UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 28, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-22048
STARCRAFT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1817634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 1903
1123 South Indiana Avenue
Goshen, Indiana 46526
(Address of principal executive offices/zip code)
Registrant's telephone number, including area code: 574/534-7827
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: [X] No:
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes: No: [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: May 7, 2004 - 8,853,191 shares
of Common Stock, without par value.
STARCRAFT CORPORATION March 28, 2004
Form 10-Q
- INDEX -
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - March 28, 2004 (Unaudited)
and September 28, 2003 (Audited) 1
Consolidated Statements of Operations (Unaudited) for the
three and six month periods ended March 28, 2004 and
March 30, 2003 2
Consolidated Statements of Cash Flow (Unaudited) for the
six month periods ended March 28, 2004 and March 30, 2003 3-4
Notes to Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21-22
EXHIBITS 23-26
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
(Unaudited) (Audited)
CONSOLIDATED BALANCE SHEETS March 28, 2004 September 28, 2003
-------------- ------------------
(Dollars in Thousands)
ASSETS
Current Assets
Cash and cash equivalents....................... $ 308 $ 836
Accounts receivable, trade less allowance for
doubtful accounts: $213 at March 28, 2004
and $200 at September 28, 2003............. 25,889 28,606
Other receivables............................... 2,587 576
Inventories ................................... 16,817 10,060
Tooling and engineering projects................ 5,657 6,593
Deferred income taxes........................... 1,585 1,702
Other current assets............................ 886 707
-------- ------
Total current assets........................ 53,729 49,080
Property and Equipment
Land, buildings, and improvements............... 8,698 6,005
Machinery and equipment......................... 8,903 7,321
--------- ----------
17,601 13,326
Less accumulated depreciation................... 5,185 4,190
--------- -----------
12,416 9,136
Goodwill, net ..................................... 77,443 --
Intangible assets, net .............................. 13,940 --
Other assets ................................... 1,446 514
--------- -----------
$ 158,974 $ 58,730
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade......................... $ 21,727 $ 19,549
Current maturities of long-term debt............ 454 --
Accrued expenses:
Compensation and related expenses........... 1,019 2,668
Warranty.................................... 698 698
Income taxes................................ 423 3,378
Taxes - other............................... 166 434
Other....................................... 834 394
--------- -----------
Total current liabilities.............. 25,321 27,121
Long-term debt, net of current maturities............ 27,768 9,148
Deferred income taxes................................ 5,297 --
Minority interest in subsidiary...................... -- 9,821
Commitments and contingencies........................ -- --
Shareholders' Equity
Preferred Stock, no par value; 2,000,000 shares
authorized, none issued................... -- --
Common Stock, no par value; 20,000,000 shares
authorized, issued and outstanding 8,852,666
shares as of March 28, 2004 and 5,044,307
shares as of September 28, 2003 ........... 149,138 15,203
Additional paid-in capital..................... 3,420 3,420
Accumulated deficit............................. (52,181) (6,151)
Accumulated other comprehensive income.......... 211 168
--------- -----------
Total shareholders' equity................. 100,588 12,640
--------- -----------
$ 158,974 $ 58,730
========= ===========
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
3 Months Ended 6 Months Ended
------------------------------------- ---------------------------------
March 28, 2004 March 30, 2003 March 28, 2004 March 30, 2003
--------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
Net Sales $ 39,156 $ 47,171 $ 82,954 $ 87,052
Cost of goods sold ......................... 33,493 36,700 69,645 67,715
------------- ----------- ------------ ------------
Gross profit ...................... 5,663 10,471 13,309 19,337
Operating Expenses
Selling and promotion ................. 719 468 1,348 851
General and administrative ............ 4,666 4,022 8,683 8,511
Goodwill impairment ................... 47,900 -- 47,900 --
