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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended _____________June 30, 2002______________________
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________________
Commission File Number: _________0-24804_______________________________________
-------
_______________________________Featherlite, Inc._______________________________
-----------------
(Exact name of registrant as specified in its charter)
__________Minnesota_________________________________41-1621676_________________
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
_____Highways 63 & 9, P.O. Box 320, Cresco, IA 52136___________________________
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
______________________________563/547-6000_____________________________________
------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
6,535,104 Shares as of August 10, 2002
1
FEATHERLITE, INC.
INDEX
Page No.
--------
Index . . . . .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 2
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance
sheets June 30, 2002 and December 31, 2001. . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
Three Month and Six Month Periods Ended June 30, 2002 and 2001. . . . . 4
Condensed Consolidated Statements of Cash Flows
Three Month and Six Month Periods Ended June 30, 2002 and 2001. . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 11
Item 3. Quantitative & Qualitative Disclosures about Market Risk . . . . 20
Part II. Other Information:
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
Part I: FINANCIAL INFORMATION
Item 1:
Featherlite, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
June 30, December 31,
ASSETS 2002 2001
---- ----
Current assets
Cash $ 271 $ 247
Receivables 7,104 5,001
Refundable income taxes - 2,755
Inventories
Raw materials 7,198 6,949
Work in process 11,572 12,129
Finished trailers/motorcoaches 18,368 25,008
Used trailers/motorcoaches 20,437 22,129
-------- -------
Total inventories 57,575 66,215
Prepaid expenses 1,676 1,977
-------- --------
Total current assets 66,626 76,195
-------- --------
Property and equipment,net 16,338 17,024
Other assets 4,270 3,952
-------- --------
$ 87,234 $ 97,171
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 4,672 $ 9,299
Bank line of credit 6,324 7,226
Checks issued, not yet presented 3,684 3,061
Wholesale financing and other notes payable 21,046 27,713
Subordinated convertible debt 1,448 -
Motorcoach shell costs payable 6,068 7,531
Accounts payable 2,912 5,902
Trade creditor repayment plan 2,966 3,253
Accrued liabilities 9,570 8,365
Customer deposits 760 2,204
-------- --------
Total current liabilities 59,450 74,554
Long-term debt, net of current maturities 10,317 7,386
Other long term liabilities 83 90
Commitments and contingencies (Note 5)
Shareholders' equity 17,384 15,141
-------- --------
$ 87,234 $ 97,171
======== ========
See notes to unaudited condensed consolidated financial statements
3
Featherlite, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except for per share data)
Three Months Ended Six months Ended
June 30, June 30,
------- -------
2002 2001 2002 2001
----- ---- ---- ----
Net sales $ 47,624 $ 57,412 $ 108,229 $122,093
Cost of sales 39,953 52,069 92,704 109,725
Restructuring charge - 2,950 - 2,950
--------- -------- ---------- --------
Gross profit 7,671 2,393 15,525 9,418
Selling and administrative expenses 5,476 5,810 10,786 11,618
Restructuring charge - 1,150 - 1,150
--------- -------- ---------- ---------
Income (loss) from operations 2,195 (4,567) 4,739 (3,350)
Other income (expense)
Interest ( 782) (1,129) (1,593) (2,461)
Other, net 210 155 225 380
--------- -------- ---------- --------
Total other expense ( 572) ( 974) (1,368) (2,081)
--------- --------- ---------- ---------
Income (loss) before income taxes 1,623 (5,541) 3,371 (5,431)
Provision for (benefit from) income taxes 600 (1,403) 1,247 (1,358)
--------- --------- ---------- ---------
Net income (loss) $ 1,023 $ (4,138) $ 2,124 $ (4,073)
========== ========= ========== =========
Net income (loss) per share -
Basic $ 0.16 $ (0.63) $ 0.33 $ (0.62)
--------- --------- ---------- ---------
Diluted $ 0.14 (0.63) $ 0.30 $ (0.62)
--------- --------- ---------- ---------
Average common shares outstanding-
Basic 6,535 6,535 6,535 6,535
--------- -------- --------- -------
Diluted 7,112 6,535 6,995 6,535
--------- -------- --------- -------
See notes to unaudited condensed consolidated financial statements
4
Featherlite, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six months Ended
June 30
2002 2001
---- ----
Cash provided by (used for) operating activities
Net income (loss) $ 2,124 $(4,073)
Depreciation & amortization 1,006 1,246
Non-cash restructuring charge - 3,400
Other non-cash adjustments, net (317) 58
Decrease in refundable income taxes 2,755 -
Decrease in working capital items, net 2,610 7,782
------- -------
Net cash provided by operating activities 8,178 8,413
------- -------
Cash provided by (used for) investing activities
Purchases of property and equipment, net ( 308) ( 330)
Proceeds from other property, net 160 254
-------- -------
Net cash provided by (used for) investing activities (148) ( 76)
------- -------
Cash provided by (used for) financing activities
Repayment of short-term debt, net (8,257) (9,313)
Proceeds from long-term debt 96 916
Repayment of long-term debt (1,288) (160)\
Repayment of Sanford mortgage and interest swap (3,856) -
Proceeds from deposit on Sanford sale/leaseback 3,800 -
Proceeds from subordinated debt and warrant 1,500 -
-------- -------
Net cash used for financing activities (8,005) (8,557)
-------- -------
Net cash (decrease) for period 25 (220)
Cash balance, beginning of period 247 331
-------- -------
Cash balance, end of period $ 271 $ 111
====== ======
See notes to unaudited condensed consolidated financial statements
5
FEATHERLITE,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for
Featherlite, Inc. (the "Company") have been prepared, without audit, in
accordance with the instructions of Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Financial information as of December 31, 2001
has been derived from the audited financial statements of the Company, but does
not include all disclosures required by generally accepted accounting
principles. For further information refer to the consolidated financial
statements and notes to consolidated financial statements included in the
Company's Form 10-K Annual Report for the year ended December 31, 2001.
It is the opinion of management that the unaudited condensed financial
statements include all adjustments, consisting of normal recurring accruals,
necessary to fairly state the results of operations for the three months and six
month periods ended June 30, 2002 and 2001. The results of interim periods may
not be indicative of results to be expected for the full fiscal year.
Note 2. Going Concern Basis of Presentation
The auditor's report on the December 31,2001 financial statements included an
uncertainty as to the Company's continuation as a going concern. The removal of
this uncertainty is dependent upon continued compliance with the terms and
covenants of the amended loan agreements, continued compliance with its Trade
Creditor Repayment Plan, and ultimately the continued generation of sufficient
cash flow to meet its obligations on a timely basis.
