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 June 27, 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: August 6, 2004 - 8,853,191
shares of Common Stock, without par value.
STARCRAFT CORPORATION June 27, 2004
Form 10-Q
- INDEX -
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 27, 2004 (Unaudited)
and September 28, 2003 (Audited) 1
Consolidated Statements of Operations (Unaudited) for the
three and nine month periods ended June 27, 2004 and
June 29, 2003 2
Consolidated Statements of Cash Flow (Unaudited) for the
nine month periods ended June 27, 2004 and June 29, 2004 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 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18-19
SIGNATURES 20-21
EXHIBITS 22-29
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
(Unaudited) (Audited)
CONSOLIDATED BALANCE SHEETS June 27, 2004 September 28, 2003
------------- ------------------
(Dollars in Thousands)
ASSETS
Current Assets
Cash and cash equivalents....................... $ 672 $ 836
Accounts receivable, trade less allowance for
doubtful accounts: $256 at June 27, 2004
and $200 at September 28, 2003............. 28,211 28,606
Other receivables............................... 3,689 576
Inventories ................................... 15,218 10,060
Tooling and engineering projects................ 3,772 6,593
Deferred income taxes........................... 1,585 1,702
Other current assets............................ 596 707
------------- ---------------
Total current assets........................ 53,743 49,080
Property and Equipment
Land, buildings, and improvements............... 5,558 3,761
Machinery, equipment and fixtures............... 13,630 9,565
------------- ---------------
19,188 13,326
Less: Accumulated depreciation................. 5,772 4,190
------------- ---------------
13,416 9,136
Goodwill, net ..................................... 77,443 --
Intangible assets, net .............................. 13,400 --
Other assets ................................... 1,441 514
------------- ---------------
$ 159,443 $ 58,730
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt............ 390 --
Accounts payable, trade......................... $ 20,597 $ 19,549
Accrued expenses:
Compensation and related expenses........... 1,613 2,668
Warranty.................................... 582 698
Income taxes................................ -- 3,378
Taxes - other............................... 170 434
Other....................................... 736 394
------------- ---------------
Total current liabilities.............. 24,088 27,121
Long-term debt, net of current maturities............ 29,594 9,148
Deferred income taxes................................ 5,092 --
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 8,853,191
shares as of June 27, 2004 and 5,044,307
shares as of September 28, 2003 ........... 149,144 15,203
Additional paid-in capital..................... 3,420 3,420
Accumulated deficit............................. (52,108) (6,151)
Accumulated other comprehensive income.......... 213 168
------------- ---------------
Total shareholders' equity................. 100,669 12,640
------------- ---------------
$ 159,443 $ 58,730
============= ===============
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
3 Months Ended 9 Months Ended
------------------------------------ ---------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
Net Sales $ 45,099 $ 62,117 $ 128,053 $ 149,170
Cost of goods sold ......................... 39,971 46,910 109,616 114,625
------------- ------------- -------------- -------------
Gross profit ...................... 5,128 15,207 18,437 34,545
Operating Expenses
Selling and promotion ................. 764 526 2,112 1,377
General and administrative ............ 3,689 3,695 12,372 12,206
Goodwill impairment ................... -- -- 47,900 --
Amortization of intangibles ........... 540 -- 900 --
------------- ------------- -------------- -------------
Operating Income (Loss) 135 10,986 (44,847) 20,962
Nonoperating (Expense) Income
Interest, net ......................... (240) (91) (454) (307)
Other, net .......................... -- (1) -- 18
------------- ------------- -------------- -------------
(240) (92) (454) (289)
------------- ------------- -------------- -------------
Income (Loss) Before Minority
Interest and Income Taxes.......... (105) 10,894 (45,301) 20,673
Minority Interest in Income
of Subsidiary -- 4,161 610 8,641
------------- ------------- -------------- -------------
Income (Loss) Before Income Taxes (105) 6,733 (45,911) 12,032
Income taxes (benefit) (179) 2,680 42 3,121
------------- ------------- -------------- -------------
Net Income (Loss) $ 74 $ 4,053 $ (45,953) $ 8,911
============= ============= ============== =============
Comprehensive income (loss) $ 76 $ 4,230 $ (45,908) $ 9,088
============= ============= ============== =============
Basic earnings (loss) per share $ 0.01 $ 0.81 $ (6.25) $ 1.80
