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, 1999
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
incorporation or organization) Identification No.)
Highways 63 & 9, P.O. Box 320, Cresco, IA 52136
(Address of principal executive offices) (Zip Code)
319/547-6000
(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.
6,510,104 Shares as of August 12, 1999
<PAGE>
FEATHERLITE, INC.
INDEX
Page No.
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Balance sheets
June 30, 1999 and December 31, 1998 . . . . . . . . . . . . . . . . . 3
Condensed Statements of Income
Three and Six Month Periods Ended June 30, 1999 and 1998 . . . . . . 4
Condensed Statements of Cash Flows
Three and Six Month Periods Ended June 30, 1999 and 1998 . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . .10
Item 3. Quantitative & Qualitative Disclosures about Market Risk . . . . 16
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
2
<PAGE>
Part I: FINANCIAL INFORMATION
Item 1:
Featherlite, Inc.
Condensed Balance Sheets
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
-------- ---------
<S> <C> <C>
Current assets
Cash $ 210 $ 188
Receivables 12,253 10,332
Inventories
Raw materials 12,502 12,571
Work in process 19,446 18,817
Finished trailers/motorcoaches 31,200 29,985
-------- --------
Total inventories 63,148 61,373
Prepaid expenses 1,506 1,522
Deferred taxes 1,107 1,107
-------- --------
Total current assets 78,224 74,522
-------- --------
Property and equipment,net 17,624 15,868
Goodwill and other assets 16,045 16,398
-------- --------
$ 111,893 $ 106,788
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long term debt $ 1,206 1,241
Other notes payable 19,209 17,936
Accounts payable 18,659 18,221
Accrued liabilities 5,106 5,720
Customer deposits 4,771 2,241
-------- --------
Total current liabilities 48,951 45,359
-------- --------
Long Term debt, net of current maturities 29,746 30,914
Other long term liabilities 950 972
Commitments and contingencies (Note 6)
Shareholders' equity 32,246 29,543
-------- --------
$ 111,893 $ 106,788
======== ========
</TABLE>
See Notes to financial statements
3
<PAGE>
Featherlite, Inc.
Condensed Statements of Income
(Unaudited)
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Three months Ended Six months Ended
June 30 June 30
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 56,295 $ 49,294 $ 115,717 $ 91,036
Cost of sales 47,475 41,905 97,200 76,730
-------- -------- -------- --------
Gross profit 8,820 7,389 18,517 14,306
Selling and administrative expenses 6,450 5,276 13,084 9,937
-------- -------- -------- --------
Income from operations 2,370 2,113 5,433 4,369
Other income (expense)
Interest (839) (685) (1,737) (1,261)
Other, net 151 249 580 471
-------- -------- -------- --------
Total other expense (688) (436) (1,157) (790)
-------- -------- -------- --------
Income before taxes 1,682 1,677 4,276 3,579
Provision for income taxes 672 672 1,722 1,433
-------- -------- -------- --------
Net income $ 1,010 $ 1,005 $ 2,554 $ 2,146
======== ======== ======== ========
Net income per share - basic $ 0.15 $ 0.16 $ 0.39 $ 0.34
-------- -------- -------- --------
Net income per share - diluted $ 0.15 $ 0.15 $ 0.39 $ 0.33
-------- -------- -------- --------
Average common shares outstanding-basic 6,500 6,414 6,500 6,335
-------- -------- -------- --------
Average common shares outstanding-diluted 6,525 6,571 6,515 6,456
-------- -------- -------- --------
</TABLE>
See Notes to financial statements
4
<PAGE>
Featherlite, Inc.
Condensed Statements of Cash Flow
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months Ended
June 30
----------------
1999 1998
---- ----
<S> <C> <C>
Cash provided (used) by operating activities
Net income $ 2,554 $ 2,146
Depreciation & amortization 1,146 876
Other non cash adjustments, net (360) (278)
Increase in working capital, net (1,326) (3,107)
--------- --------
Net cash (used for) operating activities 2,014 (363)
--------- --------
Cash provided (used for) investing activities
Acquisition of business - (310)
Additions to property and equipment, net (2,605) (863)
Sale of aircraft and other property, net 543 173
--------- --------
Net cash (used for) investing activities (2,062) (1,000)
--------- --------
Cash provided by (used for) financing activities
Change in short term debt 1,273 (2,012)
Change in long term debt and grants (1,203) 3,777
--------- --------
Net cash provided by financing activities 70 1,765
--------- --------
Net cash increase 22 402
Cash, beginning of period 188 1,632
--------- --------
Cash, end of period $ 210 $ 2,034
========= ========
Non-cash investing and financing activities:
Fair market value of assets acquired $ 12,417
Excess of purchase price over net assets acquired 6,640
Liabilities assumed (16,247)
Issuance of common stock (2,500)
--------
Cash used for business acquisition $ (310)
========
</TABLE>
See Notes to financial statements
5
<PAGE>
FEATHERLITE,INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The accompanying condensed financial statements 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 fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Financial information as of December
31, 1998 has been derived from the audited financial statements of the Company,
but does not include all disclosures required by generally accepted accounting
principles.