The accompanying condensed consolidated financial statements for the three month
and six month periods ended June 30, 2002 have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During the six months ended June
30, 2002, the Company's operations provided cash of $8.2 million, including net
income of $2.1 million, and a net decrease of $5.4 million in working capital
items, principally due to the collection of a $2.8 million income tax receivable
and reduction of motorcoach inventories. The Company's aggregate credit line
availability improved by $3.6 million in the six months ended June 30, 2002 as
the result of the above items as well as $1.5 million received from a private
corporate investor in the form of subordinated convertible debt, which was used
to reduce line of credit borrowings. At June 30, 2002, the Company had
approximately $8.2 million available to borrow on its two credit lines compared
to $4.6 million at December 31, 2001. At June 30, 2002, the current order
backlog for trailers had improved significantly over levels at December 31,
2001. Motorcoach sales activity is down from last year at this time due in large
part to the closing of the Vogue facility in Pryor, Oklahoma. However, new and
used motorcoach inventories have been reduced by $7.1 million and more new units
have been sold in 2002 than produced.
On July 31, 2002 the Company amended and restated its credit agreements with its
principal lenders that extended their terms by two or more years and revised the
financial covenants based on the Company's financial plan for 2002. Although
there can be no assurance, the Company believes these amended and restated
credit agreements will provide it with sufficient working capital to meet its
liquidity requirements over the next 12 months. As of June 30, 2002, the Company
was in compliance with the financial covenants of the new agreements.
On June 28, 2002, the Company repaid the Wachovia/First Union Bank mortgage on
the Sanford, Florida facility with the proceeds of a $3.8 million deposit
received in connection with the planned sale/leaseback of the facility for $5.0
million, which was completed on July 31, 2002.
6
During the six months ended June 30, 2002, the Company has continued to make
timely installment payments under the terms of its Trade Creditor Repayment
Plan. Despite these efforts, management cannot provide assurance that the
Company will continue to maintain successful operations.
Note 3: Restructuring Charge
In June, 2001, the Company adopted a plan to shut-down its Pryor, Oklahoma,
manufacturing facility and suspend development and manufacturing of the Vogue
6000 motorcoach. An accrual of $4.1 million was made in the financial statements
as of June 30, 2001 to provide for exit and other costs related to this
restructuring. An additional $422,000 was accrued in the fourth quarter of 2001
for estimated lease and other costs to be incurred until this facility could be
subleased. As of June 30, 2002 approximately $200,000 of restructuring costs
remain accrued, principally for rent and other costs related to holding this
facility.
Note 4: Financing Arrangements
As of June 30, 2002, the Company's was not in compliance with certain of its
financial covenants under its credit facilility with U.S. Bank National
Association (U.S Bank) and its motorcoach financing agreement with Deutsche
Financial Services Corporation (Deutsche). However, on July 31, 2002, the
Company entered into amended and restated financing agreements with both U.S
Bank and Deutsche that provided, among other things, new financial covenants
that became effective as of June 30, 2002. As a result, both U.S.Bank and
Deutsche effectively waived the June 30, 2002 covenant violations that existed
under the old agreements with them.
The Company was in compliance with all covenants under each of these amended and
restated facilities as of June 30, 2002. However, the debt with respect to these
new agreements will continue to be classified as current liabilities until the
Company has additional experience and success in maintaining profitable
operations and demonstrating an ability to continue compliance with its
restrictive debt covenants for the remainder of 2002. See "Liquidity and Capital
Resources" elsewhere in the report for additional information on the Company's
amended and restated credit agreeemtents
On June 28, 2002, the Company repaid the $3.7 million mortgage with
Wachovia Bank, N.A. (formerly First Union National Bank) on the Sanford, Florida
property and terminated a related interest rate swap agreement with a payment of
$149,000. These obligations were repaid with a $3.8 million advance deposit made
by GBNM Partnership for their July 31, 2002 purchase of the Company's sales and
service center in Sanford, Florida for $5.0 million, with the balance of $1.2
million received on August 1, 2002. The Company also entered into an agreement
with GBNM Parthership to lease back the facility beginning August 1, 2002 for an
initial term of 7 years plus a 3 year renewal option, at a rental rate of
$50,000 per month for the first 5 years. Since the Company has an option to
repurchase this facility for $5.4 million on August 1, 2005, this will be
recorded as a sale/leaseback financing transaction.
Note 5: Commitments and Contingencies.
Pursuant to trailer dealer inventory floor plan financing arrangements, the
Company may be required, in the event of default by a financed dealer, to
repurchase trailers from financial institutions or to reimburse the institutions
for unpaid balances, including finance charges plus costs and expenses. The
Company was contingently liable under these arrangements for a maximum of $8.1
million at June 30, 2002. During the six months ended June 30, 2002, the Company
was required to make repurchases under these arrangements totaling $61,000. In
the opinion of management, no reserve is required for this contingency because
the aggregate amount of such repurchases on an annual basis has been less than 1
percent of annual sales and the repossessed inventory has been resold to other
dealers without a loss. The Company has no motorcoach dealers and accordingly,
has no repurchase obligations with respect to motorcoaches.
7
The Company is partially self-insured for a portion of certain health benefit
and workers' compensation insurance claims. The Company's maximum annual claim
exposure under these programs varies as follows: For health claims there is an
annual stop loss of $100,000 per claim but no aggregate loss limit. For workers
compensation claims, there is a $250,000 per occurrence limit and an aggregate
loss limit of $1.9 million. At June 30, 2002, $2.0 million was accrued for
estimated unpaid health and workers compensation claims and is classified in
accrued liabilities in the condensed consolidated balance sheet. The Company has
obtained an irrevocable standby letter of credit in the amount of $2.4 million
in favor of the workers' compensation claim administrators to guaranty
settlement of claims.
The Company, in the course of its business, has been named as a defendant in
various legal actions. These actions are primarily product liability or workers'
compensation claims in which the Company is covered by insurance subject to
applicable deductibles. Although the ultimate outcome of such claims cannot be
ascertained at this time, it is the opinion of management, after consulting with
counsel, that the resolution of such suits will not have a material adverse
effect on the financial position of the Company or its operating results for any
particular period.
The Company leases certain office and production facilities under various
operating leases that expire at varying dates through 2011. Aggregate rental
expenses under these operating leases is estimated to be $877,000 for 2002.
The Company has obtained fixed price commitments from certain suppliers for
about 85 percent of its expected aluminum requirements in 2002 to reduce the
risk related to fluctuations in the cost of aluminum, the principal commodity
used in the Company's trailer segment. In certain instances there may be a
carrying charge added to the fixed price if the Company requests a deferral of a
portion of its purchase commitment to the following year.
Note 6: Shareholders' Equity
Shareholders' equity may be further detailed as follows (in thousands):
June 30, Dec. 31,
2002 2001
-------- --------
Common stock - without par value;
Authorized- 40 million shares;
Issued- 6,535 shares at June 30,2002
6,535 shares at Dec.31, 2001 $ 16,595 $16,595
Additional paid-in capital 4,156 4,062
Accumulated deficit (3,367) (5,492)
Accumulated other comprehensive loss - (24)
-------- --------
Total Shareholders' equity $ 17,384 $ 15,141
======== ========
In the six months ended June 30, 2002, the Company realized the accumulated
other comprehensive loss of $24,000 when the interest rate swap was terminated
and a loss of $32,000 realized.