============= ============= ============== =============
Dilutive earnings (loss) per share $ 0.01 $ 0.74 $ ** $ 1.65
============= ============= ============== =============
**Not presented herein since effect is antidilutive
See Notes to Consolidated Financial Statements
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited
9 Months Ended
-----------------------------------------------
June 27, 2004 June 29, 2003
------------- -------------
(Dollars in Thousands)
Operating Activities
Net income (loss) ..................... $ (45,953) $ 8,911
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization ......... 2,721 889
Loss on disposal of equipment.......... 9 --
Recovery of bad debt................... (197) --
Minority interest...................... (6,890) 6,142
Goodwill impairment.................... 47,900 --
Change in deferred taxes............... (342) --
Change in operating assets and liabilities:
Receivables ...................... (1,110) (14,009)
Inventories ...................... (3,929) (1,112)
Other current assets ............. 3,298 (1,434)
Accounts payable .................. (2,824) 8,782
Accrued expenses................... (5,355) 2,668
Other .......................... 271 --
------------ -------------
Net cash from operating activities .... (12,401) 10,837
------------ -------------
Investing Activities
Purchase of property and equipment (3,810) (4,207)
Proceeds from sale of equipment........ 33 --
Acquisitions, net of cash acquired..... (1,200) --
Other assets........................... (275) (287)
------------ -------------
Net cash from investing activities (5,252) (4,494)
------------ -------------
Financing Activities
Net proceeds (payments) on revolving
credit agreements.................. 17,247 (1,065)
Payments on notes to related parties... -- (1,474)
Proceeds from exercise of stock options 242 233
Other.................................. -- --
------------ -------------
Net cash from financing activities 17,489 (2,306)
------------ -------------
Increase (Decrease) in Cash and Cash
Equivalents ........................... (164) 4,199
Cash and cash equivalents at
beginning of period................. 836 284
------------ -------------
Cash and cash equivalents at
end of period....................... $ 672 $ 4,483
============ =============
See Notes to Consolidated Financial Statements
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARCRAFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited (Continued)
9 Months Ended
June 27, 2004 June 29, 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 --
============ =============
Issuance of common stock................. $133,693,000 --
============ =============
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STARCRAFT CORPORATION
June 27, 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 June
27, 2004 and June 29, 2003. The results of operations for the three
and nine month periods ended June 27, 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 nine month periods ended June 27, 2004 and June 29, 2003 are
for 13 and 39 week periods, respectively.
Certain amounts in the September 28, 2003 consolidated financial
statements have been reclassified to confirm with the current
presentation. These reclassifications had no effect on total assets,
total shareholders' equity or net income as previously reported.
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 June
27, 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.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 27, 2004
Note 3. Inventories
The composition of inventories is as follows (dollars in thousands):
(Unaudited) (Audited)
June 27, 2004 September 28, 2003
Raw materials $ 14,835 $ 9,583
Finished goods 788 877
-------------- ---------------
15,623 10,460
Allowance for slow-moving
and obsolete inventories (405) (400)
-------------- ---------------
Total $ 15,218 $ 10,060
============== ================
Note 4. 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 5. 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 million and is being amortized
using the straight-line method over 20 years. The contracts are valued
at $4.5 million and are being amortized over the life of the
respective contract. Amortization expense was $540 thousand for the
quarter ended June 27, 2004, and $900 thousand for the nine month
period ended June 27, 2004.
Note 6. 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 June
27, 2004 are classified as long-term debt.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 27, 2004
Note 7. Comprehensive Income
Other comprehensive income consists of foreign currency translation
adjustments. Other comprehensive income for the three months ended
June 27, 2004 and June 29, 2003 was $2 thousand and $177 thousand,
respectively. Other comprehensive income for the nine months ended
June 27, 2004 and June 29, 2003 was $45 thousand and $177 thousand,
respectively.