Amortization of intangibles ........... 360 -- 360 --
------------- ----------- ------------ ------------
Operating income (loss) 47,982 5,981 (44,982) 9,975
Nonoperating (Expense) Income
Interest, net ......................... (141) (103) (214) (216)
Other, net .......................... -- (24) -- 19
------------- ----------- ------------ ------------
(141) (127) (214) (197)
------------- ----------- ------------ ------------
Income (loss) before minority interest
and income taxes ............ (48,123) 5,854 (45,196) 9,778
Minority Interest in Income (Loss)
of Subsidiary (798) 2,746 610 4,480
------------- ----------- ------------ ------------
Income (loss) before income taxes (47,325) 3,108 (45,806) 5,298
Income Taxes 24 203 221 441
------------- ----------- ------------ ------------
Net income (loss) $ (47,349) $ 2,905 $ (46,027) $ 4,857
============= =========== ============ ============
Basic earnings (loss) per share $ (5.83) $ 0.58 $ (6.96) $ 0.98
============= =========== ============ ============
Dilutive earnings (loss) per share $ (5.83) $ 0.54 $ (6.96) $ 0.91
============= =========== ============ ============
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited
6 Months Ended
March 28, 2004 March 30, 2003
-------------- --------------
(Dollars in Thousands)
Operating Activities
Net income (loss) ..................... $ (46,027) $ 4,857
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization ......... 1,357 660
Minority interest...................... (6,890) 3,484
Goodwill impairment.................... 47,900 --
Change in deferred taxes............... (137) --
Change in operating assets and liabilities:
Receivables ...................... 2,314 (9,783)
Inventories ...................... (5,528) (1,897)
Other current assets ............. 1,123 (2,246)
Accounts payable .................. (1,694) 5,752
Accrued expenses................... (5,316) (400)
Other .......................... 56 --
----------- -----------
Net cash from operating activities .... (12,842) 427
----------- -----------
Investing Activities
Purchase of property and equipment (1,933) (2,305)
Acquisitions, net of cash acquired..... (1,200) --
Other assets........................... (280) (88)
----------- -----------
Net cash from investing activities (3,413) (2,393)
----------- -----------
Financing Activities
Net proceeds on revolving credit
agreements......................... 15,485 2,750
Payments on notes to related parties... -- (770)
Proceeds from exercise of stock options 242 113
Other.................................. -- 127
----------- -----------
Net cash from financing activities 15,727 2,220
----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents ........................... (528) 254
Cash and cash equivalents at
beginning of period................. 836 284
----------- -----------
Cash and cash equivalents at
end of period....................... $ 308 $ 538
=========== ===========
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited (Continued)
6 Months Ended
------------------------------------------
March 28, 2004 March 30, 2003
-------------- --------------
(Dollars in Thousands)
Non-cash Investing and Financing Activities
In conjunction with the acquisition of
businesses liabilities were assumed
as follows:
Fair value of assets acquired............ $ 147,286,853 --
============= ==============
Liabilities assumed...................... $ 13,592,653 --
============= ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STARCRAFT CORPORATION
March 28, 2004
Note 1. Basis of Presentation
The accompanying unaudited financial statements of Starcraft Corporation
(the "Company") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to those rules
and regulations. Reference is made to the Company's audited financial
statements set forth in its annual report on Form 10-K for its fiscal year
ended September 28, 2003.
In the opinion of the management of the Company, the unaudited financial
statements contain all adjustments (which include only normally recurring
adjustments) necessary for a fair statement of the results of operations
for the three and six month periods ended March 28, 2004 and March 30,
2003. The results of operations for the three and six month periods ended
March 28, 2004 are not necessarily indicative of the results which may be
expected for the year ending October 3, 2004.
The Company has adopted a 52 or 53 week fiscal year ending the last Sunday
nearest to September 30. The results of operations for the three and six
month periods ended March 28, 2004 and March 30, 2003 are for 13 and 26
week periods, respectively.