On January 31, 2002, the Company received $1.5 million from a private corporate
investor in the form of a convertible subordinated debt and a warrant for
150,000 shares of the Company's common stock. This debt is due in full on
January 2, 2003 or may be converted at that time to common stock at the option
of the holder. The conversion price is the lower of $3.00 per share or the
8
average closing market price of the Company's common stock between April 30,
2002 and October 31, 2002. The face amount of the convertible debt was reduced
and paid-in capital increased by the fair value of $95,000 assigned to the
warrant using the Black-Sholes option-pricing model. This amount is being
amortized to interest expense over the 11 month term of the convertible debt,
with $43,000 expensed in the six months ended June 30, 2002. The warrant may be
exercised at any time before January 31, 2007 at a price of $2.00 per common
share.
Note 7: Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
Total comprehensive income (loss) is as follows for the three month and
six month periods ended June 30, 2002 and 2001:
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------ ----- ---- ----
Net income $ 1,023 $(4,138) $2,124 $(4,073)
Cumulative effect of adjustment of
interest rate swap, net of tax - 11
Income (loss) on interest rate swap,
net of tax (21) 3 (24) (49)
------- ------- ------- -------
Total comprehensive income(loss) $ 1,002 $(4,135) $ 2,100 $(4,111)
------- ------- ------- -------
At June 30, 2002, there were no components of comprehensive income as the
interest rate swap was terminated.
Note 8: Stock Option Plan
In accordance with the stock option plan established by the Company in July
1994, as amended in May 1998, the Board of Directors has granted options to
purchase Company common stock to certain employees and directors in the total
amount of 503,400 shares at June 30, 2002 and 835,400 at December 31,2001. These
options were granted at prices ranging from $1.11- $10.00 per share, and are
exercisable at varying dates not to exceed 10 years from the date of grant.
During the six months ended June 30, 2002, options totaling 36,000 were granted
at an average price of $3.05 per share, no options were exercised and 368,000
forfeited. In February 2002, the Board of Directors authorized the officers of
the Company to cancel approximately 396,500 outstanding stock options and
replace them with an equal number of new stock options to be issued with an
exercise price equal to the fair market value of one share of common stock as
determined six months and one day from the effective date of cancellation of
such outstanding options. The exchange of stock options will be voluntary with
respect to each holder of outstanding stock options. This exchange will be
completed on November 25, 2002 at the closing market price on that date.
Note 9: Net Income (Loss) Per Share
Following is a reconciliation of the weighted average shares outstanding used to
determine basic and diluted net income per share for the three months and six
months ended June 30,2002 and 2001:
Three months Six months
- ------------------------------------------------------------------- ------------ -------------- ---------
2002 2001 2002 2001
------ ------ ---- ----
Net income available to common shareholders $1,023 $(4,138) $2,124 $(4,073)
- ------------------------------------------------------------------- ------------ -------------- ---------
Weighted average number of shares outstanding- basic 6,535 6,535 6,535 6,535
- ------------------------------------------------------------------- ------------ -------------- ---------
Dilutive effect of stock options/warrants 63 - 32 -
- ------------------------------------------------------------------- ------------ -------------- ---------
Dilutive effect of convertible note 514 - 428
- ------------------------------------------------------------------- ------------ -------------- ---------
Weighted average number of shares outstanding- dilutive 7,112 6,535 6,995 6,535
- ------------------------------------------------------------------- ------------ -------------- ---------
Net income per share - basic $0.16 ($0.63) $ 0.33 $(0.62)
- ------------------------------------------------------------------- ------------ -------------- ---------
Net income per share - diluted $0.14 ($0.63) $ 0.30 $(0.62)
- ------------------------------------------------------------------- ------------ -------------- ---------
9
Stock options for 175,000 shares at June 20, 2002 and 829,800 shares at June 30,
2001 were excluded from the dilutive effect of stock options because the
exercise price of the options was greater than the market value of the stock at
those dates.
Note 10: Segment Reporting
The Company has two principal business segments that manufacture and sell
trailers and luxury motorcoaches and related parts, accessories and services to
many different markets, including recreational, entertainment and agriculture.
"Corporate and other" primarily includes the Company's limited aircraft
operations and corporate and administration expenses.
Management evaluates the performance of each segment based on income before
income taxes. During 2001, management adopted a policy of ceasing to charge
interest on intercompany borrowing balances and to retain all interest expense
related to the U.S.Bank line of credit in the Corporate and other division.
Prior year segment results have been restated to conform with this new policy,
which had no effect on consolidated net income (loss) before income taxes.
Information on business segment sales, income before income taxes and assets are
as follows for the three month and six month periods ended June 30, 2002 and
2001 (in thousands):
Corporate and
Trailers Motorcoaches other Total
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Three Months Ended June 30:
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
2002
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Net sales to unaffiliated customers $ 29,011 $ 18,613 $ - $ 47,624
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Income (loss) before income taxes 2,241 227 (835) 1,623
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Identifiable assets 28,541 52,125 6,568 87,234
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
2001
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Net sales to unaffiliated customers $ 27,367 $ 30,045 $ - $ 57,412
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Income (loss) before income taxes 719 (5,384) (876) (5,541)
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Identifiable assets 34,401 61,722 7,704 103,827
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Corporate and
Trailers Motorcoaches other Total
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Six Months Ended June 30:
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
2002
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Net sales to unaffiliated customers $ 56,322 $ 51,907 $ - $108,229
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Income (loss) before income taxes 3,758 1,617 (2,004) 3,371
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Identifiable assets 28,541 52,125 6,568 87,234
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
2001
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Net sales to unaffiliated customers $ 57,416 $ 64,677 $ - $122,093
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Income (loss) before income taxes 1,427 (5,160) (1,698) (5,431)
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Identifiable assets 34,401 61,722 7,704 103,827
- ------------------------------------------------------- ----------------- -------------------- ---------------- ----------------
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion pertains to the Company's results of operations and
financial condition for the three-month and six month periods ended June 30,
2002 and 2001.
10
Results of Operations
Three months ended June 30, 2002 and 2001
On a consolidated basis, the Company's net income for the quarter ended June 30,
2002, was $1.0 million or $0.14 per diluted share, compared with a loss of $4.1
million or ($0.63) per diluted share, in the second quarter of 2001. This
significant increase in 2002 reflects: (i) the non-recurrence of a $4.1 million
restructuring charge incurred in closing the Pryor, Oklahoma facility in the
second quarter of 2001; (2) improved gross profit margins in 2002 and (3)
reduced selling and administrative costs and lower interest expense in the
second quarter of 2002, as discussed further below.
Net sales for the quarter decreased by $9.8 million (17.0 percent) to $47.6
million in the second quarter of 2002 compared with $57.4 million in 2001. The
Company believes the decrease is due in part to the impact of general economic
uncertainty on potential customers, particularly in the motorcoach segment.
These sales levels are in line with the Company's expectations, however.
Motorcoach segment sales were down $11.4 million or 38.0 percent, including a
decrease of 23.8 percent in sales of new motorcoaches and a 54.1 percent
decrease in sales of used coaches, primarily due to discontinuing production of
Vogue coaches in Pryor, Oklahoma in 2001. Trailer segment sales increased by
$1.6 million or 6.0 percent. Sales were up in all categories except specialty
transporters and commercial trailers.