Note 8. Subsequent Event
Effective July 13, 2004, subsequent to quarter end, the Company issued
$15 million in principal amount of unsecured senior subordinated
convertible notes in a private placement to accredited investors. The
notes bear interest at 8.5% and mature in July 2009, with semi-annual
interest payments payable on January 1 and July 1 of each year,
commencing January 1, 2005. The interest payments can be made in
either cash or stock at the Company's discretion. The notes are
convertible, subject to certain conditions, into shares of Starcraft's
Common Stock at a conversion price of $15.60.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 27, 2004
Note 9. 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) 9 Months Ended (Unaudited)
--------------------------------- ----------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
Basic earnings (loss) per share
Net income (loss) available
to common stockholders $ 74 $ 4,053 $ (45,953) $ 8,911
============= ============ ============= =============
Weighted average common
shares outstanding 8,853 4,991 7,357 4,961
============= ============ ============= =============
Basic earnings (loss) per share $ 0.01 $ 0.81 $ (6.25) $ 1.80
============= ============ ============= =============
Dilutive earnings (loss) per share
Net income (loss) available
to common stockholders $ 74 $ 4,053 $ (45,953) $ 8,911
============= ============ ============= =============
Weighted average common
shares outstanding 8,853 4,991 7,357 4,961
Add: Potential dilutive effects of
incentive stock options 405 506 516 453
------------- ------------ ------------ -------------
453
Weighted average potential
dilutive common shares outstanding 9,258 5,497 7,873 5,414
============= ============ ============= =============
Dilutive earnings (loss) per share $ 0.01 $ 0.74 $ (**) $ 1.65
============= ============ ============= =============
**Not presented herein since 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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 27, 2004
Note 10. 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 9 Months Ended
------------------------------------- --------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
(Dollars in thousands, except per share amounts)
Net income (loss) - as reported $ 74 $ 4,053 $ (45,953) $ 8,911
Deduct: total stock-based employee
compensation expense determined under
fair value based methods for all awards 536 17 2,182 112
------------- ------------- ------------ -------------
Net income (loss) - pro forma $ (462) $ 4,036 $ (48,135) $ 8,799
============== ============= ============== =============
Earnings (loss) per share - as reported
Basic earnings (loss) per share $ 0.01 $ 0.81 $ (6.25) $ 1.80
============== ============= ============== =============
Dilutive earnings (loss) per share $ 0.01 $ 0.74 $ (**) $ 1.65
============== ============= ============== =============
Earnings (loss) per share - pro forma
Basic earnings (loss) per share $ (0.05) $ 0.81 $ (6.54) $ 1.77
============== ============= ============== =============
Dilutive earnings (loss) per share $ (**) $ 0.74 $ (**) $ 1.62
============== ============= ============== =============
**Not presented herein since effect is antidilutive
9
NOTES TO FINANCIAL STATEMENTS (Continued)
STARCRAFT CORPORATION
June 27, 2004
Note 11. 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 12. 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.
10
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 June 27, 2004
(Third Quarter Fiscal Year 2004) to the three
months ended June 29, 2003 (Third Quarter Fiscal Year 2003)
- --------------------------------------------------------------------------------
Net sales for the quarter ended June 27, 2004 decreased $17.0 million to $45.1
million from $62.1 million for the quarter ended June 29, 2003. Our Canadian
second stage facility experienced a significant slowdown and accounted for $16.6
million of the $17.0 sales decline, while New Jersey declined $4.2 million due
to the previously announced expiration of a second stage program. Shreveport
operations were significantly favorable to prior year levels due to the effects
of a new second stage program while our Haslet, Texas facility declined 19% due
to an interruption in the supply of vehicles from the OEM, as well as softness
in the overall automotive market and OEM large sport utility vehicle sales
during the third quarter. Parts distribution sales increased 38% to $9.3 million
due to sales generated from the new wheel distribution program. H2 parts sales,
which are included in the parts distribution totals, declined 10% which is
consistent with the decline of H2 vehicle sales. Sales relating to businesses
acquired in fiscal 2004 were $4.1 million, including Wheel to Wheel sales of
$1.1 million and $2.1 million in sales from our Canadian paint facility. These
partially offset the above shortfalls.
