows and credit facilities should provide sufficient liquidity. However,
to fund various liabilities assumed under the Wheel to Wheel merger, the Company
intends to increase its revolving credit facilities by $9 million in early 2004.
INCOME TAXES
At this time, the Company does not have U.S. federal income tax expenses 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.
During 2004, as the operating loss carryforwards are utilized, the Company will
begin recording U.S. federal income taxes, along with Canadian taxes. At
September 28, 2003, the operating loss carryforwards were approximately $3.3
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 39% effective tax rate
for the fiscal year ended September 28, 2003 and September 29, 2002,
respectively.
Year Ended
---------------------------------------------
September 28, 2003 September 29, 2002
------------------ ------------------
(Dollars in thousands, except per share amounts)
Net Income - as reported $ 11,788 $ 2,963
Deduct: pro-forma provision for
income taxes 4,411 1,437
Net income - pro forma $ 7,377 $ 1,526
Earnings per share - as reported
Basic Earnings per share $ 2.49 $ 0.65
Dilutive earnings per share $ 2.25 $ 0.55
Earnings per share - pro forma
Basic Earnings per share $ 1.56 $ 0.34
Dilutive earnings per share $ 1.41 $ 0.29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
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 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,
generally three years. The Company accrues an estimated liability for potential
warranties at the time products are sold, 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.
Indentifiable Intangible Assets and Goodwill: The identifiable intangible assets
generated by the Wheel to Wheel merger will be amortized to expense over the
expected lives of the assets ranging from one to three years. Goodwill will not
be amortized to expense, but rather will be evaluated annually for any
impairment in the carrying value, and adjusted accordingly through the income
statement.
OFF-BALANCE SHEET ARRANGEMENTS
As part of the Wheel to Wheel merger, the Company will be assuming a consulting
agreement for a former shareholder of Wheel to Wheel. As of September 28, 2003,
Wheel to Wheel has 117 remaining monthly payments of $27,750 due under this
arrangement that will not be recorded on the balance sheet.
LONG-TERM CONTRACTUAL OBLIGATIONS:
Payments due by period
----------------------------------------------------------------------
Total Less than 1-3 3-5 More than
1 Year Years Years 5 Years
Long-Term Debt Obligations $ 9,148 $ - $ 9,148 $ - $ -
Operating Lease Obligations $ 8,195 $ 1,997 $ 4,913 $ 2,766 $ 4,465
Employment Agreement Obligation $ 1,500 $ 300 $ 900 $ 300 $ -
------- --------- ------- -------- --------
Total $18,843 $ 2,297 $14,961 $ 3,066 $ 4,465
======= ========= ======= ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
AVAILABLE INFORMATION
Availability of Reports. Starcraft is a reporting company under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The public may read and copy any Company filings at the
Commission's Public Reference Room at 450 Fifth Street N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330.
Because the Company makes filings to the Commission electronically, you may
access this information at the Commission's internet site: www.sec.gov. This
site contains reports, proxies and information statements and other information
regarding issuers that file electronically with the Commission.
Web site Access. Our internet Web site address is www.starcraftcorp.com. We make
available, free of charge at the "Investor Relations" portion of this Web site
under "SEC Filings" annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the 1934 Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Commission. Reports of beneficial ownership filed pursuant to Section 16(a)
of the 1934 Act are also available on our Web site.
DISCUSSION OF FORWARD-LOOKING INFORMATION
The discussion above includes forward-looking statements respecting domestic and
international market and economic trends, the Company's products and marketing
plans, anticipated capital expenditures, the adequacy of capital resources and
other matters. From time to time, the Company may make oral or written
forward-looking statements regarding its anticipated sales, costs, expenses,
earnings and matters affecting its condition and operations. All such
forward-looking statements are subject to a number of material factors which
could cause the statements or projections contained therein to be materially
inaccurate. Such factors include, without limitation, the following:
General Operating Contingencies. The Company may not be able to attract and
retain employees with sufficient skills to conduct its operations efficiently
and may from time to time be subject to work slow-downs or stoppages. The
Company may be adversely affected by delay or unavailability of supply of
numerous component parts. The Company will not always be able to satisfy its
capital requirements with internally generated funds and may, from time to time,
need to rely on bank financing and other third party capital resources. There is
no assurance that such resources will always be available to the Company or as
to the terms that will apply to any financing, or as the Company's ability to
continue to comply with such terms over time.
Acquisitions and Diversification. The Company may be engaged in negotiations
from time to time regarding prospective acquisitions of related businesses. Such
acquisitions could be material to the Company and, if effected, could have a
material effect on the Company's financial condition or results of operations.
There is no assurance as to when or whether the Company will be able to effect
acquisitions, whether it will be able to generate requisite funding to effect
such acquisitions, or as to the terms on which such acquisitions may be
effected. The Company may have less experience manufacturing and marketing such
acquired products than it has in its business. There is no assurance that such
new acquisitions will be profitable.
Economic Conditions. The level of disposable consumer income affects the
Company's sales because its products are generally considered discretionary
expenditures by consumers. In difficult economic times, consumers tend to spend
less of their income on discretionary items. Other economic factors affecting
the demand for the Company's products include the availability and price of
gasoline, the level of interest rates and the availability of consumer
financing.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Reduced gasoline availability could adversely affect the demand for the
Company's products. A significant increase in the price of gasoline could reduce
demand for the Company's products because it would increase the cost of
operating these products. Because many consumers finance their purchase of
vehicle conversions, the availability of financing and level of interest rates
can affect a consumer's purchasing decision. A decline in general economic
conditions or consumer confidence can be expected to affect the Company's and
Tecstar's sales adversely.
OEM Automotive Supply Segment. All of the Company's OEM Automotive Supply sales
in 2003, 2002 and 2001 were to GM. The Company's OEM Automotive Supply sales are
directly impacted by the size of the automotive industry and GM's market share.
Further, GM periodically reduces production or closes plants for several months
for model changeovers. During the fourth quarter of fiscal year 2000 and
continuing into the second quarter of fiscal 2001, one of the Company's
manufacturing facilities was substantially shut down as a result of GM's model
changeover. This adversely affected the Company's fiscal 2000 and 2001 results.
A decline in sales in the automotive market or in GM's automotive sales, or
production cutbacks and plant shut downs for model changeovers by GM, could have
an adverse impact on the Company's sales and profits. Sales of the OEM
Automotive Supply segment are subject to long-term contracts with GM. Continued
sales and growth of this segment is subject to the Company's ability to continue
to satisfactorily perform and to obtain such contracts over time.
The Company's contractual agreements with its customer may be shortened or
extended by the customer at its discretion. There is no assurance that the
Company's contractual agreements will remain in effect for the stated periods.
Single Customer. GM has recently publicized its interest to put significant
pressures on its suppliers to reduce costs, including GM's intention to change
suppliers if suppliers do not comply. As the Company's sole customer is GM,
there is no assurance that the Company's sales and margins will not be adversely
affected by this program.
Regulation. The Company is subject to various foreign, federal, state and local
regulations. The Company must comply with certain Federal and state regulations
relating to the disposition of hazardous wastes generated in its production
processes. The Company's failure to comply with applicable regulations or
changes in current regulations, including the adoption of new safety or
environmental standards, could have a material adverse effect on the Company's
results of operations.
Competition. The OEM Automotive Supply business is also highly competitive with
several large companies competing in this market. There is no assurance the
Company will be able to maintain its current competitive position in this
market.