Consolidated gross profit increased by $5.3 million to $7.7 million in the
second quarter of 2002 from $2.4 million for the same period in 2001. As a
percentage of sales, gross profit for the quarter was 16.1 percent in 2002
compared to 4.2 percent in 2001. This improvement in margin reflects the
non-recurrence of the $2.9 million restructuring charges included in cost of
sales in 2001(which reduced 2001 margins by 5.1 percentage points) together with
higher gross profit realized on sales in both the trailer and motorcoach
segments. Trailer margins were 4.9 percentage points higher in 2002 due to
improved labor and overhead utilization compared to 2001 when the Nashua plant
closure during the quarter created inefficiencies and resulted in other cost
increases. Motorcoach gross profit margins improved as higher margins were
realized on sales of new and used units. These improvements were partially
offset by the accrual of $412,000 for estimated warranty costs on Vogue
motorcoaches.
Selling and administrative expenses decreased in the second quarter of 2002 by
$334,000, a 5.7 percent decrease from the same period in 2001. As a percentage
of sales, these expenses increased to 11.5 percent in the second quarter of 2002
from 10.1 percent for the same period in 2001. Trailer segment expenses
increased by 1.0 percent due to increases in promotion related expenses and
bonus expenses. Motorcoach segment expenses decreased by 27.0 percent due
primarily to reduced marketing and administrative costs resulting from the
closing the Pryor facility in 2001. There was no recurrence in 2002 of the
restructuring charge of $1.2 million related to closing the Company's
manufacturing plant in Pryor, Oklahoma in 2001.
Interest expense decreased by $347,000 in the second quarter of 2002 compared to
the same period in 2001 due to lower average levels of debt in 2002 as well as
lower average interest rates in 2002. This was partially offset by $43,000
related to the warrant amortization as discussed in Note 6 to unaudited
condensed consolidated financial statements. Other income (expense), net,
increased by $55,000 in 2002, primarily as the result of increased gains on
property sales in 2002.
Income before taxes (IBT) increased by over $7.2 million in the second quarter
of 2002 compared to the same quarter last year. This improvement reflects an
increase in trailer segment IBT of $1.5 million,and an improvement of $5.6
million in motorcoach segment IBT, for the reasons discussed above.
The provision for income taxes was 37 percent for the second quarter of 2002
compared to 41 percent for the same period in 2001. The reduced provision rate
in 2002 reflects anticipated benefits due to utilization of state income tax
loss carryforwards from prior years.
11
Six months ended June 30, 2002 and 2001
On a consolidated basis, the Company's net income for the six month period ended
June 30, 2002, was $2.1 million or $0.30 per diluted share, compared with a loss
of $4.1 million, or ($0.62) per diluted share, in the first six months of 2001.
This significant improvement in profitability for the first six months of 2002
reflects: (i) the non-recurrence of a $4.1 million restructuring charge incurred
in the first six months of 2001 in closing the Pryor, Oklahoma facility; (ii)
higher gross profit (despite lower sales) ; and (iii) reduced selling and
administrative costs and lower interest expense, as discussed further below.
Net sales decreased by $4.1 million (11.4 percent) to $108.2 million for the
first six months of 2002 compared with $122.1 million for the same period in
2001. This included a 0.2 percent increase in sales of specialty trailers and
transporters. Motorcoach segment sales were down 21.2 percent with a $14.8
million reduction in sales of the Vogue facility, which was closed during the
first six months of 2001. While sales of new motorcoaches were down 23 percent
and sales of used coaches were down 15 percent compared to the same period in
2001, these sales levels are ahead of the Company's plan for 2002.
Consolidated gross profit increased by $6.1 million to $15.5 million in the
first six-months of 2002 from $9.4 million for the same period in 2001. As a
percentage of sales, gross profit was 14.3 percent in the first six months of
2002 compared to 7.7 percent for the same period in 2001. This improvement in
gross profit reflects a $2.9 million improvement as a result of the
non-recurrence of the restructuring charge included in cost of sales in 2001
(which reduced the 2001 gross margin by 2.4 percentage points) as well as
improved margins realized on sales in both the trailer and motorcoach segments.
Trailer margins were 4.4 percentage points higher in the first six months of
2002 due to lower material costs, improved labor and overhead utilization
compared to 2001 when the Nashua plant closure reduced inefficiencies and
resulted in other cost increases. Motorcoach gross profit margins improved
significantly as higher margins were realized on sales of used units, offset
slightly by lower margins realized on new motorcoach sales as non-current models
were sold at reduced prices and an accrual of $412,000 for estimated warranty
costs on Vogue motorcoaches.
Selling and administrative expenses decreased in the first six months of 2002 by
$832,000, a 7.2 percent decrease from the same period in 2001. As a percentage
of sales, these expenses increased to 10.0 percent in 2002 from 9.5 percent in
2001. Trailer segment expenses increased by 2.6 percent as increases in both
advertising and promotion related expenses exceeded reduced personnel and other
costs. Motorcoach segment expenses decreased by 20.6 percent due primarily to
reduced marketing and administrative costs resulting from the closing the Pryor
facility in the first six months of 2001. A restructuring charge of $1.2 million
in 2001 included the estimated payroll, severance and other costs paid in
connection with closing the Pryor, Oklahoma facility in 2001. No such charges
were incurred in 2002. Corporate expenses increased by about $300,000 as a
result of increased bonus accruals in 2002.
Interest expense decreased by $868,000 in the first six months of 2002 compared
to the same period in 2001 due to lower average levels of debt in 2002 as well
as lower average interest rates in 2002. Other income (expense), net, decreased
by $156,000 as the result of financial advisory fees related to investigating
strategic financing alternatives and reductions in other miscellaneous income
items in 2002.
Income before taxes (IBT) for the six month period increased by over $8.8
million in 2002 compared to the same period last year. This improvement
reflects, an increase in trailer segment IBT of $2.3 million, an increase in
corporate net expense by $306,000 and an improvement of $6.8 million in
motorcoach segment IBT for the reasons discussed above.
12
The provision for income taxes was 37 percent in 2002 compared to 41 percent in
2001. The reduced provision rate in 2002 reflects anticipated benefits due to
utilization of state income tax loss carryforwards from prior years.
Liquidity and Capital Resources
The Company's liquidity is primarily measured by its cash flow from operations
together with amounts available to borrow on its approved lines of credit with
U.S Bank and with Deutsche. During the six-month period ended June 30, 2002, the
Company's operating activities provided net cash of $8.2 million, including $5.4
million generated by a net decrease in certain current operating items. An
advance deposit of $3.8 million was also received on the sale/leaseback
financing transaction completed on August 1, 2002. This cash, net of amounts
used for capital expenditures and net non-line of credit debt reduction,
decreased amounts outstanding at June 30, 2002 on the Company's lines of credit.
At June 30, 2002, the Company had approximately $8.2 million available to borrow
on its credit lines compared to $4.6 million at December 31, 2001.