Note 2. Principles of Consolidation
On January 16, 2004, the Company through Wheel to Wheel Acquisition
Company, LLC an Indiana limited liability Company and a wholly owned
subsidiary of the Company (the "Acquisition Subsidiary"), acquired Wheel to
Wheel, Inc., a Michigan corporation ("Wheel to Wheel"). Wheel to Wheel had
a 50% ownership in each of Tecstar, LLC and Tecstar Manufacturing Canada
Limited (collectively "Tecstar"). Through the acquisition of Wheel to
Wheel, the Company now owns 100% of Tecstar, which accounts are
consolidated in these financial statements at March 28, 2004. All
inter-company transactions have been eliminated.
Prior to January 16, 2004, the Company owned 50% of Tecstar and
consolidated the accounts due to management representation on the Tecstar
Board of Directors and control of its affairs. The Company accounted for
the Wheel to Wheel 50% ownership as minority interest.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
March 28, 2004
Note 3. Acquisition
Effective January 16, 2004, the Company purchased all of the assets of
Wheel to Wheel for a purchase price of $133,693,000, representing the
issuance of 3,550,000 common shares at a value of $37.66 per share in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
141. The acquisition has been accounted for as a purchase and, accordingly,
the operating results of Wheel to Wheel have been included in the Company's
financial statements since the date of acquisition. The acquired assets and
liabilities assumed have been recorded at their estimated fair values at
the date of acquisition and approximate the following:
Cash $ 4,402
Other current assets 2,507,980
Property, plant and equipment 1,913,000
Other assets 3,581,895
Goodwill 124,978,188
Intangible assets 14,300,000
Current liabilities (4,569,419)
Other liabilities (9,023,046)
-----------
$ 133,693,000
Note 4. Inventories
The composition of inventories is as follows (dollars in thousands):
(Unaudited) (Audited)
March 28, 2004 September 28, 2003
Raw materials $ 16,750 $ 9,583
Finished goods 462 877
--------------- -------------
17,212 10,460
Allowance for slow-moving
and obsolete inventories (405) (400)
----------------- -------------
Total $ 16,817 $ 10,060
============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
March 28, 2004
Note 5. Goodwill
Goodwill represents the excess of the Wheel to Wheel purchase price over
the fair value of the assets acquired. Under SFAS No. 142 the goodwill is
not amortized and is assessed annually for impairment, chosen by management
as the end of the second quarter. Effective March 28, 2004, management
determined the goodwill to be impaired and recorded a $47.9 million
impairment charge.
Note 6. Intangible Assets
Intangible assets represent the customer relationship and business
contracts acquired through the acquisition of Wheel to Wheel. The customer
relationship is valued at $10,000,000 and is being amortized using the
straight-line method over 20 years. The contracts are valued at $4,500,000
and are being amortized over the life of the respective contract.
Amortization expense was $360,000 for the quarter ended March 28, 2004.
Note 7. Long-term Debt
The Company entered into a $30 million dollar revolving credit agreement
with its current lending institution on January 16, 2004. Advances under
the agreement are limited to a specific percentage of eligible receivables
and inventory, subject to a maximum of $30 million. The advances bear
interest subject to a pricing matrix with ranges of 3/4% below the prime
rate to 1/4% above the prime rate dependent upon a ratio of funded debt to
EBITDA. The revolver also contains a LIBOR based borrowing option with
rates ranging from 150 to 250 basis points above Euro dollar rates,
dependent upon the same ratio of funded debt to EBITA. The credit facility
matures April 1, 2006 and as a result, all borrowings under the credit
facility at March 28, 2004 are classified as long-term debt.
Note 8. Comprehensive Income
Other comprehensive income consists of foreign currency translation
adjustments. Comprehensive income, which consists of net income and other
comprehensive income (loss), for the three and six month periods ended
March 28, 2004 was ($47,306) and $(45,984), respectively. There were no
foreign currency transactions for the corresponding prior year periods.