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 and six month
periods ended June 30, 1999 and 1998. The results of interim periods are not
necessarily indicative of results to be expected for the year. For further
information refer to the financial statements and notes to financial statements
included in the Company's Form 10-K Annual Report for the year ended December
31, 1998.
Note 2: Property and Equipment
Property and equipment consists of the following at June 30, 1999 and December
31, 1998 (in thousands):
1999 1998
---- ----
Land and improvements $ 4,876 $ 3,042
Building and improvements 8,951 8,887
Machinery and equipment 12,501 11,763
Accumulated depreciation (8,704) (7,824)
------- -------
Net Property and equipment $17,624 $ 15,868
------- -------
Note 3: Goodwill and Other Assets
Goodwill and other consists of the following at June 30, 1999 and
December 31, 1998 (in thousands):
1999 1998
---- ----
Goodwill, net $ 9,224 $ 9,126
Aircraft held for resale 6,326 6,676
Idle facilities 229 231
Advertising and other 264 363
Investment in joint venture 2 2
------- --------
Total $ 16,045 $ 16,398
------- --------
Note 4: Income taxes
The Company is the subject of an Internal Revenue Service examination for the
years ended December 31, 1995, 1996 and 1997. The IRS has proposed adjustments
related to the treatment of various incentive grants received in connection
with the Company's building expansion in prior years. The Company believes its
position is valid and intends to vigorously defend it. No assurance can be
given that the Company will be successful in sustaining its treatment of these
grants. Any additional tax due will result in the creation of a current income
tax liability and a reduction in deferred income tax liabilities.
6
<PAGE>
Note 5: Financing Arrangements
Other notes payable primarily include borrowings under a wholesale
finance agreement with a financial services company for a $23.7 million line of
credit to finance completed new and used motorcoaches held in inventory. The
agreement includes covenants requiring maintenance of defined levels of tangible
net worth, leverage and working capital. It is subject to renewal on October 31,
1999. At June 30, 1999, $19.1 million was borrowed against this line.
Long-term debt consists of the following at June 30, 1999 and December
31, 1998 (In thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------- ------------------ ------------------------
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Working Capital line of credit; interest at prime less .75* $ 15,845 $ 17,939
- -------------------------------------------------------------------------- ------------------ -----------------
Bank notes; interest at prime less .75%, payable in varying monthly
installments through 2008; same collateral and covenant provisions as
working capital line of credit * 7,727 7,817
- -------------------------------------------------------------------------- ------------------ -----------------
Bank notes; interest at prime plus .75%; payable in vary monthly installments
through Januanry,2001; collateralized by aircraft 4,554 5,215
- -------------------------------------------------------------------------- ------------------ -----------------
Notes and capitalized leases, interest to 11.5%, payable in varying monthly
installments to 2003; collateralized by real estate 350 1,184
- -------------------------------------------------------------------------- ------------------ -----------------
Bank note, interest at 7.34%; payable in monthly installments to 2004;
collateralized by Sanford, Florida real estate.** 2,476 -
- -------------------------------------------------------------------------- ------------------ -----------------
Total long-term debt 30,952 32,155
- -------------------------------------------------------------------------- ------------------ -----------------
Less current maturities (1,206) (1,241)
- -------------------------------------------------------------------------- ------------------ -----------------
Long-term debt, net of current maturities $ 29,746 $ 30,914
- -------------------------------------------------------------------------- ------------------ -----------------
</TABLE>
* Long-term debt includes borrowing under a credit agreement with a
bank that provides a working capital line of credit equal to the lesser of $23
million or a defined percentage of eligible trade receivables and inventory. The
agreement includes covenants requiring maintenance of defined levels of tangible
net worth, earnings before interest, taxes, depreciation and amortization
(EBITDA) and fixed charge coverage ratio. The maturity date of the borrowings
under this agreement is September 24, 2002.
** Long-term debt also includes borrowings to refinance the land
acquisition and construction cost of a sales and service center as discussed in
Note 6 below. The aggregate borrowings on this project will total approximately
$4.0 million and will be repayable in equal monthly installments based on a 15
year amortization with the remaining balance due in November, 2003. The Company
also entered into an interest rate swap for the notional amount of the
financing on this project to fix the effective interest rate on this borrowing
at 7.34% over a five-year term.
Note 6: Commitments and Contingencies.
Pursuant to dealer inventory floor plan financing arrangements, the Company may
be required, in the event of default by a financed dealer, to repurchase
products from financial institutions or to reimburse the institutions for unpaid
balances including finance charges plus costs and expenses. The Company was
contingently liable under the arrangement for a maximum of $ 15.8 million at
June 30, 1999 and $17.2 million at December 31, 1998.