Potential Product Liability and Warranties. Like other automotive manufacturers,
the Company may be subject to claims that its products caused or contributed to
damage or injury sustained in vehicle accidents or may be required to recall
products deemed unsafe. Any such claims in excess of the Company's insurance
coverage or material product recall expenses could adversely affect the
Company's financial condition and results of operations. It is possible that
actual expenses the Company incurs to honor warranties on products could exceed
the warranty liability accrued on its books for such expenses, which could
adversely affect its results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company are exposed to
fluctuations in interest rates and foreign currencies. These fluctuations can
vary the cost of financing, investment yields and operations of the Company.
The Company does not have any investments that would be classified as trading
securities under generally accepted accounting principles. The Company's
non-trading investments, excluding cash and cash equivalents, consist of
certificates of deposit and debt securities. These financial instruments are
subject to market risk in that changes in interest rates would impact the market
value of such investments. The Company generally does not utilize derivatives to
hedge against increases in interest rates which decrease market values.
Based on the Company's overall interest rate exposure at September 28, 2003,
including variable rate debt, a hypothetical 10 percent change in interest rates
applied to the fair value of the financial instruments as of September 28, 2003,
would have no material impact on earnings or cash flows over a one-year period.
The Company's foreign currency risk exposure results from fluctuating currency
exchange rates, primarily the U.S. dollar against the Canadian dollar. The
Company faces transactional currency exposures that arise when its foreign
subsidiaries enter into transactions, denominated in currencies other than their
local currency. The Company also faces currency exposure that arises from
translating the results of its Canadian operations to the U.S. dollar at
exchange rates that have used financial derivatives to hedge against
fluctuations in currency exchange rates. During fiscal 2003, the Company
incurred a $1.1 million foreign currency gain.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STARCRAFT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2003, September 29, 2002
and September 30, 2001
STARCRAFT CORPORATION AND SUBSIDIARIES
Goshen, Indiana
CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2003, September 29, 2002 and September 30, 2001
CONTENTS
REPORT OF INDEPENDENT AUDITORS ................................................1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS ..............................................2
CONSOLIDATED STATEMENTS OF INCOME.........................................4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ..........................5
CONSOLIDATED STATEMENTS OF CASH FLOWS ....................................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...............................7
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Starcraft Corporation and Subsidiaries:
We have audited the consolidated balance sheets of Starcraft Corporation and
Subsidiaries as of September 28, 2003 and September 29, 2002 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended September 28, 2003. Our audit also
included the financial statement schedule listed in the index at Item 15(d).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Starcraft
Corporation and Subsidiaries as of September 28, 2003 and September 29, 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended September 28, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule referred to above presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Elkhart, Indiana
November 7, 2003
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 28, 2003 and September 29, 2002
2003 2002
---- ----
(dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 836 $ 284
Accounts receivable
Trade, less allowance for
doubtful accounts: 2003 - $200; 2002 - $288 28,606 20,610
Other receivables 576 2,108
Inventories 10,060 8,204
Tooling and engineering projects 6,593 952
Other current assets 2,409 974
------------ ------------
Total current assets 49,080 33,132
Property and equipment
Land, buildings and improvements 6,005 3,820
Machinery and equipment 7,321 4,540
------------ ------------
13,326 8,360
Less accumulated depreciation 4,190 2,836
------------ ------------
9,136 5,524
Other assets 514 436
------------ ------------
$ 58,730 $ 39,092
============ ============
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 28, 2003 and September 29, 2002
2003 2002
---- ----
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable, related party $ - $ 1,474
Accounts payable, trade 19,549 18,058
Accrued expenses
Compensation and related expenses 2,668 2,302
Warranty 698 771
Income taxes 3,378 396
Taxes, other 434 44
Indemnification reserve - 346
Other 394 675
------------ ------------
Total current liabilities 27,121 24,066
Long-term debt 9,148 12,704
Minority interest in subsidiary 9,821 1,991
Commitments and contingencies (Note 9) - -
Shareholders' equity
Preferred stock, no par value: 2,000,000 shares
authorized, none issued - -
Common stock, no par value: 10,000,000 shares
authorized, issued and outstanding
4,804,102 shares in 2003 and 4,454,059 shares in 2002 15,203 14,850
Additional paid-in capital 3,420 1,008
Accumulated deficit (6,151) (15,527)
Accumulated other comprehensive income 168 -
------------ ------------
12,640 331
------------ ------------
$ 58,730 $ 39,092
============ ============
CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 28, 2003, September 29, 2002
and September 30, 2001
2003 2002 2001
---- ---- ----
(dollars in thousands, except per share data)
Net sales $ 192,102 $ 104,684 $ 48,934
Cost of goods sold 147,835 79,748 38,184
------------ ------------ ------------
Gross profit 44,267 24,936 10,750
Operating expenses
Selling and promotion 1,866 2,014 1,209
General and administrative 17,297 13,501 8,689
Compensation expense from warrant and
option redemption - 2,096 -
------------ ------------ ------------
Operating income 25,104 7,325 852
Nonoperating (expense) income
Interest, net (457) (476) (547)
Other income, net 33 589 293
------------ ------------ ------------
(424) 113 (254)
------------ ------------ ------------
Income from continuing operations before
minority interest and income taxes 24,680 7,438 598
Minority interest 10,832 4,087 70
------------ ------------ ------------
Income from continuing operations before
income taxes 13,848 3,351 528
Income taxes 2,060 388 26
------------ ------------ ------------
Income from continuing operations 11,788 2,963 502
Loss from discontinued operations, net of income
tax expense of $24 in 2001 - - (4,031)
Gain on sale of discontinued business, net of income
tax of $0 in 2001 - - 352
------------ ------------ ------------
Net income (loss) $ 11,788 $ 2,963 $ (3,177)
============ ============ ============
Earnings (loss) per common share, basic $ 2.49 $ .65 $ (.71)
Earnings (loss) per common share, diluted $ 2.25 $ .55 $ (.71)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 28, 2003, September 29, 2002
and September 30, 2001
Accumulated
Issued and Other
Outstanding Additional Compre-
Common Common Paid-In Accumulated hensive
Shares Stock Capital Deficit Income Total
------------- ---------- --------- ---------- ----------- ----------
--------------------(dollars in thousands)---------------------
Balance, October 2, 2000 4,245,059 $ 14,382 $ 1,008 $ (15,313) $ - $ 77
Net loss (3,177) - (3,177)
Stock option compensation - - 378 - - 378
Issuance of common stock 10,000 19 - - - 19
------------- ---------- --------- ---------- ----------- ----------
Balance, September 30, 2001 4,255,059 14,401 1,386 (18,490) - (2,703)
Net income - - - 2,963 - 2,963
Stock option redemption - - (378) - - (378)
Issuance of common stock 199,000 449 - - - 449
------------- ---------- --------- ---------- ----------- ----------
Balance, September 29, 2002 4,454,059 14,850 1,008 (15,527) - 331
Net income - - - 11,788 - 11,788
5% Common stock dividend 225,460 - 2,412 (2,412) - -
Currency translation
adjustments - - - - 168 168
Issuance of common stock 124,583 353 - - - 353
------------- ---------- --------- ---------- ----------- ----------
Balance, September 28, 2003 4,804,102 $ 15,203 $ 3,420 $ (6,151) $ 168 $ 12,640
============= ========== ========= ========== =========== ==========
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 28, 2003, September 29, 2002
and September 30, 2001
2003 2002 2001
---- ---- ----
(dollars in thousands)
Cash flows from operating activities
Income from continuing operations $ 11,788 $ 2,963 $ 502
Adjustments to reconcile income from continuing
operations to net cash from operating activities
Compensation expense from warrants and options - 2,096 378
Depreciation 1,646 766 1,241
(Gain)/loss on disposal of assets 233 (85) -