Note 9. Common Stock
On February 9, 2004, the Board of Directors declared a 5% common stock
dividend. The stock dividend was paid on March 19, 2004 to stockholders of
record as of February 20, 2004. All share and per share data have been
adjusted to reflect the stock dividend on a retroactive basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
March 28, 2004
Note 10. Earnings Per Share
The computation of basic and dilutive earnings (loss) per share follows (in
thousands, except share and per share amounts):
3 Months Ended (Unaudited) 6 Months Ended (Unaudited)
--------------------------------- -------------------------------------
March 28, 2004 March 30, 2003 March 28, 2004 March 30, 2003
-------------- -------------- -------------- --------------
Basic earnings (loss) per share
Net income (loss) available
to common stockholders $ (47,349) $ 2,905 $ (46,027) $ 4,857
========== ========== ========== ==========
Weighted average common
shares outstanding 8,115 4,970 6,608 4,945
========== ========== ========== ==========
Basic earnings (loss) per share (5.83) $ 0.58 $ (6.96) $ 0.98
========== ========== ========== ==========
Dilutive earnings (loss) per share
Net income (loss) available
to common stockholders $ (47,349) $ 2,905 $ (46,027) $ 4,857
========== ========== ========== ==========
Weighted average common
shares outstanding 8,115 4,970 6,608 4,945
Add: Potential dilutive effects of
incentive stock options (a) 438 (a) 416
---------- ----------- ---------- ----------
Weighted average potential
dilutive common shares outstanding 8,115 5,408 6,608 5,361
========== ========== ========== ==========
Dilutive earnings (loss) per share $ (5.83) $ 0.54 $ (6.96) $ 0.91
========== ========== ========== ==========
(a) Calculation does not reflect the effect of incentive stock options
since their effect is antidilutive.
During the second fiscal quarter of 2004 the Company declared and
issued a 5% Common Stock dividend. As a result, the Company issued
421,539 additional shares of common stock. The number of basic and
dilutive shares, along with the basic and dilutive earnings per share
shown above reflect the stock dividend for all periods shown.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
March 28, 2004
Note 11. Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure."
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair market value of the shares at the date of
grant. The Company accounts for the stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, the Company recognizes no compensation
expense for the stock options.
The following table illustrates the effect on net income and earnings per
share as if the Company had applied the fair value recognition provisions
of SFAS No. 123 "Accounting for Stock-Based Compensation."
3 Months Ended 6 Months Ended
------------------------------------- ---------------------------------
March 28, 2004 March 30, 2003 March 28, 2004 March 30, 2003
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
Net income(loss) - as reported $ (47,349) $ 2,905 $ (46,027) $ 4,857
Deduct: total stock-based employee
compensation expense determined under
fair value based methods for all awards 660 17 1,646 96
---------- ----------- ---------- ----------
Net income (loss) - pro forma $ (48,009) $ 2,888 $ (47,673) $ 4,761
========== ========== ========== ==========
Earnings (loss) per share - as reported
Basic earnings (loss) per share $ (5.83) $ 0.58 $ (6.96) $ 0.98
========== ========== ========== ==========
Dilutive earnings (loss) per share $ (5.83) $ 0.54 $ (6.96) $ 0.91
========== ========== ========== ==========
Earnings (loss) per share - pro forma
Basic earnings (loss) per share $ (5.92) $ 0.58 $ (7.21) $ $0.96
========== ========== ========== ==========
Dilutive earnings (loss) per share $ (5.92) $ 0.53 $ (7.21) $ 0.89
========== ========== ========== ==========
NOTES TO FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
March 28, 2004
Note 12. Operating Segment Information
The Company's principal business is the supply of the OEM Automotive
Industry. The Company's previously reported Automotive Parts and Products
segment no longer meets the quantitative thresholds for separate disclosure
as set forth in SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information."
Note 13. Warranty Expense
The Company's OEM Automotive Supply segment provides products to Original
Equipment Manufacturers ("OEM") under warranty terms similar to terms
offered by the OEM to its customers, which is generally 3 years or 36,000
miles. The Company accrues an estimated liability for potential warranties
at the time products are sold, based on past experience.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of the three months ended March 28, 2004
(Second Quarter Fiscal Year 2004) to the three months
ended March 30, 2003 (Second Quarter Fiscal Year 2003)
- --------------------------------------------------------------------------------
Net sales for the quarter ended March 28, 2004 decreased $8.0 million to $39.2
million from $47.2 million for the quarter ended March 30, 2003. Slower sales at
our Canadian second stage facility accounted for $4.5 million of the $8.0 sales
decline, while New Jersey and Shreveport operations also experienced lower
sales. The New Jersey and Shreveport facilities were affected by expiration of
second stage programs and contributed minimal sales compared to prior year.