7
<PAGE>
Also, the Company is self-insured for a portion of certain health benefit and
workers' compensation insurance claims. The Company's maximum annual claim
exposure under these programs is approximately $4.0 million, including $1.1
million accrued for estimated unpaid claims at June 30, 1999 and at December 31,
1998. The Company has obtained an irrevocable standby letter of credit in the
amount of $1.2 million in favor of the workers compensation claim administrator
to guaranty settlement of claims.
There is a risk to future operating results if the Company were to lose its sole
supplier of motorcoach conversion shells, Prevost Car Company, although the
Company could purchase certain shells from other manufacturers. The Company does
have business interruption insurance to cover all or a portion of the losses it
may sustain if Prevost's plant is destroyed by fire or certain other
catastrophes.
The Company, in the course of its business, has been named as a defendant in
various legal actions. Most, but not all, of such actions are 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, but may be
material to the Company's operating results for any particular period.
In November 1998 the Company entered into a contract in the aggregate amount of
$2.9 million for the development and construction of a sales facility on land
near the Company's Sanford location. In 1999, this project was expanded to
include a service center at an additional approximate cost of $800,000. This
project will be substantially completed by the end of the third quarter of 1999.
It is being financed with borrowed funds from First Union Bank.
Note 7: Related Party Transactions
In June, 1999, the Company entered into an operating lease for an aircraft with
Clement Enterprises, Inc., a Company owned by certain shareholders. The lease
requires monthly rental payments of $28,698 through December 31, 2000.
Note 8: Shareholders' Equity
Shareholders' equity may be further detailed as follows (in thousands)
June 30, Dec 31,
1999 1998
-------- --------
Common stock - without par value;
Authorized- 40,000,000 shares;
issued- 6,500,051 shares $ 16,385 $ 16,236
Additional paid-in capital 4,062 4,062
Retained earnings 11,799 9,245
-------- -------
Total Shareholders' equity $ 32,246 $ 29,543
======== ========
In 1994, the Company completed an initial public offering of 1,955,000 shares of
Company common stock and granted an option to the Underwriter to purchase
120,000 shares at a price of 120 percent of the initial public offering price of
$6.00 per share. This option, which expires in September 1999, has not yet been
exercised.
In 1999, the Company issued an additional 25,000 shares of common stock to the
former owner of Vantare International, Inc. These additional shares were earned
under the terms of the purchase agreement for this 1996 asset acquisition for
the achievement of defined earnings levels through December 31, 1998. An
additional 75,000 shares may still be earned under this agreement for the
performance of the Vantare Division through December 31, 2000. Goodwill related
to this acquisition was increased by $150,000 for this stock issue.
8
<PAGE>
Note 9: 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 556,380 shares at June 30, 1999 and 529,380 at December 31, 1998.
These options were granted at prices ranging from $5.50-$10.00 per share, and
are exercisable at varying dates not to exceed 10 years from the date of grant.
Options totaling 27,000 shares have been granted in 1999. No options have been
exercised in 1999.
Note 10: Earnings per Share
The weighted-average number of shares of common stock used to compute the basic
earnings per share was increased by 25,043 and 15,255 at June 30,1999 and
156,534 and 121,815 at June 30,1998 for the assumed exercise of options and
warrants in computing the quarterly and year to date diluted earnings per share
data, respectively. Basic and diluted earnings per share, as calculated under
FAS statement No. 128, are not materially different than the primary and fully
diluted earnings per share as previously reported in prior periods.
Note 11: Segment Reporting
The Company has two principal business segments, trailers and motorcoaches. The
accounting policies applied to determine segment information are the same as
described in the summary of significant accounting policies in the Company's
annual report for the year ended December 31, 1998, except that in 1999, the
Company began allocating certain expenses previously classified as corporate to
the motorcoach segment to better reflect the cost of administering that segment.
Allocations in the amount of $321,000 were made for the quarter ended June 30,
1999 and $642,000 for the six months ended June 30, 1999. No such allocation was
made in 1998. Management evaluates the performance of each segment based on
profit or loss from operations before income taxes, excluding non-recurring
gains or losses.
The Company's sales are not materially dependent on a single customer or small
group of customers.
Information on business segment sales, income before taxes and assets as follows
for the six month and three month periods ended June 30, 1999 and 1998 (in
000's):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
- ------------------------------------------------------- ----------------- ---------------- ---------------- ----------------
1999 1998 1999 1998
- ------------------------------------------------------- ----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales to unaffiliated customers
Trailers $ 29,041 $ 29,629 $ 59,551 $ 58,210
Motorcoaches 27,254 19,665 56,166 32,826
Total net sales $ 56,295 $ 49,294 $ 115,717 $ 91,036
Income before taxes
Trailers $ 2,692 $ 3,199 $ 5,951 $ 5,619
Motorcoach 832 450 1,849 1,765
3,524 3,649 7,800 7,384
General corporate (1,154) (1,536) (2,367) (3,015)
Interest expense ( 839) ( 685) (1,737) (1,261)
Other income (expense),net 151 249 580 471
Income before income taxes $ 1,682 $ 1,677 $ 4,276 $ 3,579
Identifiable assets
Trailers $ 39,261 $ 39,496
Motorcoaches 62,365 41,933
General corporate 10,267 13,614
Total assets as reported $111,893 $ 95,043
</TABLE>
9
<PAGE>
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,
1999 and 1998.