Minority interest 7,830 1,834 (930)
Changes in operating assets and liabilities
Accounts receivable (6,464) (10,979) (2,280)
Inventories (1,856) (3,568) (43)
Tooling and engineering projects (5,641) (123) (65)
Accounts payable 1,491 6,060 (3)
Accrued expenses 3,038 882 (1,273)
Other (1,366) (566) (242)
------------ ------------ ------------
Net cash from continuing operations 10,699 (720) (2,715)
Net loss from discontinued operations - - (4,031)
------------ ------------ ------------
Net cash from operating activities 10,699 (720) (6,746)
Cash flows from investing activities
Collection of notes receivable, net - 358 106
Purchase of property and equipment (5,504) (2,943) (811)
Proceeds from sale of property and equipment 13 42 5
Proceeds from sale of conversion vehicle business - - 277
Proceeds from sale of bus and mobility vehicle business - - 8,000
------------ ------------ ------------
Net cash from investing activities (5,491) (2,543) 7,577
Cash flows from financing activities
Net proceeds (payments) on revolving credit agreement (3,556) 4,612 3,592
Payments of long-term debt - (814) (5,436)
Redemption and cancellation of warrants and options (1,474) (1,000) -
Issuance of common stock 353 449 19
------------ ------------ ------------
Net cash from financing activities (4,677) 3,247 (1,825)
------------ ------------ ------------
Effect of exchange rate changes on cash 21 - -
Net change in cash and cash equivalents 552 (16) (994)
Cash and cash equivalents at beginning of year 284 300 1,294
------------ ------------ ------------
Cash and cash equivalents at end of year $ 836 $ 284 $ 300
============ ============ ============
Supplemental disclosure of cash flow information
Interest paid $ 606 $ 473 $ 1,335
Income taxes paid 673 137 259
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2003, September 29, 2002 and September 30, 2001
(Dollars in thousands, except per share data)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Consolidation: Starcraft Corporation and
Subsidiaries (collectively referred to as the "Company") are second stage
manufacturers of pickup truck and sport utility vehicles to an original
equipment manufacturer ("OEM automotive supply"). The Company also supplies
after-market automotive parts and products ("automotive parts and products") to
wholesale and retail customers. The consolidated financial statements include
the accounts of Starcraft Corporation and its wholly owned subsidiaries:
Starcraft Automotive Group, Inc., Imperial Automotive Group, Inc., Starcraft
Southwest, Inc., and National Mobility Corporation. The Company has a 50%
ownership interest in each of Tecstar, LLC and Tecstar Manufacturing Canada
Limited (collectively "Tecstar") which are OEM automotive suppliers. The
operations of Tecstar Manufacturing Canada Limited ("Tecstar Canada") commenced
in February 2003. 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. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company's customers operate primarily in the automotive industry. The OEM
automotive supply segment sales are primarily to one customer in the United
States and Canada. The Company's automotive parts and products segment sells
products throughout North America, and export sales are principally to locations
in Asia and northern Europe. Credit is extended to customers based on an
evaluation of the customer's financial condition, and when credit is extended,
collateral generally is not required.
During fiscal 2001, the Company discontinued two segments. The Company sold its
conversion vehicle business on May 25, 2001, for no gain or loss, and its
shuttle bus and mobility vehicle business on August 31, 2001 for an after tax
gain of $352. The results of operations of these businesses are recorded as
discontinued operations.
Net sales and gross profits of the discontinued operations for the fiscal year
ended September 30, 2001 were $33,483 and $1,163, respectively.
Cash Equivalents and Concentrations: Cash equivalents include all highly liquid
investments with a maturity when purchased of three months or less. The first
$100 of deposits in each financial institution is insured by an agency of the
U.S. Government.
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statements of Cash Flows - Noncash Activities: During 2002, the Company issued
notes payable as partial consideration in redemption of warrants and stock
options of $1,474. During 2001, the Company recorded $378 of compensation
expense for stock options issued to a director of the Company and the Company
received $527 of notes receivable as proceeds in the sale of its conversion
vehicle business.
Accounts Receivable: The Company sells to customers using credit terms customary
in its industry. Interest is not normally charged on receivables. Management
establishes an allowance for doubtful accounts for potential losses on its
accounts receivable based on historical loss experience and current economic
conditions. Accounts receivable are charged off to the allowance when management
determines the account is uncollectible.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method for certain inventories
($224 and $538 at September 28, 2003 and September 29, 2002, respectively) and
by the first-in, first-out ("FIFO") method for all other inventories.
Tooling and Engineering Projects: Tooling and engineering projects represent
costs, less amounts billed, incurred by the Company in the development of
tooling and engineering services provided by the Company's partner in Tecstar.
The Company receives a specific purchase order for these tooling and engineering
projects and is generally reimbursed by the customer within terms customary in
its industry. Costs are deferred until reimbursed by the customer. Forecasted
losses on incomplete projects are recognized currently.
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.
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Warranties: The Company follows the policy of accruing an estimated liability
for warranties at the time the warranted products are sold. Warranty is provided
for terms similar to those offered by the OEM to its customers. Warranty
activity for the years ended September 28, 2003 and September 29, 2002 is as
follows: 2003 2002
Accrued warranty at beginning of year $ 771 $ 763
Adjustments (25) (8)
Warranty claims paid (48) -
--------- ---------
Accrued warranty at end of year $ 698 $ 771
========= =========
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.
Translation of Foreign Currency: Assets and liabilities of Tecstar Canada are
translated at rates of exchange in effect at the close of the fiscal year.
Revenues and expenses are translated at the average rates of exchange for the
year. Translation gains and losses are accumulated within other comprehensive
income as a separate component of shareholders' equity. Foreign currency
transaction gains and losses (transactions denominated in a currency other than
Tecstar Canada's local currency) are generally included in selling and
administrative expenses, and netted a $1,120 gain during the year ended
September 28, 2003.
Fair Value of Financial Instruments: The Company's carrying amount for its
financial instruments, which include cash, accounts receivable, accounts payable
and long-term debt, approximates fair value.
Other Income: Other income is comprised of royalty payments from parties that
license the use of the Starcraft brand name and other miscellaneous items. In
2002, other income also included $332 related to cancellation of debt owed to a
former vendor of the van conversion business.
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Deferred income taxes are provided based on the liability method
of accounting pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes" which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities. A valuation allowance adjusts deferred tax assets to the net amount
that is more likely than not to be realized. No provision has been made for U.S.
and state income taxes or foreign withholding taxes on the undistributed
earnings (approximately $4,143 at September 28, 2003) of foreign subsidiaries
because it is expected that such earnings will be reinvested indefinitely. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to U.S. income taxes (subject to an adjustment for
foreign tax credits), state income taxes and withholding taxes payable to the
foreign countries. Determination of the amount of any unrecognized deferred
income tax liability of these undistributed earnings is not practical.
Evaluation of Impairment of Long-Lived Assets: In accordance with SFAS No. 144,
"Impairment or Disposal of Long-Lived Assets", the Company evaluates the
carrying value of long-lived assets whenever significant events or changes in
circumstances indicate the carrying value of these assets may be impaired. The
Company evaluates potential impairment of long-lived assets by comparing the
carrying value of the net assets to the expected net future cash inflows
resulting from use of the assets. Management believes that no material
impairment of long-lived assets exists at September 28, 2003.