Gross profits decreased to $5.1 million for the quarter ended June 27, 2004.
This was down $10.1 million from $15.2 million for the quarter ended June 29,
2003. Gross profit was adversely affected by several factors, most notably the
profit impact of a $29.0 million decline in second stage manufacturing sales
compared to third quarter of fiscal 2003. Impact on gross margin due to this
decline approximates $9.0 million. We also incurred one-time charges associated
with the New Jersey shutdown and costs associated with an interruption in the
supply of chassis to our Haslet facilities. Impact of these issues on gross
profit was $1.5 million. We did have improved sales in the Parts distribution
business and our Shreveport facility; however, the $4.1 million in sales
relating to businesses acquired in 2004 did not generate any gross profit.
Selling and promotion expenses were $0.8 million for the third 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 most of
the increase. General and administrative expenses were $3.7 million, consistent
with the third quarter of fiscal 2003. General and administrative expenses
associated with recent acquisitions were $0.4 million, while prior year expenses
include a $1.3 million currency transaction gain on material purchases in our
Canada facility. Excluding the impact of these two items, general and
administrative expense declined $1.7 million, due mostly to lower incentive
compensation.
Amortization attributable to the intangible assets booked during the merger with
Wheel to Wheel was $.5 million during the third quarter of fiscal 2004.
Interest expense was $0.2 million in the third quarter versus $0.1 million
during the third quarter of fiscal 2003. Higher borrowings during the quarter
caused the increase and were slightly offset by favorable interest rates. Sales
relating to businesses acquired in fiscal 2004 were $4.1 million, included Wheel
to Wheel sales of $1.1 million and $2.1 million in sales from our Canadian paint
facility. These partially offset the above shortfalls.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of the nine months ended June 27, 2004
(Third Quarter Fiscal Year 2004) to the nine
months ended June 29, 2003 (Third Quarter Fiscal Year 2003)
- --------------------------------------------------------------------------------
Net sales for the nine months ended June 27, 2004 decreased $21.1 million to
$128.1 million, from $149.2 million for fiscal 2003. The Canadian second stage
program account for $16.9 million of the sales decline as volume in this
facility has slowed significantly. The New Jersey facility declined $7.7 million
in sales attributable to expiration of a second stage program, while our
Louisiana facility is $2.0 million behind 2003 pace as the launch of a new
second stage program has partially offset the expiration of another second stage
program. Parts distribution sales declined $2.3 million due to declines in our
H2 parts sales as retail sales levels fell off the previous years pace.
Partially offsetting this decline was $6.7 million dollars in wheel sales which
was a new program in fiscal 2004. Sales relating to acquisitions accounted for
$9.3 million during the nine months ended June 27, 2004.
Gross profit for the nine months ended June 27, 2004 was $18.4 million, compared
to $34.5 million for the comparable period of fiscal 2003. The decline in second
stage manufacturing revenue had significant impact on our gross profit. Second
stage revenue on a nine month basis has declined $32 million from fiscal 2003 to
fiscal 2004. Also, sales related to businesses acquired in 2004 totaled $9.3
million and did not contribute any gross profit.
Selling and Promotion expenses were $2.1 million for the nine months ended June
27, 2004 versus $1.4 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 $0.4 million caused the
increase. General and Administrative expense was $12.4 million for the nine
months ended June 27, 2004 versus $12.2 million for the comparable period of
fiscal 2003. General and administrative expenses relating to recent acquisitions
were $0.9 million for the nine months ended June 27, 2004, while prior year
expenses include a $1.3 million currency transaction gain previously discussed.
Excluding these two items, general and administrative expenses declined from
$13.5 million in fiscal 2003 to $11.5 million in fiscal 2004 due largely to
lower incentive compensation and prototype expenses.