Results of Operations
Three months ended June 30, 1999 and 1998
On a consolidated basis, the Company's net income for the second quarter ended
June 30, 1999 was $1,010,000, or 15 cents per diluted share, compared with
$1,005,000,or 15 cents per diluted share, in the second quarter of 1998.
Net sales for the quarter increased by $7.0 million in 1999 to $56.3 million
compared with $49.3 million in 1998,a 14.2 percent gain. This growth was led by
a 38 percent, or $7.3 million, increase in sales of Featherlite Vantare and
Featherlite Vogue motorcoaches, including $5.0 million from sales of Vogue
motorcoaches which was acquired in May, 1998. On a comparable basis, adjusting
sales for the pre-acquisition sales of Vogue, total luxury motorcoach segment
sales gained by 14 percent over the second quarter of 1998. Sales of specialty
trailers and transporters were down by 5 percent.
Gross profit margin increased by $1.4 million to $8.8 million in the second
quarter of 1999 from $7.4 million in 1998. As a percentage of sales, gross
profit margin for the quarter was 15.7 percent compared to 15.0 percent in 1998.
This improvement reflects higher margins realized in the luxury motorcoach
segment, partially offset by slightly lower margins in the specialty trailer
segment mainly due to changes in product mix.
Selling and administration expenses increased in 1999 by $1.2 million over 1998,
including a $800,000 increase related to the Vogue operations which were
acquired in May, 1998. As a percentage of sales, these expenses increased to
11.5 percent in 1999 from 10.7 percent in 1998.
Interest expense increased by $154,000 in 1999 compared to 1998 due to higher
levels of debt in 1999 and a slightly higher interest rate for a portion of the
quarter. Other income was higher in 1998 than in 1999 due to the sale of an
aircraft in 1998 on which a $130,000 gain was realized.
Segment Information
The following discussion pertains to information on the Company's two principal
business segments as set forth in Note 11 to the financial statements for the
three months ended June 30, 1999 and 1998.
Trailer segment
- ------------------------------------- --------------- -------------- ----------
1999 1998 Inc(dec)
- ------------------------------------- --------------- -------------- ----------
Net sales (000's) $ 29,041 $ 29,629 (2.0%)
- ------------------------------------- --------------- -------------- ----------
Segment income (000's) 2,692 3,199 (15.8%)
- ------------------------------------- --------------- -------------- ----------
Segment income percent 9.3% 10.8%
- ------------------------------------- --------------- -------------- ----------
Trailer segment sales decreased by 2.0 percent in the second quarter of 1999
over 1998. Sales of specialty trailers and transporters were down by 4.8
percent which was partially offset by an increase of 45 percent in sales of
10
<PAGE>
parts, delivery and other items. On a product group basis, horse trailer sales
increased by 7.8 percent, livestock trailer sales were down 21.7 percent,
car/racecar transporter sales increased by 1 percent, utility trailer sales were
unchanged and commercial trailer sales were down by 38 percent. Livestock
trailer sales have been adversely impacted since the third quarter of 1998 by
overall difficulties in the agribusiness economy and commercial trailer sales
are a category which is being de-emphasized by the Company. There have been no
overall increases in trailer model prices in 1999.
Trailer segment income decreased in 1999 by 15.8 percent as the result of a
lower gross margin percent and increased marketing and selling expenses. The
gross margin percentage decreased by .7 percent primarily as the result of a
lower percentage of transporter sales, which have a higher than average gross
margin percentage, in 1999 than in 1998. Segment income was further decreased
by marketing and delivery costs which increased as a percentage of sales to 8.9
percent in 1999 from 8.1 percent in 1998, in part due to a special sales
promotion program in 1999.
Motorcoach Segment
- ---------------------------------------------------------------------
1999 1998 Inc (dec)
- ---------------------------------------------------------------------
Net Sales (000's) $ 27,254 $ 19,665 38.6 %
- ---------------------------------------------------------------------
Segment income (000's) 832 450 84.9 %
- ---------------------------------------------------------------------
Segment income percent 3.0% 2.3%
- ---------------------------------------------------------------------
Motorcoach segment sales increased by $7.6 million, or 38.6 percent, in the
second quarter compared with the same quarter last year, including $5 million,
which was contributed by the addition of the Featherlite Vogue line of
motorcoaches acquired in May 1998. On a comparable basis, adjusting for the
pre-acquisition sales of Vogue in the second quarter of last year, total
motorcoach segment sales gained 14 percent over the second quarter of 1998. The
sales of Featherlite Vantare bus conversions increased by about 37 percent over
1998. Sales of Featherlite Vogue luxury motorcoaches were lower than expected
in the second quarter.