Stock Based Compensation: The Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure",
and accordingly, accounts for its stock option plans using the intrinsic value
method of Accounting Principles Board Opinion No. 25, "Accounting for
Stock-Based Compensation".
2003 2002 2001
---- ---- ----
Net income (loss), as reported $ 11,788 $ 2,963 $ (3,177)
Deduct: stock-based compensation expenses
determined under fair value based method,
net of tax 129 289 1,139
---------- -------- ----------
Proforma net income (loss) $ 11,659 $ 2,674 $ (4,316)
========== ======== ==========
Basic earnings (loss) per share, as reported 2.49 .65 (.71)
Proforma basic earnings (loss) per share 2.46 .59 (.97)
Diluted earnings (loss) per share, as reported 2.25 .55 (.71)
Proforma diluted earnings (loss) per share 2.23 .50 (.97)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
The proforma amounts shown above and the weighted-average grant-date fair values
of options granted were estimated using the Black-Scholes option-pricing model
with the following assumptions:
2003 2002 2001
---- ---- ----
Risk-free interest rate 3.10% - 5.25% 5.25% - 6.23% 5.35% - 5.88%
Dividend yield 0% 0% 0%
Volatility factor 84.18% - 86.17% 77.45% - 94.70% 75.94% - 94.61%
Expected option life 4 years 4 years 4 years
Comprehensive Income: Other comprehensive income consists of foreign currency
translation adjustments. Comprehensive income for the year ended September 28,
2003 was $11,956. There were no foreign currency translations for the year ended
September 29, 2002, or Septemer 30, 2001.
Use of Estimates: Preparation of the financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Management makes estimates for
indemnification, accrued warranty, valuation allowance for deferred tax assets,
allowance for doubtful accounts, allowances for slow-moving and obsolete
inventories, impairment of property, plant, equipment, and depreciation expense.
Earnings Per Common Share: Basic earnings per common share is based on net
income available to common shareholders divided by the weighted average number
of common shares considered to be outstanding during the period. Diluted
earnings per common share shows the dilutive effect of any additional potential
common shares issuable under stock options.
Fiscal Year: The Company's fiscal year ends on the Sunday closest to September
30. The years ended September 28, 2003, September 29, 2002 and September 30,
2001 each consisted of 52 weeks.
Reclassifications: Certain amounts in the 2002 and 2001 consolidated financial
statements have been reclassified to conform with the 2003 presentation. These
reclassifications had no effect on total assets, total shareholders' equity or
net income as previously reported.
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Enacted Accounting Standards: In May 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 was effective for financial instruments entered into or modified after
May 31, 2003, and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement did not
have an impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") 46, "Consolidation
of Variable Interest Entities". This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", and
addresses consolidation by business enterprises of variable interest entities.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiary if the entities do not effectively
disperse risk among the parties involved. FIN 46 also enhances the disclosure
requirements related to variable interest entities. This statement is effective
immediately for variable interest entities created or in which an enterprise
obtains an interest after January 31, 2003. FIN 46 was effective for the Company
beginning June 30, 2003 for all interest in variable interest entities acquired
before February 1, 2003. The adoption of the provisions of this statement did
not have an impact on the Company's consolidated financial statements.
NOTE 2 - INVENTORIES
Inventories consist of the following:
2003 2002
---- ----
Raw materials $ 9,583 $ 7,568
Finished goods 877 723
------------ ------------
10,460 8,291
Allowance for slow-moving and obsolete inventories 400 87
------------ ------------
$ 10,060 $ 8,204
============ ============
NOTE 3 - NOTES PAYABLE, RELATED PARTY
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, as incentive for their guarantee of certain of the
Company's debt (see Note 7). The warrants and stock options were redeemed at a
price of $5.54 per share (less each issue's underlying strike price), which
reflected a 15% discount from the average closing price of $6.52 per share for
the twenty-day period through and including September 25, 2002. The total cost
of the redemption was $2,474. Of this amount, the Company recorded $2,096 of
compensation expense in fiscal 2002 (in fiscal 2001, the Company had recorded
$378 of compensation expense for stock options issued in December 2000). The
redemption price of $2,474 consisted of $1,000 in cash and notes payable of
$1,474. The notes payable were paid in full during the year ended September 28,
2003.
NOTE 4 - LONG-TERM DEBT
In February 2002, Tecstar entered into a $10,000 revolving credit agreement with
a lending institution, which matures on October 1, 2004. In May 2002, the size
of the facility was increased to accommodate growth in Tecstar's business.
Advances under the revolving credit agreement are limited to a specified
percentage of eligible receivables and inventories, subject to a maximum of
$15,000. At September 28, 2003, Tecstar had $8,875 and $11,295 of outstanding
borrowings under its revolving credit facility at September 28, 2003 an
September 29, 2002, respectively. 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 was in compliance as of September 28, 2003.
In June 2002, the Company entered into a $2,000 revolving credit agreement,
which matures on October 1, 2004, with the same lending institution that
provided Tecstar, LLC's credit facility. The Company had $268 and $1,409 of
outstanding borrowings under its revolving credit facility at September 28, 2003
and September 29, 2002, respectively. Advances under this revolving credit
agreement bear interest at a rate of 1% over the prime rate and are
collateralized by substantially all the Company's assets. In addition, a portion
of the credit facility is guaranteed by two individuals, both of whom are
directors and one of whom is an officer of the Company. In October 2003, the
amount of the facility was decreased to $1,000, and the personal guarantees were
released. The facility is subject to various loan covenants with which the
Company was in compliance as of September 28, 2003.
NOTE 4 - LONG-TERM DEBT (Continued)
In April 2003, Tecstar Canada entered into a $5,000 revolving credit agreement,
which matures on October 1, 2004, with the same lending institution that
provides Tecstar, LLC's credit facility. The Company had $5 of outstanding
borrowings under this revolving credit facility at September 28, 2003,
respectively. 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 Canada's tangible net worth. The borrowings are collateralized by
substantially all of Tecstar Canada's assets. This facility is subject to
various loan covenants with which Tecstar was in compliance as of September 28,
2003.
The weighted average interest rate on outstanding borrowings as of September 28,
2003 was 3.50% (5.30% at September 29, 2002).
The total credit commitments under these three facilities at September 28, 2003
are $22,000. At September 28, 2003, there was approximately $12,852 available
under all facilities.