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. Since that
time, the second stage program at the New Jersey facility has been terminated
earlier than expected. This program accounted for 8% of fiscal 2003 sales.
12
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 June 27, 2004. Long-term debt was
$29.6 million at June 27, 2004 compared to $9.1 million at September 28, 2003.
Operations utilized $12.4 million in cash during the first nine months of fiscal
2004, compared to generating $10.8 million of cash during the first nine months
of fiscal 2003. Trade receivables, exclusive of the effects of acquisitions,
were $0.4 million lower than September 28, 2003 levels. Inventory levels,
exclusive of the effects of acquisitions were $5.2 million higher than September
28, 2003 levels. Wheel inventory associated with the new wheel program was $1.5
million while Shreveport inventory increased $0.8 million due to the launch of a
new supply program. Other receivables and tooling development and reimbursement
engineering services increased $3.1 million during the first nine months of 2004
due to investment in potential new sales programs and timing of tooling and
engineering reimbursement from customers. Accrued expenses at June 27, 2004,
exclusive of the effects of acquisitions, were $4.5 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, exclusive of the effects of acquisitions, totaled
$3.8 million during the first nine months of fiscal 2004. Major items included
tooling expenditures for aftermarket parts of $0.8 million, $0.4 million for
leasehold improvements in our Texas facility, and tooling expenditures of $1.5
million.
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
13
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.
Effective July 13, 2004, Starcraft Corporation completed the private placement
of $15 million of unsecured senior subordinated convertible notes. The notes
were placed with accredited investors in a transaction exempt from registration
under the Securities Act of 1933, pursuant to Section 4(2) of the Securities
Act, and Regulation D thereunder. The notes bear interest at 8.5% and mature in
July 2009 with semi-annual interest payments payable on January 1 and July 1 of
each year, commencing January 1, 2005. The payments can be made in either cash
or stock, to be determined at Starcraft's discretion. The notes are convertible
at the option of the holder, subject to certain conditions, in whole or in part,
into shares of Starcraft's common stock at a 25% premium to the previous
five-day average closing price of Starcraft's stock price as of July 12, 2004.
Starcraft has agreed to file within 60 days after closing a registration
statement under the securities Act of 1933 to register the shares of its common
stock issuable upon conversion of the notes for potential resale by noteholders.
Starcraft paid a placement fee of $245,000 and an origination fee of $225,000 in
respect of this issuance. The funds were used to pay down the revolver.
Available funds on the revolving line of credit, subject to borrowing base
limitations, approximated $17 million after pay down of the revolver with the
convertible notes proceeds.
The Company believes the additional capital provided by the convertible notes
proceeds will better align its long term growth initiatives with capital not
subject to borrowing base fluctuations, enhancing management's flexibility in
addressing long and short term capital and liquidity needs as they arise. The
Company believes the additional flexibility provided by the convertible notes
together with borrowings available under revolving credit facilities will be
sufficient to satisfy its liquidity requirements, and growth initiatives through
2005.
INCOME TAXES
At this time, the Company does not have U.S. federal income tax expense due to a
reserve on existing deferred tax assets, which exists primarily due to operating
loss carryforwards. The Company is incurring 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
June 27, 2004, the operating loss carryforwards were approximately $0.3 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 during the first six months of
2004 compared to $6.1 million during the first six months of fiscal 2003. A new
supply program started during the third quarter of fiscal 2004 which returned
the Shreveport facility to profitability, and should continue at this pace
fiscal 2005.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
MANUFACTURING AND OPERATING TRENDS - Continued
Supply programs in the New Jersey facility are ending in 2004. The Company plans
to close this facility after the programs have ended, and anticipates a shutdown
by September, 2004.
The Canadian facility operated at a loss for the nine months ended June 27, 2004
due to substantially reduced sales volume. Operating losses at this facility
will continue to occur if sales volumes do not increase. We do not anticipate
sales in the fourth quarter of fiscal 2004 to improve over current levels.