On July 31, 2002 the Company amended and restated the credit agreements
with its principal lenders and completed the sale/leaseback of its sales and
service center in Sanford, Florida. Following is a summary of these new
agreements:
1. The Amended and Restated Loan Agreement with U.S. Bank is in an aggregate
amount of $23.3 million, including $14 million in an asset-based revolving
credit commitment, $7.2 million in term loans on existing real estate and
equipment and the remaining $2.0 million as a term loan for new equipment
purchases. This Agreement is for a three-year period with annual interest
accruing at prime plus 0.50 percent on outstanding balances. The proceeds from
the $7.2 million term notes were used to repay $4.4 million of existing term
notes with the balance of $2.8 million reducing borrowings on the revolving
credit note. The $7.2 million term notes are repayable over 36 months with
aggregate monthly principal payments of $120,000 plus interest with the
remaining unpaid balance due on June 30, 2005. Repayment of advances on the new
equipment term note will be based on a 60 month amortization with the unpaid
balance due on June 30, 2005. Advances under the revolving credit commitment
range from 70 to 85 percent on eligible accounts receivable and from 30 to 70
percent on eligible inventory. At the time of closing, net availability on the
revolving credit line was $7.7 million with about $1.7 million outstanding. The
Agreement requires the Company to notify the Bank of material adverse changes in
its operations and financial condition, among other matters, and to comply with
the following financial covenants through December 31, 2003: maintain a minimum
consolidated fixed charge coverage ratio of 1.05 to 1.0 as of the end of each
fiscal quarter for the year to date period then ended, commencing with the
fiscal quarter ended June 30, 2002; not to exceed a maximum consolidated total
liabilities to consolidated tangible net worth ratio of 4.25 to 1.0 as of the
last day of each quarter commencing with the quarter ended June 30, 2002;
achieve a minimum consolidated EBITDA of $9 million during each fiscal year and
not to exceed aggregate capital expenditures of $2 million in any fiscal year.
Although the Company was not in compliance with original covenants, the Company
was in compliance with the amended covenant requirements as required for the
quarter ended June 30, 2002.
2. The Amended Wholesale Financing Agreement with Deutsche provides for
aggregate financing of $25 million on new and used motorcoaches held as
inventory by the Company. This is a two-year agreement,which expires in July,
2004, with interest on borrowings at the greater of 6.5 percent or prime plus
0.25 percent. Advances under the agreement are based on 90 percent of the cost
of eligible new inventory and 70 percent of the defined value of eligible used
inventory. As of July 31, 2002, the aggregregate availabity under this Agreement
was $25.0 million with $20.9 million outstanding. The agreement requires
compliance with the following financial covenants: maintain a minimum defined
tangible net worth and subordinated debt of $13 million for the fiscal quarter
ended June 30, 2002, $14 million for the quarters ended September 30 and
December 31, 2002 and $15 million for each fiscal quarter ended March 31, 2003
13
and thereafter; not to exceed a maximum ratio of debt minus subordinated debt to
tangible net worth and subordinated debt of 6.0 to 1.0 for the quarter ended
June 30, 2002 and 5.0 to 1.0 for the quarter ended September 30, 2002 and each
quarter ended thereafter; achieve a minimum ratio of defined current tangible
assets to current liabilities of not less than 1.0 to 1.0 as of the end of the
fiscal quarter ended June 30, 2002 and 1.2 to 1.0 as of the end of the fiscal
quarter ended September 30, 2002 and for each quarter ended thereafter; achieve
80 percent of the Company's projected net income for each quarter of 2002
beginning June 30, 2002, and achieve monthly net income greater than zero.
Although the Company was not in compliance with the original convenants, the
Company was in compliance with these amended covenants for the quarter ended
June 30, 2002.
3. On June 28, 2002 the Company satisfied in full its $3.7 million
mortgage with Wachovia Bank on the Company's Sanford, Florida sales and service
center and terminated a related interest rate swap agreement with a payment of
$149,000. These obligations were paid-off with a $3.8 million advance deposit
made by GBNM Parternship in connection with their July 31, 2002 purchase of the
sales and service center in Sanford, Florida for $5.0 million, with the balance
of $1.2 million received on August 1, 2002. The Company entered into an
agreement with GBNM Partnership to lease the Sanford facility beginning August
1, 2002 for an initial term of 7 years plus a 3 year renewal option, at a rental
rate of $50,000 per month for the first 5 years. Since the Company has an option
to repurchase this facility for $5.4 million on August 1, 2005, this will be
recorded as a sale/leaseback financing transaction.
The Company continues to make payments according to the schedule worked out with
its trade creditors in November 2001. During 2001, many of the Company's trade
accounts payable were past due, and certain of its vendors required cash payment
upon delivery of materials and supplies. In an effort to restructure its trade
debt, the Company offered a repayment plan to trade creditors of its trailer
division with balances outstanding as of November 15, 2001. Each trade creditor
was given the opportunity to choose one of four options ranging from payment in
full in equal quarterly installments over a period of three years to discounting
the payable in varying percentages in exchange for payment within a shorter
period of time. The Trade Creditor Repayment PLan (the plan) was approved by a
majority of creditors, and covers outstanding balances of approximately $7.3
million. According to the payment option chosen by each creditor, the Company
will repay $2.8 million in 2002, $2.3 million in 2003 and $2.2 million in 2004.
Three installments under this plan were paid in 2002 on January 31, , April 30,
and July 31, respectively. Installments are due every three months thereafter.
There are no interest or service charges in connection with this arrangement.
Vendors under the Plan have been continuing to supply the Company with
materials; however, they frequently require prepayments at the time of order or
payment on delivery of the materials. A number of vendors have begun to extend
the Company more normal credit terms again as they receive payments under the
Plan.
The Company's liquidity is generally reflected by a number of key indicators.
The Company's ratio of current assets to current liabilities was 1.12 to 1 at
June 30, 2002, compared with a ratio of 1.02 to 1 at December 31, 2001. This
ratio is expected to continue to improve as the financing arrangements described
above have been completed and portions of the debt included in current
liabilities are expected to be reclassified to long-term. This will occur when
the Company has additional experience and success in maintaining profitable
operations and demonstrating an abilitiy to continue to its compliance with its
restrictive debt covenants for the remainder of 2002. The ratio of total debt to
shareholders' equity decreased to 2.34 to 1 at June 30, 2002 from 3.13 to 1 at
December 31, 2001. During the six months ended June 30, 2002, total debt
declined by almost $7.0 million.