Sales at New Jersey and Shreveport were $1.4 million combined, versus prior year
sales of $6.3 million for the second quarter. H2 Hummer parts sales decreased
20% and fell in relation to the overall decline in H2 vehicle sales. Offsetting
these variances were acquisition related sales of $3.7 million, including Wheel
to Wheel sales of $2.0 million and $1.2 million in sales from our Canadian paint
facility.
Gross profits decreased to $5.7 million for the quarter ended March 28, 2004.
This was down $4.8 million from $10.5 million for the quarter ended March 30,
2003. Gross profit was adversely affected by several factors. The $8.0 million
decline in sales had significant impact, as the New Jersey and Shreveport
facilities did not generate enough sales volume to contribute any margin. Second
stage sales mix declined to 73% of total sales from 81% in the prior year
quarter, while financial performance of the businesses acquired during the first
quarter, most notably our Canadian paint facility, were substantially lower than
expected.
Selling and promotion expenses were $0.7 million for the second quarter of 2004
compared to $0.5 million for the fiscal 2003 quarter. Selling expenses
associated with recent acquisitions were $0.2 million and accounted for all of
the increase. General and administrative expenses were $4.7 million, an increase
of $0.7 million over the second quarter of fiscal 2003. General and
administrative expenses associated with recent acquisitions were $0.4 million,
while expenses associated with the Wheel to Wheel merger were $0.2 million.
A goodwill impairment charge of $47.9 million was recorded during the second
quarter of fiscal 2004. On January 16, 2004 the Company issued 3.55 million
shares to the shareholders of Wheel to Wheel, its partner in Tecstar. According
to SFAS No. 141, purchase account guidelines applied to this non-cash
transaction. The trading price of a publicly traded security is the best
indicator of its value. SFAS No. 141 guidelines further require the securities
issued to be valued at the date the acquisition is agreed upon and announced.
Accordingly, the price of these shares was $37.66 in determining the value of
the transaction. As detailed in Note 3, goodwill generated from this non-cash
transaction was approximately $125 million.
This goodwill is not subject to amortization, but rather tested once annually
for impairment per SFAS No. 142. The principle driver of this impairment test is
the current trading price of the public securities issued. Due to a material
decline in the trading price to $13.63 at March 28, 2004, the Company decided to
perform its annual impairment test. Goodwill, which was valued based upon the
purchase of Wheel to Wheel is now valued in relationship to the entire reporting
entity, and accordingly was adjusted by the reported impairment amount at March
28, 2004.
Interest expense was $141,000 in the second quarter versus $103,000 during the
second quarter of fiscal 2003. Higher borrowings were partially offset by
favorable interest rates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of the three months ended March 28, 2004
(Second Quarter Fiscal Year 2004) to the three months
ended March 30, 2003 (Second Quarter Fiscal Year 2003)
- --------------------------------------------------------------------------------
Net sales for the six months ended March 28, 2004 decreased $4.1 million to
$83.0 million, from $87.1 million for fiscal 2003. The second stage programs in
the Texas facility were $5.5 million higher than fiscal 2003 due to a strong
start in the first quarter. The Canadian second stage program was $1.3 million
lower than fiscal 2003, however this plant did not contribute any sales during
the first quarter of fiscal 2003, as it was not in operation until January of
2003. Sales at our Shreveport facility were $5.2 million lower than fiscal 2003,
while the New Jersey facility was down $3.4 million compared to fiscal 2003.
Both declines were due to expiration of second stage programs. H2 hummer parts
sales declined $5.0 million compared to the first six months of fiscal 2003 and
were reflective of reasons discussed previously in second quarter results. Sales
relating to acquisitions accounted for $5.3 million during the six months end
March 28, 2004.