Motorcoach segment income percentage increased in 1999 by .7 percentage points
compared to 1998 due to an increase of 3.8 percentage points in the segment
gross margin percentage and a partially offsetting increase of 3.1 percentage
points in segment operating expenses. The improvement in the gross margin
percentage is primarily due to improved gross margin percentages in both new
and used motorcoach sales in 1999 compared to 1998. Segment operating expenses
increased by approximately $1.4 million in 1999, including $800,000 due to the
Featherlite Vogue acquisition in May 1998 and an allocation of $321,000 of
corporate marketing and administrative expenses in 1999, which decreased segment
income as a percent of sales by 1.2 percentage points in 1999.
Six months ended June 30, 1999 and 1998
Net sales of $115.7 million for the six months ended June 30, 1999 increased by
27.1 percent from net sales of $91.0 million in last year's first six months.
The 1999 increase of $24.7 million over 1998 includes $16.9 million from the
Featherlite Vogue line of products which were acquired in May 1998. The balance
of the sales increase, $7.8 million, resulted from growth in established
product categories, including a 23 percent increase in sales of Featherlite
Vantare luxury motorcoaches. On a comparable basis, adjusting for the
pre-acquisition sales of Vogue in the first six months of last year, total
luxury motorcoach segment sales increased by 22 percent. Sales of Featherlite
aluminum and steel brand trailers and other products increased by 2.3 percent.
Gross profit increased to $18.5 million in the first six months of 1999 from
$14.3 million in 1998 primarily as a result of the increased levels of sales. As
a percentage of sales, gross margin for the six months increased to 16.0% in
1999 from 15.7% in 1998. The gross profit percentage increase primarily reflects
the change in sales mix between trailers and motorcoaches as well as changes in
the gross margin percentage of each business segment.
11
<PAGE>
Selling and administrative expenses increased in 1999 by $3.1 million over 1998
and increased as a percentage of sales to 11.3 percent from 10.9 percent in
1998. The increase in the total cost of this category primarily reflects
additional advertising, personnel and other costs related to Company growth,
including $2.1 million related to the Vogue division that was acquired in May
1998.
Interest expense increased in 1999 compared to 1998 due to higher levels of debt
primarily related to increased working capital needs of the motorcoach segment.
The provision for income taxes reflects an effective federal and state income
tax rate of about 40% in 1999 and 1998. Other income increased by $109,000 due
to increased gains on aircraft sales in 1999.
Segment Information
The following discussion pertains to information on the Company's two principal
business segments as set forth in Note 11 to the financial statements for the
six months ended June 30, 1999 and 1998:
Trailer segment
- --------------------------------------- -------------- -----------------
1999 1998 % Inc(dec)
- --------------------------------------- -------------- -----------------
Net sales (000's) $59,551 $58,210 2.3 %
- --------------------------------------- -------------- -----------------
Segment income (000's) 5,951 5,619 5.9 %
- --------------------------------------- -------------- -----------------
Segment income percent 10.0% 9.7%
- --------------------------------------- -------------- -----------------
Trailer segment sales increased by 2.3 percent in the first six months of 1999
over 1998, including an increase in trailer sales of .7 percent and increase in
parts, delivery and other sales of 29.5 percent. On a trailer product category
basis, horse trailer sales increased 5 percent, livestock trailer sales
decreased by 26 percent, car/racecar and specialty transporter sales were up 23
percent, utility trailer sales decreased by 12 percent and commercial trailers
sales were down by 18 percent. The decrease in livestock trailer sales is a
result of the economic difficulties in the farm and agricultural economy that
began in 1998, particularly in the Midwest. Utility sales are down due to
decreased deliveries of snowmobile trailers. The decrease in sales of commercial
trailers reflects the Company's deemphasis of this product category.
Trailer segment income increased in 1999 due to greater sales volume as well as
an increased gross margin percentage on the sales. The gross margin percentage
increased by 1.1 percent as the result of lower material costs due to a lower
average cost per pound of aluminum used as well as a higher percentage of
transporter sales which have a lower material cost as a percentage of the
selling price. This improvement was partially offset by greater marketing and
delivery costs, which increased as a percentage of sales to 8.8 percent in 1999
from 8.0 percent in 1998.
Motorcoach Segment
-----------------------------------------------------------------------
1999 1998 % Inc (dec)
-----------------------------------------------------------------------
Net Sales (000's) $56,166 $32,826 71.1 %
-----------------------------------------------------------------------
Segment income (000's) 1,849 1,765 4.7 %
-----------------------------------------------------------------------
Segment income percent 3.3% 5.4%
-----------------------------------------------------------------------
Motorcoach segment sales increased by $23.4 million, or 71 percent, in the first
six months of 1999 compared to the same period last year, including $16.9
million, which was contributed by the addition of the Featherlite Vogue line of
motorcoaches acquired in May 1998. The sales of Featherlite Vantare increased by
about 23 percent.