The Company's liquidity and results of operations have significantly improved
during the six months ended June 30, 2002, Many of the factors regarding
financing that were uncertain at December 31, 2001 have been resolved and the
uncertainty about the Company's ability to continue as a going concern are
somewhat reduced. The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
14
Following is a discussion of the principal components of the Company's cash flow
for the six month period ended June 30, 2002, as reflected in the unaudited
condensed consolidated statements of cash flows:
Operating activities provided net cash of $8.2 million. The Company's net income
of $2.1 million was increased by adjustments for depreciation and amortization
of $1.0 million and decreased by other non-cash items in an aggregate net amount
of $317,000. Net changes in receivables, inventories and other current assets
provided cash of $9.6 million, including an income tax refund of $2.8 million
received in the first quarter of 2002. Substantially all of the remainder of
this change resulted from decreased inventories, in large part related to the
motorcoach segment, where the number of units in inventory were reduced , with
the new motorcoach inventory decreasing by $6.2 million and the used motorcoach
inventory decreasing by $900,000. Net decreases in accounts payable, customer
deposits and other current liabilities used cash of $4.2 million. These changes
include, among other items: a decrease of $1.5 million in motorcoach shell
payables due to a decrease in the number of bus shells held for production; a
decrease of $3.1 million in accounts payable as $729,000 was converted to the
Trade Creditor Repayment Plan as described above, and $2.4 million was paid on
other accounts payable; checks issued but not presented for payment increased by
$622,000, and an increase of $1.1 million in accrued liabilities. Customer
deposits decreased by $1.4 as deposits received on pending sales of trailers and
motorcoaches in prior periods were applied to sales completed in the current
period.
Increased expenditures for working capital items may be required to support
production levels in excess of sales from time to time. To maintain a level
production schedule, production may begin on coaches before an order has been
received from a specific buyer. As of June 30, 2002, approximately 88 percent of
the coaches in production and to be completed over the next four months have not
been sold to specific customers. While it is the Company's expectation that
substantially all of these motorcoaches will be sold to specific customers
before production is completed, or shortly thereafter, there is no assurance
this will occur. Accordingly, this could adversely impact the liquidity of the
Company.
The shell manufacturer has financed a number of motorcoach shells acquired by
the Company for a four-month period that approximates the time normally required
to perform the conversion process. Payment is required for these shells at the
time the shell is sold or at the end of the defined period, whichever occurs
sooner. The manufacturer has the right to demand payment or to repossess shells
at that time. At June 30, 2002, $6.1 million was owed to the shell manufacturer,
a reduction of $1.5 million since December 31, 2001.
The Company's investing activities for the six months ended June 30, 2002
used net cash of $148,000. The Company's net capital expenditures for plant and
equipment were $148,000 for the six-month period ended June 30, 2002. There were
no aircraft sales or purchases during the this six month period. On July 31,
2002 U.S. Bank renewed the availability of a capital expenditure financing under
a $2.0 million Capital Expenditure Term Note to finance the Company's planned
capital expenditures on machinery and equipment in 2002.
The Company leases certain office and production facilities under various
operating leases that expire at varying dates through fiscal year 2011. Minimum
lease payments for 2002 will total $877,000. In addition, the Company accrued as
a restructuring charge liability at December 31, 2001, $400,000 of estimated
rent to be paid on the Pryor facility in 2002 until it is subleased. In 2001,
the Company decided not to lease a new sales and service center in North
Carolina but as consideration for being released from this obligation, will pay
an aggragate amount of $302,000 in monthly installments over a three year period
beginning in March, 2002, to Clement Properties, an entity owned by certain of
the majority shareholders of the Company.
15
As discussed above, the Company entered into an agreement with GBNM Parterhip to
lease the sales and service center facility in Sanford, Florida beginning August
1, 2002 for an initial term of 7 years plus a 3 year renewal option, at a rental
rate of $50,000 per month for the first 5 years. Since the Company has an option
to repurchase this facility for $5.4 million on August 1, 2005, this will be
recorded as a sale/leaseback transaction.
The Company's financing activities in the six months ended June 30, 2002 used
net cash of $8.0 million, including $8.3 million for net reductions in line of
credit borrowings, $3.8 million for the repayment of the Sanford facility
mortgage and $1.3 million for other long-term debt reductions and Trade Creditor
Repayment Plan payments. On June 28, 2002, the Company received a
deposit of $3.8 million in connection with their July 31, 2002 sale of the
Sanford, Florida, sales and service center for $5 million with the remaining
balance of $1.2 million received on August 1, 2002. As discussed further below,
the Company began leasing the facility on August 1.
The Company also borrowed $1.5 million from Bulk Resources, Inc., an unrelated
private investor, in the form of a subordinated convertible note. This note is
due January 2, 2003 or may be converted together with interest accrued thereon
at the rate of 6.5 percent per annum into shares of the Company's common stock
at $3.00 per share or the average closing price of the Company's common stock
between April 30, 2002 and October 30, 2002. The option must be exercised by
January 15, 2003. A detachable warrant for 150,000 shares of common stock at
$2.00 per share was issued in conjunction with the convertible note, which must
be exercised by January 31, 2007, and was assigned a fair value of $95,000 as
discussed in Note 6 to condensed cosolidated financial statements.
As discussed in Note 5 to the condensed consolidated unaudited financial
statements, the Company is contingently liable under certain trailer dealer
floor plan arrangements. These arrangements relate to inventory financing
provided to Featherlite trailer dealers by financial institutions. The Company
would be required to repurchase trailer inventory if the financial institution
repossesses it and it is in saleable condition. No reserve has been provided for
this contingency because the aggregate amount of such repurchases has
historically been less than one percent of sales and repossessed inventory has
been resold to other dealers without a loss. These contingent liabilities total
approximately $8.1 million at June 30, 2002. Also, the Company is partially
self-insured for a portion of certain health benefit and workers' compensation
insurance claims. For health claims there is an annual stop loss limit of
$100,000 per claim but no aggregate loss limit. For workers compensation claims,
there is a $250,000 per occurrence limit and an aggregate limit of $1.9 million.
At June 30, 2002, $2.0 million was accrued for estimated unpaid claims. The
Company has obtained an irrevocable standby letter of credit in the amount of
$2.4 million in favor of the workers' compensation claim administrators to
guarantee payment of claims.
Assuming continued improvement in the national economy, the Company believes
that its current cash balances, cash flow generated from operations and
available borrowing capacity will be sufficient to fund continued operations and
capital requirements consistent with past levels for the next twelve months. As
described above, the Company has agreements with its two major lenders to
continue funding in 2002 and beyond.
For the foreseeable future, the Company does not plan to pay dividends but
instead will follow the policy of reinvesting any earnings in order to finance
the expansion and development of its business. The Company is a party to certain
loan agreements that prohibit the payment of dividends without the lender's
consent.
Forward-looking Information and Risks
Certain statements in this report, and in the Company's Form 10-K and other
filings with the SEC, are forward-looking in nature and relate to trends and
events that may affect the Company's future financial position and operating
results. The words "believe," "estimate," "expect," "intend," "may," "could,"
"will," "plan," "anticipate'" and similar words and expressions are intended to
identify forward-looking statements. These statements speak only as of the date
of this quarterly report, are based on current expectations, are inherently
uncertain, are subject to risks, and should be viewed with caution. Actual
16
results and experience may differ materially from the forward-looking statements
as the result of many factors, including but not limited to: product demand and
acceptance of products in each segment of the Company's markets, fluctuations in
the price of aluminum, competition, facilities utilization, the availability of
additional capital as may be required to finance any future net liquidity
deficiency and certain other unanticipated events and conditions. It is not
possible to foresee or identify all such factors. The Company makes no
commitment to update any forward-looking statement or to disclose any facts,
events, or circumstances after the date hereof that may affect the accuracy of
any forward-looking statement, other than as required by law.