Gross profit for the six months ended March 28, 2004 was $13.3 million, compared
to $19.3 million for the comparable period of fiscal 2003. The decline in sales
of $4.1 million was a factor as were the issues which affected gross profit
during the second quarter of fiscal 2004 previously noted, including performance
of acquired companies during the first half of fiscal 2004.
Selling and Promotion expenses were $1.3 million for the six months ended March
28, 2004 versus $0.9 million for the comparable period of fiscal 2003. Higher
marketing costs for new business development and selling and promotional
expenses associated with recent acquisitions of $0.2 million caused the
increase. General and Administrative expense was $8.7 million for the six months
ended March 28, 2004 versus $8.5 million for the comparable period of fiscal
2003.
SEASONALITY AND TRENDS
The Company's business sales and profits are dependent on the automotive markets
in the United States. The business is influenced by a number of factors
including OEM plant shutdowns, model year changeovers, atypical weather for any
sales region, interest rates, gasoline prices, and OEM programs affecting price
and supply. The business is also dependant upon long-term contracts.
The Company provided updates on the status of our OEM programs in the Company's
Annual Report on Form 10-K for the year ended September 28, 2003. The only
change in status of these programs was an earlier than expected expiration of
the second stage program at the New Jersey facility. This program accounted for
8% of fiscal 2003 sales.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Funds available from operations and under the Company's revolving credit
agreements were adequate to finance operations and provide for capital
expenditures during the three months ended March 28, 2004. Long-term debt was
$27.8 million at March 28, 2004 compared to $9.1 million at September 28, 2003.
Operations utilized $12.8 million in cash during the first six months of fiscal
2004, compared to generating $0.4 million of cash during the first six months of
fiscal 2003. Trade receivables, exclusive of the effects of acquisitions, were
$4.3 million lower than September 28, 2003 levels due to softer volume.
Inventory levels, exclusive of the effects of acquisitions were $5.5 million
higher than September 28, 2003 levels. Wheel inventory associated with the
Silverado and GMC Sierra wheel program was $4.0 million while Shreveport
inventory increased $1.0 million due to the launch of a new supply program.
Other receivables and tooling development and reimbursement engineering services
increased $2.0 million during the first six months of 2004 due to investment in
potential new sales programs and timing of tooling and engineering reimbursement
from customers. Accrued expenses at March 28, 2004, exclusive of the effects of
acquisitions, were $5.3 million lower than September 28, 2003, and were
reflective of $3.1 million in Canadian tax payments and $2.5 million in
incentive compensation payments. Distributions totaling $7.5 million were also
made to our partner in Tecstar prior to the merger on January 16, 2004. Capital
expenditures total $1.9 million during the first six months of fiscal 2004.
Major items included tooling expenditures for aftermarket parts of $0.8 million
and $0.4 million for leasehold improvements in our Texas facility.
In October 2003, Starcraft and Wheel to Wheel jointly acquired the assets of
Tarxien Automotive in Ontario, Canada. Tarxien, with $3.0 million in annual
sales, was acquired for its OEM-compliant horizontal paint line, and its plastic
injection molding facilities that will further support Starcraft's ongoing
automotive aftermarket parts business.
In November 2003, the Company acquired 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.
Total purchase price of the assets net of assumed liabilities, for Tarxien
Automotive and Classic Design was $1.2 million.
The Company, in relation to the acquisition of Wheel to Wheel, has entered into
employment contracts with three employees, that among other things, allow for
severance payments of two years worth of base salary for termination without
cause. Obligations under these severance agreements would total $1.8 million
annually. In January 2004, the Company entered into a $30 million revolving
credit agreement with its current lending institution, and a new lending
institution, which matures on April 1, 2006. The facility was amended to
accommodate the increased revolver needs associated with recent acquisitions and
the Wheel to Wheel merger. Advances under the agreement are limited to a
specific percentage of eligible receivables and
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES - Continued
inventory, subject to a maximum of $30 million. The advances bear interest
subject to a pricing matrix with ranges of 3/4% below the prime rate to 1/4%
above the prime rate dependent upon a ratio of funded debt to EBITDA. The
revolver also contains a LIBOR based borrowing option with rates ranging from
150 to 250 basis points above Euro dollar rates, dependent upon the same
calculation. The borrowings are collateralized by substantially all of the
Company's assets.