Annual maturities of long-term debt under these revolving credit agreements are
as follows:
2004 $ -
2005 9,148
-------------
$ 9,148
NOTE 5 - INCOME TAXES
The components of income from continuing operations before income taxes are as
follows:
2003 2002 2001
---- ---- ----
United States operations $ 9,091 $ 3,351 $ 528
Foreign operations 4,757 - -
------------ ------------ ------------
Total $ 13,848 $ 3,351 $ 528
============ ============ ============
NOTE 5 - INCOME TAXES (Continued)
The provision for income taxes is summarized as follows:
2003 2002 2001
---- ---- ----
Current
Federal $ - $ - $ -
State 733 388 26
Foreign 2,604 - -
------------ ------------ ------------
3,337 388 26
Deferred (1,277) - -
------------ ------------ ------------
Total $ 2,060 $ 388 $ 26
============ ============ ============
The provision for income taxes is different from the amount that would otherwise
be computed by applying a federal statutory rate of 34% to income from
continuing operations before income taxes. A reconciliation of the differences
is as follows:
2003 2002 2001
---- ---- ----
Rate applied to pretax income
from continuing operations $ 4,708 $ 1,139 $ 180
State income taxes, net of federal
income tax benefit 484 255 17
Income taxes passed through
minority interest 1,651 - -
Utilization of net operating
loss carryforwards (3,433) (1,006) (182)
Other, net (1,344) - 11
------------ ------------ ------------
$ 2,060 $ 388 $ 26
============ ============ ============
NOTE 5 - INCOME TAXES (Continued)
The composition of the deferred tax assets and liabilities at September 28, 2003
and September 29, 2002 is shown below:
2003 2002
---- ----
Deferred tax assets
Inventories $ 98 $ 162
Accrued warranty 155 174
Other accrued liabilities 723 587
Goodwill 70 77
Net operating loss carryforwards 1,277 5,215
Alternative minimum tax credit carryforward 490 278
Other 70 77
----------- -----------
Total deferred tax assets 2,813 6,493
Valuation allowance (1,111) (6,338)
----------- -----------
1,702 155
Deferred tax liabilities
Accelerated depreciation (215) (155)
----------- -----------
Net deferred tax asset (liability) $ 1,487 $ -
=========== ===========
The alternative minimum tax carryforward of $490 has no expiration date. The net
operating loss carryforward of $3,273 expires in 2021.
The valuation allowance for deferred tax assets decreased by $5,227 and $868 in
2003 and 2002, respectively and increased by $876 in 2001.
NOTE 6 - COMPENSATION PLANS
The Company sponsors a qualified profit-sharing plan, more commonly known as a
401(k) plan, for all of its employees with over six months of service. The plan
provides for a discretionary matching contribution by the Company of the
employee's contribution, up to 6% of compensation. Also, the plan provides for
an additional discretionary contribution annually as determined by the Board of
Directors. The amounts charged to expense for this plan were approximately $56,
$31, and $0 in 2003, 2002 and 2001, respectively.
NOTE 7 - STOCK OPTIONS
The Company maintains two stock incentive plans under which stock options are
granted to key employees and directors. The plans authorize the granting of
stock options for up to 1,158,075 shares of the Company's common stock, of which
132,217 are still available for grant. The options in these two plans have
five-year terms and generally become fully exercisable after six months. The
Company also sponsors a stock option plan with 40,300 shares of common stock
reserved for certain sales representatives who are not employees of the Company,
of which 26,000 shares are still available for grant. There were 1,050 and 8,000
shares outstanding under this plan at September 28, 2003 and September 29, 2002,
respectively. No compensation expense was recorded for options issued and
outstanding under this plan as the effect was immaterial. These options also
have a five-year term.
At September 28, 2003, there were 687,575 options issued and outstanding under
these three plans. Under the three plans, options may not be granted at prices
below 85% of the current market value of the stock at the date of grant. All
options awarded through September 28, 2003 have been at fair market value on the
date of grant.
On November 20, 1998 the Company issued warrants to purchase 400,000 shares of
common stock to two individuals as incentive for their partial guarantee of the
Company's long-term debt. The warrants entitled each of the individuals to
purchase up to 200,000 shares of common stock of the Company for $2.20 per
share, which was the ten day, average market price preceding the date of grant.
The options had a five-year term. On December 12, 2000 the Company issued stock
options to purchase 500,000 shares of common stock to two individuals as
incentive for their partial guarantee of the Company's long-term debt (see Note
3). Each of the individuals were entitled to purchase up to 250,000 shares of
common stock of the Company for $3.00 per share, which was the twenty-day,
average market price preceding the date of grant. The options had a five-year
term. On September 25, 2002, the Company elected to redeem and cancel warrants
to purchase 360,000 shares of common stock and options to purchase 500,000
shares of common stock (see Note 3).
NOTE 7 - STOCK OPTIONS (Continued)
A summary of the Company's stock option and warrant activity and related
information under the stock option plans and warrants for the years ended
September 28, 2003, September 29, 2002 and September 30, 2001 follows:
2003 2002 2001
--------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 641,322 $ 3.35 1,798,947 $ 2.92 1,136,991 $ 3.33
Granted 173,500 15.55 31,500 4.28 1,010,100 2.84
Canceled (500) 11.74 (69,300) 6.65 (309,294) 4.05
Redeemed - - (903,000) 2.54 - -
Exercised (126,747) 2.89 (208,950) 2.14 (10,500) 1.79
Expired - - (7,875) 4.51 (28,350) 4.57
------------ ------- ----------- -------- ----------- -------
Outstanding at
end of year 687,575 $ 6.49 641,322 $ 3.35 1,798,947 $ 2.92
============ ======= =========== ======== =========== =======
Options outstanding at September 28, 2003, are exercisable at prices ranging
from $1.42 to $36.70 and have a weighted-average remaining contractual life of
2.76 years. As of September 28, 2003, the exercise prices of all outstanding
stock options were less than the market price of the Company's common stock,
except for 20,000 shares. The weighted-average fair value of options granted
during the fiscal years ended September 28, 2003, September 29, 2002, and
September 30, 2001 was $9.70, $3.20 and $2.10 respectively. The following table
summarizes information about stock options outstanding at September 28, 2003.
Outstanding Weighted- Weighted-
Number Weighted-Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Price September 28, 2003 Contractual Life Price September 28, 2003 Price
-------------- ------------------ ---------------- ----- ------------------ -----
$1.42 - $2.97 322,875 2.43 years $ 2.61 322,875 $ 2.61
$3.32 - $712 203,700 1.76 years 5.03 203,700 5.03
$11.74 - $12.30 128,000 4.61 years 12.20 - -
$23.19 - $36.70 33,000 4.91 years 31.38 - -
---------- ------------- -------- ----------- ---------
687,575 2.76 years $ 6.49 526,575 $ 3.55
========== ============= ======== =========== ========
There were exercisable options outstanding to purchase 408,844 and 1,463,744
shares at September 29, 2002 and September 30, 2001, respectively, at
weighted-average exercise prices of $3.16 and $2.80, respectively.
NOTE 8 - SHAREHOLDER RIGHTS PLAN
In August 1997, the Company adopted a Shareholders' Rights Plan issuing one
right for each outstanding share of common stock. Each right entitles the
registered holder to purchase from the Company one share of common stock at $15
per share, subject to adjustment. The rights become exercisable if a person or
group (other than certain related persons) acquires or announces a tender offer
for prescribed percentages of the Company's shares or is declared an "adverse
person" by the Company's Board of Directors. In these events, each right holder
may purchase shares with a value equal to twice the exercise price. Furthermore,
if the Company engages in certain mergers or similar business combinations a
right holder may purchase shares of the acquiring company with a value to two
times the purchase price of the right. The rights expire on August 12, 2007.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment. Rent expense charged
to continuing operations for 2003, 2002 and 2001 was $2,654, $1,404 and $1,126,
respectively. Rent expense charged to discontinued operations for 2001 was $16.
Future minimum annual lease commitments at September 28, 2003 for long-term
noncancelable operating leases are as follows:
2004 $ 1,997
2005 1,890
2006 1,645
2007 1,378
2008 1,285
Thereafter 5,946
-----------
$ 14,141
The Company is subject to various legal proceedings and claims with respect to
such matters as product liabilities and other actions, which arise out of the
normal course of its business. Management and its legal counsel periodically
review the probable outcome of pending proceedings and the costs reasonably
expected to be incurred. The Company accrues for these costs when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated. In the opinion of management, any ultimate cost to the Company in
excess of amounts accrued will not materially affect its consolidated financial
position, results of operations or cash flows.
NOTE 10 - RESEARCH AND DEVELOPMENT
The Company incurs costs to improve the appeal and safety of its products.