Motorcoach segment income increased by 4.7 percent in 1999 as a result of
increased sales. The segment income percentage decreased in 1999 by 2.1
percentage points compared to 1998 due to an increase of .8 percentage points in
the segment gross margin percentage which was offset by an increase of 2.9
12
<PAGE>
percentage points in segment operating expenses. The improvement in gross margin
percentage is primarily due to improved gross margin percentages on both new and
used motorcoaches in 1999 compared to 1998. Segment operating expenses increased
by approximately $1.9 million in 1999 due to the Featherlite Vogue acquisition
in May 1998 and an allocation of $642,000 of corporate marketing and
administrative expenses in 1999, which decreased segment income as a percent of
sales by 1.1 percentage points in 1999.
Looking Forward
The statements made in this Form 10Q quarterly report which are forward looking
in time involve risks and uncertainties discussed here and in the Company's Form
10-K and other filings with the SEC, including but not limited to: product
demand and acceptance of new products in each segment of the Company's markets,
fluctuations in the price of aluminum, competition, facilities utilization,
aircraft purchases and sales and the availability of additional capital required
for growth.
The Company expects consolidated sales to be strong in the remainder of 1999.
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 and luxury motorcoaches as well as other trailers used for
leisure and entertainment purposes. 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-situated to
benefit from growth in these markets.
Trailer segment growth should improve over the second half of the year but may
be reduced compared to recent years due to continued economic difficulties in
the agribusiness economy. This belief is based on a number of factors, including
the overall strength of our dealer network. Dealer inventories continue to turn
well and their inventory levels have declined since the beginning of the year.
Trailer segment order backlog remains strong at June 30, at a level of $13.6
million, which is 20 percent higher than March 31, 1999 and 13% higher than June
30, 1998. This part of the business is well-situated for good growth and
continued profitability.
The Company also believes the motorcoach segment of the business is well
positioned for continued growth in the 25 to 30 percent range. This segment's
position in the growing luxury motorcoach market has been strengthened with the
addition of Destinations RV, Inc. as a dealer. Destinations RV with locations in
Coburg and Bend, Ore., has been selected as the Company's exclusive dealer for
the Company's high-end Featherlite Vogue 5000 line of luxury motorcoaches. This
dealership was granted exclusive sales rights to cover a number of states in the
western United States, an area where there were limited sales for this product
previously. The Company also is consolidating certain functions of the
Featherlite Vantare and Featherlite Vogue organizations into the Featherlite
Luxury Motorcoach Division. This consolidation will achieve a unified sales and
marketing thrust as well as the benefits of unified operational control. In the
third quarter, the new Featherlite Luxury Motorcoach Sales and Service Center in
Sanford, Florida, will be completed. This facility will provide excellent brand
exposure and customer convenience from its high-visibility and high-traffic
location on Interstate 4. The motorcoach segment backlog was $23.7 million at
June 30, 1999 compared with $19.2 million at December 31, 1998 and $25.1 million
at June 30, 1998.
The Company has obtained commitments from suppliers to provide, at an agreed
upon fixed price, substantially all of its anticipated aluminum requirements for
1999 at an average cost which is about 5% lower than 1998 levels. It has also
obtained commitments for a substantial portion of its anticipated requirements
for 2000 at an average cost which is lower than 1999. This should have a
positive impact on trailer segment income. Motorcoach segment margins should
continue to improve but can be adversely affected by the impact of used
motorcoach sales which normally have a margin percentage which is substantially
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below the margin percentage on new coach sales. On an overall basis, gross
margins should remain at about the same level as last year's year-end margin
percentage of 16 percent but could trend slightly lower as the motorcoach
segment becomes a larger percentage of the consolidated totals.
Sales and administration expenses for 1999 are expected to increase but at a
lower rate than sales growth as much of the organizational growth occurred in
prior years. These expenses are expected to be reduced as a percentage of sales
as benefits related to the luxury motorcoach segment consolidation are realized.
Interest expense will likely remain higher in 1999 than 1998 as the average
level of debt is expected to be greater due to working capital growth as well as
the facilities expansion discussed further below.
There is a risk to future operating results related to losing a major supplier
of aluminum. This risk is relatively nominal, as there are alternate sources of
supply. There is also a risk to future operating results if the Company were to
lose its sole supplier of motorcoach shells, Prevost Car Company, although the
Company could purchase certain shells from other manufacturers. The Company does
have business interruption insurance to cover all or a portion of the losses it
may sustain if Prevost's plant is destroyed by fire or certain other
catastrophes. There is also a risk related to the timely delivery of certain
custom trailers and specialty transporters in the event the Company's sole
supplier of custom paint and graphics is interrupted from providing these
services due to unforeseen circumstances or customer delays in providing
specifications to the subcontractor.
The Company has made increased use of leverage and incurred interest and related
expenses in the three years ended December 31, 1998 and the six months ended
June 30, 1999. Increased debt has been incurred in connection with financing the
operations of the Vantare and Vogue Divisions and in financing additional
working capital requirements. In 1999, additional debt will be incurred to
finance construction of a sales and service center at the Company's Sanford,
Florida location. Increased leverage and related expenses create risk to future
operating results of the Company.