The Company believes that future cash flows from operations and funds available
under its revolving credit agreement will be sufficient to satisfy its
anticipated operating needs and capital and liquidity requirements for 2004. The
Company also believes that its objectives for growth over the next few years can
be accomplished with capital investment levels consistent with prior years, and
that its internal resources and existing or refinanced credit facilities will
provide sufficient liquidity for such purposes.
The Company is in the process of reviewing its capital structure and potential
transactions to mitigate exposure to near-term debt and better align the
long-term risks and opportunities of the business.
INCOME TAXES
At this time, the Company does not have U.S. federal income tax expenses due to
a reserve on existing deferred tax assets, which exists primarily due to
operating loss carryforwards. The Company is incurring Canadian taxes related to
its operation in Canada, and certain state taxes.
As the operating loss carryforwards are utilized, the Company will begin
recording U.S. federal income taxes, along with Canadian and state taxes. At
March 28, 2004, the operating loss carryforwards were approximately $0.5
million.
MANUFACTURING AND OPERATING TRENDS
The supply program in Shreveport ended during the fourth quarter of fiscal 2003.
The Company had minimal sales for this program in 2004 compared to $6.1 million
during the first six months of fiscal 2003. A new supply program starting during
the third quarter of fiscal 2004 should return the Shreveport facility to
profitability.
Supply programs in the New Jersey facility are ending in 2004. The Company plans
to close this facility after the programs have ended.
The Canadian facility operated at a loss for the six months ended March 28, 2004
due to reduced sales volume. This situation will continue to occur if sales
volumes do not increase. Currently, the Company is working with its customer in
attempts to increase sales at this location.
H2 parts sales generally follow OEM sales of the H2 chassis. The OEM is
introducing a new model of the H2 vehicle which should increase the Company's
related parts sales in the second half of fiscal 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
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. Some of the more significant policies
include:
Revenue Recognition: The Company generally manufactures products based on
specific orders from customers. Shipments are generally made by common carrier
after receiving authorization from the customer, and revenue is recognized upon
shipment under FOB factory terms.
Warranties: The Company follows the policy of accruing an estimated liability
for warranties at the time the warranted products are sold. The estimate is
generally based on past claims experience.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed principally by the straight-line method over the estimated useful
lives of the assets. The Company is depreciating buildings over periods of 15 to
50 years, building improvements over periods of 5 to 20 years, and equipment
over periods of 3 to 12 years.
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 twenty 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.
Forward Looking Statements
The foregoing discussion contains forward-looking statements regarding economic
conditions and trends, adequacy of capital resources, seasonality and supply of,
and demand for, the Company's products, and the prospects of Management's
operating strategies, revenues and profits, all of which are subject to a number
of important factors which may cause the Company's projections to be materially
inaccurate. Some of such factors are described in the Company's Form 10-K for
the year ended September 28, 2003, under the subsection entitled "Discussion of
Forward-Looking Information" which is incorporated herein by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
LONG-TERM CONTRACTUAL OBLIGATIONS:
The Company assumed long-term debt obligations totaling $3.6 million, and
various operating lease obligations associated with the Wheel to Wheel
acquisition. The Company also entered into Employment Agreements with the
majority shareholders of Wheel to Wheel. Long-term contractual obligations as of
March 28, 2004 are as follows:
Payments due by period (in thousands)
-----------------------------------------------------------------------
Total Less than 1-3 3-5 More than
1 Year Years Years 5 Years
Long-Term Debt Obligations $ 28,222 $ 454 $ 25,380 $ 684 $ 1,704
Operating Lease Obligations $ 14,624 $ 2,855 $ 5,165 $ 2,700 $ 3,904
Employment Agreement Obligations $ 6,450 $ 2,550 $ 3,000 $ 900 $ --
-------- -------- -------- ------- --------
Total $ 49,296 $ 5,859 $ 33,545 $ 4,284 $ 5,608
========= ======== ======== ======== ========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISUCSSIONS ABOUT MARKET RISKS
There have been no material changes from the information provided in the
Company's annual report on Form 10-K for the year ended September 28, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Starcraft carried out an evaluation, under the supervision and with the
participation of Starcraft's management, including Starcraft's Co-Chief
Executive Officers 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
Co-Chief Executive Officers and Chief Financial Officer concluded that, at
March 28, 2004, Starcraft's disclosure controls and procedures are
effective in accumulating and communicating to management (including such
officers) the information relating to Starcraft (including its consolidated
subsidiaries) required to be included in Starcraft's periodic SEC filings.