Research and development costs are charged to operations when incurred. Amounts
charged to continuing operations were $853, $713 and $450 in 2003, 2002 and
2001, respectively. Amounts charged to discontinued operations were $610 in
2001.
NOTE 11 - UNAUDITED FINANCIAL INFORMATION
Presented below is certain unaudited quarterly financial information for 2003,
and 2002.
Quarter Ended
December 29, March 30, June 29, September 28,
2002 2003 2003 2003
---- ---- ---- ----
Net sales $ 39,882 $ 47,171 $ 62,117 $ 42,932
Gross profit 8,867 10,471 15,207 9,722
Net income 1,953 2,905 4,053 2,877
Basic earnings per share .44 .61 .85 .60
Diluted earnings per share .41 .56 .77 .54
Quarter Ended
December 30, March 31, June 30, September 29,
2001 2002 2002 2002
---- ---- ---- ----
Net sales $ 20,910 $ 23,171 $ 29,403 $ 31,200
Gross profit 4,898 5,932 7,571 6,535
Net income (loss) 892 1,080 1,937 (946)
Basic earnings (loss) per share .21 .25 .44 (.21)
Diluted earnings (loss) per share .20 .22 .38 (.21)
The sum of quarterly earnings per share may not equal annual earnings per share
due to changes in the diluted potential common shares.
The net loss for the fourth quarter of the fiscal year ended September 29, 2002
was primarily attributed to a $2,096 non-recurring expense related to the
redemption of certain warrants and options during the quarter. This charge was
recorded as compensation expense (see Note 3).
The net loss for the quarter ended September 30, 2001 included a gain of $352
from the sale of the discontinued business.
NOTE 12 - OPERATING SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by product category. The Company's
two reportable operating segments are automotive parts and products and OEM
automotive supply. The Company evaluates the performance of its segments and
allocates resources to them based on operating income. The accounting policies
of the segments are the same as those described in Note 1 and there are no
inter-segment revenues.
The table below presents information about segments used by the chief operating
decision maker of the Company for 2003, 2002 and 2001. This information has been
restated to conform with the presentation of discontinued operations:
2003 2002 2001
---- ---- ----
Net sales by geographic region:
OEM automotive supply
Domestic $ 156,197 $ 102,058 $ 43,694
Canada 33,864 - -
Automotive parts and products
Domestic 1,340 2,364 4,953
Foreign 701 262 287
------------ ------------ ------------
$ 192,102 $ 104,684 $ 48,934
============ ============ ============
Operating segment income:
OEM automotive supply (a) $ 14,403 $ 4,740 $ 347
Automotive parts and products (748) (194) 981
------------ ------------ ------------
$ 13,655 $ 4,546 $ 1,328
============ ============ ============
(a) Includes minority interest in income of subsidiary
Total assets:
OEM automotive supply
Domestic $ 42,230 $ 36,026 $ 17,504
Canada 12,783 - -
Automotive parts and products 3,717 3,066 4,506
------------ ------------ ------------
$ 58,730 $ 39,092 $ 22,010
============ ============ ============
NOTE 12 - OPERATING SEGMENT INFORMATION (Continued)
The following provides a reconciliation of segment information to consolidated
information.
2003 2002 2001
---- ---- ----
Operating segment income $ 13,655 $ 4,546 $ 1,328
Nonoperating income (expense) (424) 113 (254)
Income taxes (2,060) (388) (26)
Unallocated corporate income (expenses) 617 (1,308) (546)
------------ ------------ ------------
Income from continuing operations $ 11,788 $ 2,963 $ 502
============ ============ ============
The following specified amounts are included in the measure of segment income
reviewed by the chief operating decision maker:
2003 2002 2001
---- ---- ----
Depreciation and amortization expense
OEM automotive supply $ 1,437 $ 550 $ 319
Automotive parts and products 209 216 63
Discontinued operations - - 859
------------ ------------ ------------
$ 1,646 $ 766 $ 1,241
============ ============ ============
The information below contains information regarding significant customer
concentrations by segment for sales and accounts receivable. The OEM automotive
supply has one significant customer.
Sales by segment for this major customer are as follows:
2003 2002 2001
---- ---- ----
OEM automotive supply $ 190,061 $ 102,058 $ 43,694
Automotive parts and products - - -
Discontinued operations - - -
NOTE 12 - OPERATING SEGMENT INFORMATION (Continued)
Significant customer concentrations in accounts receivable for the Company's
major customer are as follows:
2003 2002 2001
---- ---- ----
OEM automotive supply $ 28,253 $ 21,853 $ 10,803
Automotive parts and products - - -
Discontinued operations - - -
NOTE 13 - SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
On February 4, 2003, the Company declared a 5% stock dividend. As a result, the
Company issued 225,460 additional shares of common stock. The number of basic
and diluted shares, along with the basic and diluted earnings per share
presented, have been adjusted to reflect this stock dividend.
A reconciliation of the numerators and denominators of the basic earnings (loss)
per common share and earnings (loss) per common share assuming dilution
computations for the years ended September 28, 2003, September 29, 2002 and
September 30, 2001 is presented below.
2003 2002 2001
---- ---- ----
Earnings (loss) per share, basic
Net income (loss) available to
common shareholders $ 11,788 $ 2,963 $ (3,177)
============ ============ ============
Weighted average common shares
outstanding (in thousands) 4,738 4,543 4,457
Earnings (loss) per share (EPS), basic $ 2.49 $ .65 $ (.71)
============ =========== ============
Basic EPS - continuing operations $ 2.49 $ .65 $ .11
============ =========== ============
Basic EPS - discontinued operations $ - $ - $ (.82)
============ ============ ============
NOTE 13 - EARNINGS (LOSS) PER SHARE (Continued)
2003 2002 2001
---- ---- ----
Earnings (loss) per share assuming dilution
Net income (loss) available to
common shareholders $ 11,788 $ 2,963 $ (3,177)
============ ============ ============
Weighted average common shares
outstanding (in thousands) 4,738 4,543 4,457
Add: dilutive effects of assumed
conversions and exercises of
stock options (in thousands) 495 812 -
------------ ------------ ------------
Weighted average common and dilutive
potential common shares outstanding (in thousands) 5,233 5,355 4,457
Earnings (loss) per share (EPS) assuming dilution $ 2.25 $ .55 $ (.71)
============ ============ ============
Dilutive EPS - continuing operations $ 2.25 $ .55 $ .11
============ =========== ============
Dilutive EPS - discontinued operations $ - $ - $ (.82)
============ ============ ============
Stock options were not considered in computing loss per common share for 2001
because they were antidilutive.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company paid administrative and engineering support in the amounts of $7,486
and $5,144 for 2003 and 2002, respectively to the Company's partner in Tecstar.
These expenses were in support of existing and potential new projects at
Tecstar.
NOTE 15 - SUBSEQUENT EVENT
On October 30, 2003, the Company signed a definitive merger agreement
("Agreement") with Wheel to Wheel, Inc., the Company's partner in the Tecstar,
LLC and Tecstar Canada ventures. The Agreement calls for the Company to issue
3.55 million common shares in exchange for the remaining 50% ownership interests
of Tecstar, LLC and Tecstar Canada owned by Wheel to Wheel, Inc. The closing
date of this transaction is expected to occur following shareholder approval at
the Company's annual shareholders' meeting. At this closing date the purchase
price will be determined based on the market value of the Company's shares.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - EFFECTS ON FINANCIAL STATEMENT
Not Applicable
ITEM 9A. CONTROLS AND PROCEDURES
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 September 28, 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the portions of the Registrant's proxy statement to
be filed with the Securities and Exchange Commission on or about December 15,
2003 under the caption "Proposal I--Election of Directors" through "Audit
Committee Matters," and "Filings Under Section 16(a) of the 1934 Act."