The Company continues to make progress in readying its hardware and software
systems information technology (IT) and non-IT systems for the year 2000.
Substantially all of these changes to hardware and software systems have been
completed at a cost of approximately $70,000. An overall readiness test will be
performed during the third quarter to ensure all the Company's hardware and
software will work properly using year 2000 dates. The Company is continuing to
contact vendors and our customers to determine the status of their Year 2000
assessment and readiness programs. We are not aware of any significant problems
that would adversely impact the Company or of any other material risk to the
Company associated with Year 2000 issues. We are developing contingency plans to
address potential hardware and software systems failures that may arise
unexpectedly. We believe the most reasonably likely worst case Year 2000
scenario would be a decrease in the efficiency with which the Company is able to
procure materials and supplies from vendors and produce its products and this
could have an adverse effect on the Company's results of operations and
financial condition if prolonged.
Liquidity and Capital Resources
During the first six months of 1999, the Company's operations provided net cash
of $22,000, including $2.0 million provided by operating activities, $70,000
provided by financing activities and net of $2.1 million used for investing
activities.
Operating activities in the six months of 1999 provided net cash of $2.0
million. Net income from operations provided cash of $2.5 million. This amount
was increased by adjustments for depreciation and amortization of $1.1 million
and decreased by other non-cash items in an aggregate amount of $360,000. Net
changes in receivables, inventories and other working capital items used cash of
$1.3 million. Inventories increased by $1.8 million primarily to support the
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anticipated increased level of sales in the motorcoach segment. Increased
expenditures for working capital items may be required to support increased
sales levels throughout 1999.
Investing activities for the current quarter used net cash of $2.0 million,
including $1.8 million used for the expansion of the sales and service facility
at the Company's location in Sanford, Florida as discussed further below,
$800,000 used for other property improvements, and net of $543,000 provided from
aircraft sale and purchase transactions.
Financing activities provided net cash of $70,000 including new borrowings of
$477,000 for equipment and $1.7 million related to the Sanford expansion, and
net of a $660,000 reduction of aircraft debt and other debt reductions of $1.4
million, including $437,000 related to changes in the wholesale floor plan and
revolving line of credit.
The Company has a working capital line of credit with its primary lender,
Firstar Bank. This line has a borrowing limit of $23.0 million based on levels
of eligible receivables and inventory and an interest rate of prime less .75%
(7.25% at June 30, 1999). The maturity date of borrowings under this line is
September 24, 2002, subject to renewal and extension. The agreement contains
covenants that limit annual capital expenditures, total liabilities in relation
to defined tangible net worth and total fixed charges in relation to defined
EBITDA. Borrowings under the line are secured by substantially all assets of the
Company. There was $15.8 million borrowed against this line as of June 30, 1999.
The Company also has available through Firstar various term notes totaling $3
million as future borrowings for real estate projects and equipment. There was
$460,000 borrowed on these notes at June 30, 1999.
The Company also has a wholesale floor plan agreement with Deutsche Financial
Services to borrow up to $23 million for financing new and used motorcoaches
held in inventory, with interest at prime (8.00% at June 30, 1999) on borrowed
funds. This agreement includes covenants requiring maintenance of defined levels
of tangible net worth, leverage and working capital. At June 30, 1999, $19.1
million was borrowed on this line.
In November 1998, the Company entered into a construction contract in the amount
of $2.9 million for the development and construction of a sales facility near
the Company's Sanford, Florida location. This project was subsequently expanded
by about $800,000 to include a service center. It is expected these facilities
will be completed in about September, 1999. The construction and long-term
mortgage financing for this project are being provided by First Union Bank. At
June 30, 1999, $2.5 million was borrowed on this note. The interest rate on this
facility is based on one-month LIBOR rate plus 1.8 percent (7.93% at June 30,
1999). The Company has reduced the long-term risk related to unfavorable
fluctuations in this floating interest rate by entering into an interest rate
swap with First Union in notional amount of the financing provided, which fixed
the effective rate on this loan at 7.34 percent over a five year term. Interest
only is payable on this facility during the construction period; thereafter it
will be repayable in equal monthly installments of principal and interest based
on a 15 year amortization, with the remaining balance due November, 2003.
The Company believes that while its current cash balances, cash flow generated
from operations and available borrowing capacity would be sufficient to fund
continued operations and capital requirements consistent with past levels,
significant future growth of the Company may necessitate additional sources
of financing if such funding cannot be arranged with the Company's current
lenders. Such financing may be in the form of debt, debt with equity features
or a secondary offering of common stock. No assurance can be given that such
financing will be available to the Company.