PART II OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
(a) By action of the Registrant's Board of Directors and its shareholders,
the Articles of Incorporation of the Registrant were amended effective
January 13, 2004, to increase the number of authorized common shares
from 10,000,000 to 20,000,000.
(b) The Registrant issued 3,550,000 shares of Common Stock to the 7
shareholders of Wheel to Wheel, Inc. in connection with the
acquisition of Wheel to Wheel, Inc. on January 16, 2004. Such issuance
was exempt from registration under the Securities Act of 1933 as a
private placement under Section 4(2) and Regulation D.
The registrant issued 421,539 shares to its shareholders in a pro rata
5% stock dividend on March 19, 2004. Such issuance was not an offer or
sale of securities under the Securities Act of 1933, as amended, and
accordingly, was not subject to the registration requirements of that
act.
PART II OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security Holders
(a) The Company held its annual meeting of shareholders on January
12, 2004.
(c) Matters voted upon:
(1) Election of Director Nominees:
Votes Cast
For Withheld
--------- --------
G. Raymond Stults 3,949,963 298,964
David L. Stewart 4,105,075 143,852
(2) Approval and Ratification of the appointment of Crowe Chizek
and Company LLC as auditors for the Company for the fiscal
year ending October 3, 2004:
Votes Cast
For Against Abstain Non-votes
--------- ------- ------- ------------
4,216,082 30,013 2,832 --
(3) Amendment to the 1997 Incentive Plan:
For Against Abstain Non-votes
--------- ------- ------- ------------
2,460,797 221,261 14,032 1,396,153
(4) Increase of authorized shares:
For Against Abstain Non-votes
--------- ------- ------- ------------
4,170,723 72,772 5,432 --
(5) Approval of issuance of shares in connection with
acquisition of Wheel to Wheel, Inc.:
For Against Abstain Non-votes
--------- ------- ------- ------------
2,841,490 4,252 7,032 1,396,153
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with the report:
Exhibit 4.1 -- Amendment Number 1, dated January 30, 2004, to the Loan
Agreement by and between Starcraft Corporation and Comerica Bank dated
January 16, 2004.
Exhibit 4.2 - Amendment Number 2, dated March 23, 2004, to the Loan
Agreement by and between Starcraft Corporation and Comerica Bank dated
January 16, 2004.
Exhibit 31.1 - Certification by Co-Chief Executive Officer required by
Rule 31a-14(a) or 15d-14(a)
Exhibit 31.2 - Certification by Co-Chief Executive Officer required by
Rule 31a-14(a) or 15d-14(a)
Exhibit 31.3 - Certification by Chief Financial Officer required by
Rule 31a-14(a) or 15d-14(a)
Exhibit 32 - Certification required under Section 1350
(b) The Company filed a report on Form 8-K on January 20, 2004 to report
the acquisition of Wheel to Wheel, Inc.
The Company filed a report on Form 8-K/A on April 1, 2004 to report
historical audited financial statements for Wheel to Wheel, Inc.
The Company filed a report on Form 8-K on April 1, 2004 to report a
goodwill impairment charge and issuance of a related press release.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARCRAFT CORPORATION
(Registrant)
May 12, 2004 By: /s/ Josephn E. Katona, III
------------------------------
Joseph E. Katona, III
Chief Financial Officer