Our board of directors has determined that at least each of the following
members of the Audit Committee is an audit committee financial expert, as
defined by SEC regulations: David J. Matteson, John M. Collins, G. Raymond
Stults. Mr. Matteson and Mr. Collins are independent as defined by Nasdaq rules.
Mr. Stults is not deemed independent under Nasdaq rules in effect on the date
hereof.
Starcraft has adopted a Code of Ethics that applies to the Chief Executive
Officer and the Chief Financial Officer among others. Such Code of Ethics is
filed as an exhibit to this annual report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the portions of the Registrant's proxy statement to
be filed with the Securities and Exchange Commission on or about December 15,
2003 under the caption "Compensation Committee;" and "Management Remuneration
and Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the portions of the Registrant's proxy statement to
be filed with the Securities and Exchange Commission on or about December 15,
2003, under the captions "Voting Securities and Principal Holders Thereof;" and
the portion of "Proposal I--Election of Directors" preceding the presentation of
director and officer biographical data.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the portions of the Registrant's proxy statement to
be filed with the Securities and Exchange Commission on or about December 15,
2003 under the caption "Proposal I--Election of Directors; Management
Remuneration and Certain Transactions; Certain Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the portions of the Registrant's proxy statement to
be filed with the Securities and Exchange Commission on or about December 15,
2003, under the caption "Proposal V--Ratification of Appointment of Auditors."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of the report:
Financial Statements (as of September 28, 2003 and September 29, 2002 and
for the fiscal periods ended September 28, 2003, September 28, 2002, and
September 30, 2001):
Report of Independent Auditors
Balance Sheets
Statements of Income
Statements of Cash Flows
Statements of Shareholders' Equity
Notes to Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended September 28, 2003.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index beginning on page E-1.
(d) The following financial statement schedule is filed as part of this report:
(i) Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on behalf of the undersigned, thereto duly authorized.
STARCRAFT CORPORATION
DATE: December 5th, 2003 By: /s/ Kelly L. Rose
------------------------------
Kelly L. Rose,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 5th day of December 2003.
1) Principal Executive Officer:
By: /s/ Kelly L. Rose Chairman and Chief Executive Officer
-------------------------------
Kelly L. Rose
2) Principal Financial/Accounting Officer:
By: /s/ Joseph E. Katona, III Secretary, Chief Financial Officer
-------------------------------
Joseph E. Katona, III
3) The Board of Directors:
By: /s/ Kelly L. Rose Director
-------------------------------
Kelly L. Rose
By: /s/ John M. Collins Director
-------------------------------
John M. Collins
By: /s/ David J. Matteson Director
-------------------------------
David J. Matteson
By: /s/ Allen H. Neuharth Director
-------------------------------
Allen H. Neuharth
By: /s/ Michael H. Schoeffler Director
-------------------------------
Michael H. Schoeffler
By: /s/ David L. Stewart Director
-------------------------------
David L. Stewart
By: /s/ G. Raymond Stults Director
-------------------------------
G. Raymond Stults
Schedule II
Valuation and Qualifying Accounts and Reserves
(Dollars in Thousands)
Balance at Deductions from/ Balance
Beginning of Charged to Additions to At Close Of
Period Operations Reserves (a) Period
------------ ---------- ---------------- -----------
Allowance for doubtful accounts - deducted from accounts receivable, trade-in the consolidated balance sheets:
52 weeks ended September 28, 2003 $ 288 $ 157 $ (245) $ 200
52 weeks ended September 29, 2002 170 184 (66) 288
52 weeks ended September 30, 2001 255 -- (85) 170
(a) Write-off of bad debts, less recoveries
Balance at Deductions from/ Balance
Beginning of Charged to Additions to At Close Of
Period Operations Reserves Period
------------ ---------- ---------------- -----------
Valuation Allowance of Deferred Taxes:
52 weeks ended September 28, 2003 $ 6,338 $ -- $ (5,227) $ 1,111
52 weeks ended September 29, 2002 7,206 -- (868) 6,338
52 weeks ended September 30, 2001 6,330 - - 876 7,206
Balance at Deductions from/ Balance
Beginning of Charged to Additions to At Close Of
Period Operations Reserves Period
------------ ---------- ---------------- -----------
Warranty Reserve:
52 weeks ended September 28, 2003 $ 771 $ (25) $ (48) $ 698
52 weeks ended September 29, 2002 763 (8) -- 771
52 weeks ended September 30, 2001 3,028 (2,265)(b) -- 763
(b) Includes amounts charged to operations and reductions to reserve associated
with disposal of discontinued operations
EXHIBIT INDEX
Reference to
Regulation S-K Sequential Page
Exhibit Number Document Number
2 Agreement and Plan of Merger dated as of October 29, 2003, among
Registrant, Wheel to Wheel, Inc. and the shareholders of Wheel to
Wheel, Inc. Incorporated by reference to Exhibit 42 to Registrant's
Form 8-K filed November 3, 2003. *
3.1 Registrant's Articles of Incorporation, as amended. Incorporated by
reference to Exhibit 3.1 to the Registrant's Form 10-K for the year
ending October 1, 1995. *
3.2 Registrant's Code of By-Laws, as amended. Incorporated by reference to
Exhibit 3.2 to the Registrant's Form 10-K for the year ending October
1, 2000. *
4.1 Article 6 - "Terms of Shares" and Article 9 - "Provisions for Certain
Business Combinations" of the Registrant's Articles of Incorporation,
as amended. Incorporated by reference to Exhibit 3.1 to the
Registrant's Form 10-K for the year ending October 1, 1995. *
4.2 Article III - "Shareholder Meetings", Article VI - "Certificates for
Shares" and Article VII - "Corporate Books and Records - Section 3" of
the Registrant's Code of By-Laws, as amended. Incorporated by reference
to Exhibit 3.2 to the Registrant's Form 10-K for the fiscal year ending
September 29, 1996. *
4.3 Rights Agreement, dated as of August 12, 1997, between Registrant and
Harris Trust and Savings Bank, as Rights Agent. Incorporated by
reference to the Registrant's 8-a filed September 9, 1997. *
4.4(a) Loan Agreement by and between Tecstar, LLC and Comerica Bank dated
February 13, 2002. Incorporated by reference to Registrant's Report on
Form 10-Q for the quarter ended March 31, 2002. *
4.4(b) First Amendment to Loan Agreement and Note dated as of May 13, 2002, by
and between Tecstar, LLC and Comerica Bank. [ ]
4.4(c) Amendment No. 2 to Loan Agreement and Consent dated as of the 7th day
of June, 2002, by and between Tecsar, LLC and Comerica Bank. [ ]
4.4(d) Amendment to the Loan Agreement between Tecstar, LLC and Comerica Bank,
dated August 1, 2003. Incorporated by reference to Exhibit 4.2 to
Registrant's Form 10-Q for the fiscal quarter ended June 29, 2003. *
4.5 Loan Agreement by and between Starcraft Corporation and Comerica Bank
dated June 28, 2002. Incorporated by reference to Exhibit 4.15 to the
Registrant's Form 10-K for the year ended September 29, 2002. *
4.6 Amendment Number 1 dated April 6, 2003, to the Loan Agreement by and
between Starcraft Corporation and Comerica Bank dated June 29 2002.