While consolidated sales levels for the first six months of 2002 have declined
compared to the same period last year, in large part due to the closure of the
Vogue facility in the second quarter of 2001, they are slightly ahead of the
Company's sales plan for 2002. The order backlog for trailers of $12.8 million
at December 31, 2001 was below the backlog level of $14.8 million at December
31, 2000; but at June 30, 2002 the trailer order backlog level of $15.9 million
level was comparable to a level of $16.0 million at June 30, 2001. At December
31, 2001, order backlog for motorcoaches was $3.1 million compared to $15.9
million at December 31, 2000. The motorcoach backlog was $1.8 million at June
30, 2002 compared with $8.7 million at June 30, 2001. While there has been no
growth in the motorcoach backlog, new units held in inventory have decreased
since December 31, and new units begun before a customer order is received have
been sold when completed. With an encouraging start in 2002 due to higher gross
margins, and aggressive measures in place to promote sales and manage costs,
management expects that sales will continue to increase as national economic
business conditions improve and expects gross margins will remain at current
levels or improve slightly. There is continuing focus by the Company on the
sales and marketing related activities that have been effective in increasing
sales in the past but there is no assurance they will be successful in
increasing order levels to maintain or exceed 2001 sales volume.
The Company believes its name recognition and close affiliation with the
motorsports industry will continue to have a positive impact on its sales of
specialty trailers, transporters and luxury motorcoaches. With more than 75
percent of its revenue from end users in motorsports and leisure and
entertainment categories, which also includes horse trailers, and with its
strong position in the livestock trailer market, the Company believes it is
strategically well-positioned to continue to benefit from these markets. The
Company introduced 35 new and enhanced models of trailers in 2002 and added
motorcoach models with multiple slide-out features.
The Company's future operating results are subject to a number of risks,
including the following:
1. The Company has made increased use of leverage and incurred greater interest
and related expenses in two of the three years ended December 31, 2001.
Increased debt was incurred in connection with financing operations and
facilities expansions at the Motorcoach Division as well as financing its
increased working capital requirements through the year ended December 31, 2000.
In 2001 and through June 30, 2002, debt reductions have been made and interest
costs reduced as a result of decreases in Motorcoach Division inventories. As
described above, the Company has signed long-term agreements with its lenders
with new financial covenants, which the Company is in compliance with as of June
30, 2002. The Company believes it will achieve the requirements of these
covenants in the future. However, if the Company is unable to obtain waivers of
future covenant defaults and secure sufficient additional financing to fund its
liquidity shortfalls, the Company's business will be harmed.
2. There is a risk related to losing a major supplier of aluminum. In the past
this risk has been relatively nominal as there have been alternate sources of
supply. In recent years, the number of alternate sources of supply has been
reduced due to mergers within the aluminum industry. Also, additional time may
be required to replace an extruded aluminum supplier due to the fact that dies
are required and would have to be made. The Company routinely tries to keep at
least three suppliers of each shape so it has a backup supplier if necessary.
However, if the the number of suppliers of aluminum is further reduced, or if
the Company is otherwise unable to obtain its aluminum requirements on a timely
basis and on favorable terms, the Company operations would be harmed.
17
3. There is a risk related to the loss or interruption in the supply of bus
conversion shells from the Company's sole supplier of these shells. The Company
purchases all of its bus conversion shells from Prevost Car Company located in
Canada. Although the Company has insurance to cover certain losses it may
sustain due to fire or other catastrophe at Prevost's plant, the Company may not
be able to obtain conversion shells from another manufacturer on favorable terms
or at all. Additionally, if the Company is unable to maintain a good working
relationship with Prevost, it may be required to locate a new supplier of its
conversion shells. In the event of any significant loss or interruptions in the
subcontractor's ability to provide such services may harm the Company's
operations.
4. The Company uses one subcontractor to provide paint and graphic design work
to meet customer specifications on certain custom trailers and specialty
transporters. There is a risk to the timely delivery of these trailers in the
event of an unforeseen interruption in the subcontractor's ability to provide
these services or if the customer delays providing the specifications to the
subcontractor. Any long-term interruptions in the subcontractor's ability to
provide such services may harm the Company's operations.
5. The Company begins production of most of the luxury motorcoaches before a
customer order is received. While it is the Company's expectation that
substantially all of these motorcoaches will be sold to specific customers
before production is completed, or shortly thereafter, there is no assurance
this will occur. Failure to sell these motorcoaches on a timely basis at
prevailing prices could further decrease the liquidity of the Company.
6. The Company takes trade-ins on both new and used motorcoach sales. These
trade-in units are marketed on a retail basis to other customers. In 2001 and
2000, the Company experienced a significant decline in the market value of
trade-in units and certain non-current new models and wrotedown the carrying
value of the used inventory by $3.0 million and $1.7 million, respectively, in
order to facilitate their sale. There is a risk that additional write-downs of
this inventory will occur if these trade-in units are not sold at current
selling prices, which could adversely impact the Company's future operating
results.
7. The accompanying unaudited condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
However, the Report of Independent Public Accountants on the December 31, 2001
financial statements states that the Company is unable to ascertain whether it
will have sufficient liquidity available under its existing lines of credit to
fund operations or whether the Company will meet various covenant requirements
contained in its financing agreements. While progress has been made to reduce
these uncertainties, these matters still raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
8. In 2001, the Company was notified by The Nasdaq Stock Market, Inc. (Nasdaq)
that its common stock had failed to maintain the minimum market value of public
float required for continued listing on the Nasdaq National Market. In August
2001, the Company transferred to The Nasdaq Smallcap Market. Nasdaq has also
expressed concern that the Company may not be able to sustain compliance with
the continued listing requirements of The Nasdaq Stock Market because of the
"going concern" opinion expressed in the Report of Independent Accountants on
the Company's December 31, 2001 and 2000 consolidated financial statements.
There is no assurance the Company will be able to satisfy Nasdaq regarding its
ability to meet these continued listing requirements, and the Company's common
stock may be delisted from Nasdaq. In such an event, the market for the
Company's common stock may become more illiquid, and you may have a more
difficult time selling the Company's common stock.
9. As discussed in Note 3 to condensed consolidated financial statements, the
Company shut down its Pryor, Oklahoma manufacturing facility. It has accrued the
estimated rental and other costs of holding this facility through December 31,
2002. In the event the facility cannot be subleased or other uses found for the
facility, and additional accrual may be necessary.
18
Critical Accounting Policies
Inventories: Inventories are stated at the lower of cost, as determined on a
first-in, first-out (FIFO) basis, or market and include materials, labor and
overhead costs. Raw materials consist of the cost of materials required to
produce trailers and complete motorcoach conversions and to support parts sales
and service. Work in process consists of costs related to materials, bus
conversion shells, labor and overhead related to the production process.