Currently, the Company is working with its customer in attempts to increase
sales at this location, and anticipates a return to profitability at this
facility during fiscal 2005.
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.
15
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
June 27, 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 $29,984 $ 390 $ 27,287 $ 693 $ 1,614
Operating Lease Obligations $12,700 $ 3,091 $ 5,004 $ 2,212 $ 2,393
Employment Agreement Obligations $ 6,510 $ 2,610 $ 3,000 $ 900 $ --
-------- ------- -------- -------- -------
Total $49,194 $ 6,091 $ 35,291 $ 3,805 $ 4,007
======= ======== ======== ======== =======
Effective July 13, 2004, the Company incurred $15 million in additional
long-term debt in the form of senior subordinated convertible notes, due 2009.
Proceeds were used to reduce bank debt under the revolving credit facility. The
foregoing presentation of long-term contractual obligations at June 27, 2004,
adjusted to give effect to such transaction, appears below.
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 $29,984 $ 390 $ 12,287 $ 693 $16,614
Operating Lease Obligations $12,700 $ 3,091 $ 5,004 $ 2,212 2,393
Employment Agreement Obligations $ 6,510 $ 2,610 $ 3,000 $ 900 $ --
-------- ------- -------- -------- -------
Total $49,194 $ 6,091 $ 20,291 $ 3,805 19,007
======= ======== ======== ======== =======
16
STARCRAFT CORPORATION
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSIONS 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 June 27, 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.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the Company's
disclosure controls and procedures during the Company's last fiscal
quarter, nor any significant deficiencies or material weaknesses in
such disclosure controls and procedures requiring corrective actions.
As a result, no corrective actions were taken.
17
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Effective July 13, 2004, Starcraft Corporation completed the private
placement of $15 million of unsecured senior subordinated convertible
notes. The notes were placed with accredited investors in a
transaction exempt from registration under the Securities Act of 1933,
pursuant to Section 4(2) of the Securities Act, and Regulation D
thereunder.
The notes bear interest at 8.5% and mature in July 2009 with
semi-annual interest payments payable on January 1 and July 1 of each
year, commencing January 1, 2005. The payments can be made in either
cash or stock, to be determined at Starcraft's discretion. The notes
are convertible at the option of the holder, subject to certain
conditions, in whole or in part, into shares of Starcraft's common
stock at a 25% premium to the previous five-day average closing price
of Starcraft's stock price as of July 12, 2004.
Starcraft has agreed to file within 60 days following closing a
registration statement under the securities Act of 1933 to register
the shares of its common stock issuable upon conversion of the notes
for potential resale by noteholders. Starcraft paid a placement fee of
$245,000 and an origination fee of $225,000 in respect of this
issuance.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
Exhibit 4.1 - Convertible Senior Subordinated Note Purchase
Agreement among Starcraft Corporation and certain purchasers,
dated July 12, 2004, incorporated by reference to Exhibit 4.1 to
the registrant's current report on Form 8-K filed July 14, 2004.
Exhibit 10.1 - Amended and Restated Employment Agreement, dated
as of May 4, 2004, between Starcraft Corporation and Michael H.
Schoeffler.
Exhibit 10.2 - Employment Agreement, dated as of May 24, 2004,
between Starcraft Corporation and Joseph E. Katona, III.
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
18
Item 6. Exhibits and Reports on Form 8-K - Continued
(b) (i) The Company filed a report on Form 8-K/A on April 1, 2004,
to provide audited financial statements of Wheel to Wheel,
Inc. and updated pro forma financial information.
(ii) The Company filed a report on Form 8-K on April 1, 2004, to
report an impairment of the goodwill associated with its
acquisition of Wheel to Wheel, Inc.
(iii)The Company filed a report Form 8-K on July 14, 2004 to
report the private placement of $15 million of convertible
senior subordinated notes.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARCRAFT CORPORATION
(Registrant)
August 11, 2004 By: /s/ Joseph E. Katona, III
---------------------------
Joseph E. Katona, III
Chief Financial Officer
20