Incorporated by reference to Exhibit 4.1 to Registrant's Form 10-Q for
the fiscal quarter ended March 30, 2003. *
4.7 Amendment to Loan Agreement between Starcraft Corporation and Comerica
Bank, dated August 1, 2003. Incorporated by reference to Exhibit 4.1 to
Registrant's Form 10-Q for the fiscal quarter ended June 29, 2003. *
4.8 Loan Agreement made as of April 30, 2003, between Tecstar Manufacturing
Canada Limited and Comerica Bank [ ]
4.9 Amendment to the Loan Agreement between Tecstar Manufacturing Canada,
Ltd. and Comerica Bank, dated August 1, 2003. Incorporated by
reference to Exhibit 4.3 to Registrant's Form 10-Q for the fiscal
quarter ended June 29, 2003. *
4.10 Promissory Note from Starcraft Corporation to G. Ray Stults in the
principal amount of $803,900 dated as of September 26, 2002.
Incorporated by reference to Exhibit 4.16 to the Registrant's Form 10-K
for the year ended September 29, 2002. *
4.11 Promissory Note from Starcraft Corporation to Kelly L. Rose in the
principal amount of $670,220 dated as of September 26, 2002.
Incorporated by reference to Exhibit 4.17 to the Registrant's Form 10-K
for the year ended September 29, 2002. *
10.1(a) The Starcraft Automotive Corporation Stock Incentive Plan. Incorporated
by reference to Exhibit 10.1 to Registrant's Form S-1 Registration
Statement filed June 3, 1993. *
10.1(b) The Starcraft Corporation 1997 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.1(b) to the Registrant's From 10-K for the
fiscal year ending September 29, 1996. *
10.2(a) Employment Agreement with Kelly L. Rose dated December 12, 1996.
Incorporated by reference to Exhibit 10.3(b) to the Registrant's From
10-K for the fiscal year ending September 29, 1996. *
10.2(b) Form of First Addendum to Employment Agreement with Kelly L. Rose,
December 31, 1997. Incorporated by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the fiscal year ending March 29, 1998. *
10.2(c) Second Addendum to Employment Agreement with Kelly L. Rose, effective
December 15, 1997. Incorporated by reference to Exhibit 10.3(d) of
the Registrant's Form 10-K for the fiscal year ending September 27,
1998. *
10.2(d) Amended and Restated Employment Agreement with Kelly L. Rose dated as
of July 23, 2003. [ ]
10.3(a) Employment agreement between Starcraft Corporation and Michael H.
Schoeffler, dated January 2, 2003. Incorporated by reference to Exhibit
10.1.1 to Registrant's Form 10-Q for the fiscal quarter ended December
29, 2002. *
10.3(b) Amended and Restated Employment Agreement with Michael H. Schoeffler,
dated as of October 6, 2003. [ ]
10.4 Asset Purchase and Sale Agreement, dated May 7, 2001, between
Starcraft Automotive Group, Inc. and Centurion Vehicles, Inc.
Incorporated by reference to Exhibit 2 to the
Registrant's Form 8-K dated May 25, 2001. *
10.5 Asset Purchase and Sale Agreement, dated August 21, 2001, between
Starcraft Automotive Group, Inc. and National Mobility Corporation and
Forest River, Inc. Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K dated August 31, 2001. *
10.6 First Amendment to Asset Purchase and Sale Agreement, dated August 31,
2001, between Starcraft Automotive Group, Inc. and National Mobility
Corporation and Forest River, Inc. Incorporated by reference to Exhibit
2.2 to the Registrant's Form 8-K dated August 31, 2001. *
10.7 License Agreement by and between the Registrant and Starcraft RV, Inc.
dated September 12, 1991. Incorporated by reference to Exhibit 10.24 of
the Registrant's Form S-1 Registration Statement filed June 3, 1993. *
10.8 License Agreement by and between the Registrant and Starcraft
Recreational Products, Ltd. dated January 18, 1991. Incorporated by
reference to Exhibit 10.25 of the Registrant's Form S-1 Registration
Statement filed June 3, 1993. *
10.9(a) Directors' Share Plan, restated effective October 1, 1995. Incorporated
by reference to Exhibit 10.16(a) of the Registrant's Form 10-K for
the year ending October 1, 1995. *
10.9(b) Directors' Compensation Deferral Plan effective October 1, 1995.
Incorporated by reference to Exhibit 10.16(b) of the
Registrant's Form 10-K for the year ending October 1, 1995. *
10.10 Warrant to Purchase 200,000 Shares of Common Stock of Starcraft
Corporation, issued to Kelly L. Rose, dated November 23, 1998.
Incorporated by reference to Exhibit 10.33 of the Registrant's Form
10-K for the fiscal year ending September 27, 1998. *
10.11 Warrant to Purchase 200,000 Shares of Common Stock of Starcraft
Corporation, issued to G. Ray Stults, dated November 23,1998.
Incorporated by reference to Exhibit 10.34 of the Registrant's Form
10-K for the fiscal year ending September 27, 1998. *
10.12 Stock Options to Purchase Shares of Common Stock of Starcraft
Corporation of Kelly L. Rose dated as of December 12, 2000.
Incorporated by reference to Exhibit 10.16 to the Registrant's Form
10-K for the year ending October 1, 2000. *
10.13 Stock Options to Purchase Shares of Common Stock of Starcraft
Corporation of G. Raymond Stults dated as of December 12, 2000.
Incorporated by reference to Exhibit 10.17 to the Registrant's Form
10-K for the year ending October 1, 2000. *
10.14(a) Reimbursement Agreement between Starcraft Corporation, National
Mobility Corporation, Imperial Automotive Group, Inc. and Starcraft
Automotive Group, Inc. and Kelly L. Rose and G. Ray Stults dated as of
December 12, 2000. Incorporated by reference to Exhibit 10.18(a) to the
Registrant's Form 10-K for the year ending October 1, 2000. *
10.14(b) Security Agreement between Starcraft Corporation and Starcraft
Automotive Group, Inc. and Kelly L. Rose and G. Ray Stults entered into
as of December 12, 2000. Incorporated by reference to Exhibit 10.18(b)
to the Registrant's Form 10-K for the year ending October 1, 2000. *
10.14(c) Real Property Mortgage (LaGrange County, Indiana)(Elkhart County,
Indiana) made and executed by Starcraft Corporation, f/k/a Rokane
Investment Group, Inc. in favor of Kelly L. Rose and G. Ray Stults made
as of December 12, 2000. Incorporated by reference to Exhibit 10.18(c)
to the Registrant's Form 10-K for the year ending October 1, 2000. *
10.15 Operating Agreement of Tecstar, LLC, dated January 1, 1999.
Incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for
the fiscal quarter ended March 30, 2003. *
10.16 Agreement for Office Lease By and Between Gateway Property Development,
LLC and Starcraft Corporation, dated February 15, 2003. Incorporated by
reference to Exhibit 10.2 to Registrant's Form 10-Q for the fiscal
quarter ended March 30, 2003. *
14 Starcraft Corporation Code of Ethics [ ]
21 Subsidiaries of the Registrant [ ]
23 Consent of Crowe, Chizek and Company LLP. [ ]
31.1 Section 13a-14(a)/15d-14(a) Certification of Kelly L. Rose [ ]
31.2 Section 13a-14(a)/15d-14(a) Certification of Joseph E. Katona III [ ]
32 Section 1350 Certifications of Kelly L. Rose and
Joseph E. Katona III [ ]