Revenue Recognition: The Company recognizes revenue from the sale of trailers
and motorcoaches when title and risks of ownership are transferred to the
customer, which generally is upon shipment or customer pick-up. A customer may
be invoiced for and receive title prior to taking physical possession when the
customer has made a fixed, written commitment to purchase, the trailer or
motorcoach has been completed and is available for pick-up or delivery, and the
customer has requested the Company to hold the trailer or motorcoach until the
customer determines the most economical means of taking physical possession.
Upon such a request, the Company has no further obligation except to segregate
the trailer or motorcoach, issue its Manufacturer's Statement of Origin, invoice
the customer under normal billing and credit terms and hold the trailer or
motorcoach for a short period of time as is customary in the industry, until
pick-up or delivery. Products are built to customer specification and no rights
of return or exchange privileges are granted. Accordingly, no provision for
sales allowances or returns is recorded.
Long-lived Assets: The Company assesses long-lived assets for impairment under
SFAS Statement No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of." Under those rules, property and
equipment, goodwill associated with assets acquired in purchase business
combinations, and any other long-lived assets are included in the impairment
evaluations when events or circumstances exist that indicate the carrying amount
of those assets many not be recoverable. In the fourth quarter of 2000, the
Company determined that unamortized goodwill in the amount of $8.3 million
associated with the acquisitions of Vogue in 1998 and Vantare in 1996 was
impaired, and wrote it off. The write-off of the goodwill was based on an
analysis of projected undiscounted cash flows, which were no longer deemed
adequate to support the goodwill associated with these businesses. Impairment
reviews of the long-lived assets of certain business units in the trailer
segment also resulted in the write-down of goodwill and other long lived assets
by $431,000 in 2001. These write-downs were based on projected cash flows that
were not adequate to support goodwill associated with an acquired business and
the reduction of the net book value of related land and buildings to an amount
deemed realizable based on previous experience.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with SFAS No. 142. Other
intangible assets will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. We adopted SFAS No. 142 effective January 1, 2002.
The adoption of this SFAS had no effect on 2002 opertions because the Company
has no unamortized goodwill or other intangibles.
19
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS No. 144 supersedes previous guidance for financial accounting and
reporting for the impairment or disposal of long-lived assets and for segments
of a business to be disposed of. SFAS No. 144 is effective for the Company
beginning on January 1, 2002. Adoption of the statement is not expected to have
a material impact.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company is exposed to market risks related to changes in the cost of
aluminum. Aluminum is a commodity that is traded daily on the commodity markets
and fluctuates in price. The average Midwest delivered cash price per pound for
ingot aluminum during the three years ended December 31, 2001, as reported to
the Company by its suppliers was $0.69 in 2001, $0.75 in 2000, and $0.66 in
1999. The Company's cost of aluminum varies from these market prices due to
vendor processing charges, timing of purchases, and contractual commitments with
suppliers for specific prices and other factors. The Company has obtained
commitments from suppliers to provide, at an agreed upon fixed price, about 85
percent of its anticipated requirements for 2002 which reduces a portion of the
risk of aluminum cost fluctuations for the year. If the Company is unable to
obtain such commitments from suppliers or otherwise reduce the price risk
related to the balance of the purchases to meet its requirements in 2002 and in
the years beyond 2002, this could have an adverse impact on the Company's
operating results if the cost of aluminum increases significantly above levels
in 2001.
The Company is exposed to market risks related to changes in U.S and
international interest rates. Substantially all of the Company's debt bears
interest at a variable rate. The Company managed interest rate risk on one of
its term loans through the use of an interest rate swap. This swap was
terminated on June 28, 2002 in connection with the payment in full of the
related loan. An interest rate increase by one percentage point would reduce the
Company's future annual net income by approximately $300,000 at based upon the
Company's debt levels as of June 30, 2002.
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
As of June 30, 2002, the Company was not in compliance with certain of its
financial covenants under its credit facility with U.S. Bank and its motorcoach
financing agreement with Deutsche. However, on July 31, 2002, the Company
entered into amended and restated financing agreements with both U.S. Bank and
Deutsche that provided among other things, new financial covenants that became
effective as of June 30, 2002. As a result, both U.S. Bank and Deutsche
effectively waived the June 30, 2002 covenant violations that existed under our
old agreements with them. The Company was in compliance with all covenants under
each of these amended and restated agreements as of June 30, 2002..
Item 4. Submission of Matters to a Vote of Security-Holders.
----------------------------------------------------
(a) The Annual Meeting of the Registrant's shareholders was held on Friday, June
7, 2002.
(b) At the Annual Meeting a proposal to set the number of directors at seven was
adopted by a vote of 6,272,020 shares in favor, with 70,766 shares against, and
7,735 shares abstaining.
(c) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
under the Securities Act of 1934. The following persons were elected directors
of the Registrant to serve until the next annual meeting of shareholders and
until their successors shall have been duly elected and qualified:
20
------------------------------ ----------------------------- -------------------------------------
Nominee Number of Votes For Number of Votes Withheld
------------------------------ ----------------------------- -------------------------------------
Conrad D. Clement 6,139,767 210,754
------------------------------ ----------------------------- -------------------------------------
Jeffery A. Mason 6,140,442 210,079
------------------------------ ----------------------------- -------------------------------------
Tracy J. Clement 6,140,067 210,454
------------------------------ ----------------------------- -------------------------------------
Thomas J. Winkel 6,330,648 19,873
------------------------------ ----------------------------- -------------------------------------
Kenneth D. Larson 6,331,648 18,873
------------------------------ ----------------------------- -------------------------------------
Terry E. Branstad 6,328,348 22,173
------------------------------ ----------------------------- -------------------------------------
Charles A. Elliott 6,329,548 20,973
------------------------------ ----------------------------- -------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits. See Exhibit Index on page following signatures.
(b) Form 8-K. The Registrant filed no Form 8-K reports during the three
months ended June 30, 2002. On August 2, 2002, the Registrant filed a Form 8-K
to report a change in the Registrant's certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEATHERLITE, INC.
(Registrant)
Date: August 14, 2002 /S/ CONRAD D. CLEMENT
---------------------
Conrad D. Clement
President & CEO
Date: August 14, 2002 /S/ JEFFERY A. MASON
--------------------
Jeffery A. Mason
Chief Financial Officer
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EXHIBIT INDEX
Form 10-Q
Quarter ended June 30, 2002
Exhibit No. Description
- ----------------- --------------------------------------------------------------
10.1 Amended and Restated Loan Agreement Between U.S.Bank National
Association and Featherlite, Inc. dated July 31, 2002
- ----------------- --------------------------------------------------------------
10.2 Amendment No 5 to Amended and Restated Agreement for Wholesale
Financing Between Deutsche Financial Services Corporation and
Featherlite, Inc. dated July 31, 2002
- ----------------- --------------------------------------------------------------
10.3 Commerical Lease Between GBNM Partnership and Featherlite,
Inc.
- ----------------- --------------------------------------------------------------
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