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As discussed in Note 2 to financial statements, the Company is contingently
liable under certain dealer floor plan and retail financing arrangements. These
contingent liabilities total approximately $15.8 million at June 30, 1999. Also,
the Company is self-insured for a portion of certain health benefit and workers'
compensation insurance claims. At June 30, 1999, the Company's maximum annual
claim exposure under these programs is approximately $4 million. The Company has
obtained an irrevocable standby letter of credit in the amount of $1.2 million
in favor of the workers compensation claim administrator to guarantee payment of
claims.
The Company has also made a commitment to the City of Cresco to construct a
hangar facility at a cost of $300,000 as part of an airport expansion project
that may be completed in 2000. This expansion would be financed with new
borrowings from banks or other financial institutions.
In 1997, the Company entered into a joint venture agreement with GMR Marketing
to form Featherlite/GMR Sports Group, LLC. The joint venture is focusing on
developing promotional events and implementing marketing strategies in the
rapidly growing motorsports industry. Since inception, the Company has made
capital contributions totaling $56,000 to the joint venture. It is not expected
that this venture will require significant future capital from the Company to
maintain its operations.
The Company leases certain office and production facilities under various leases
that expire at varying dates through fiscal year 2011. Minimum lease payments
for 1999 are expected to total $828,000.
In June, 1999, the Company entered into an operating lease for an aircraft with
Clement Enterprises, Inc., a Company owned by certain shareholders. The lease
requires monthly rental payments of $28,698 through December 31, 2000.
The Company is the subject of an Internal Revenue Service examination for the
years ended December 31, 1995, 1996 and 1997. The IRS has proposed adjustments
related to the treatment of various incentive grants received in connection with
the Company's building expansion in prior years. The Company believes its
position is valid and intends to vigorously defend it. No assurance can be given
that the Company will be successful in sustaining its treatment of these grants.
Any additional tax due will result in the creation of a current income tax
liability and a reduction in deferred income tax liabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Featherlite 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. To a limited extent, the Company manages its
interest rate risk through the use of interest rate swaps. As of December 31,
1998 and June 30, 1999, the fair value of interest rate swaps was not material.
A 10 percent increase in interest rates would reduce the Company's future income
before taxes by approximately $385,000 at current levels of debt.
The Company uses substantial quantities of aluminum in the manufacturing of
trailers. The Company generally seeks to limit its exposure to the risk of
fluctuations in the price of aluminum by entering into fixed-price contracts
with suppliers for quantities sufficient to satisfy its requirements for up to
one year in advance. The Company does not engage in hedging transactions or
other use derivatives in connection with its operations.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
(a) The Annual Meeting of the Registrant's shareholders was held on Wednesday,
May 12, 1999.
(b) At the Annual Meeting a proposal to set the number of directors at seven was
adopted by a vote of 6,341,765 shares in favor, with 20,294 shares against,
14,205 shares abstaining and -0- shares represented by broker non-votes.
(c) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
Under the Securities Exchange 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:
- ---------------------------------------------------------------------------
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES AGAINST
- ---------------------------------------------------------------------------
Conrad D. Clement 6,351,761 24,503
- ---------------------------------------------------------------------------
Jeffery A. Mason 6,353,311 22,953
- ---------------------------------------------------------------------------
Tracy J. Clement 6,352,511 23,753
- ---------------------------------------------------------------------------
Donald R. Brattain 6,353,411 22,853
- ---------------------------------------------------------------------------
Thomas J. Winkel 6,353,311 22,953
- ---------------------------------------------------------------------------
Kenneth D. Larson 6,353,411 22,853
- ---------------------------------------------------------------------------
Terry E. Branstad 6,340,450 35,814
- ---------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Exhibit Index on Page 18 following signatures.
(b) Form 8-K. The Registrant did not file any reports on Form 8-K
during the three months ended June 30, 1999.
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 12, 1999 /S/ CONRAD D. CLEMENT
---------------------
Conrad D. Clement
President & CEO
Date: August 12, 1999 /S/ JEFFERY A. MASON
--------------------
Jeffery A. Mason
Chief Financial Officer
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EXHIBIT INDEX
Form 10Q
Quarter Ended June 30, 1999
Exhibit No. Description
10.1 Lease Agreement with Clement Enterprises for Rental of Aircraft
27 Financial Data Schedule (filed in electronic format only)
18
AIRCRAFT LEASE AGREEMENT
THIS AIRCRAFT LEASE AGREEMENT (the "Lease") is made and entered as of
this 11th day of June, 1999, by and between Clement Enterprises, Inc., a
Minnesota corporation whose address is 105 East Oakland Ave. , Austin, MN 55912
(hereinafter referred to as "Lessor) and Featherlite, Inc., a Minnesota
corporations with principal business offices located at U.S. Hwy 63 & Hwy 9,
Cresco, IA 52136 (hereinafter referred to as "Lessee") with respect to the
following facts:
A. Lessor is the owner of the following described aircraft and
engine(s):
Aircraft Year, Make & Model: 1995 Raytheon Beechjet 400A:
Aircraft Serial Number: RK-101
Engine Model: Pratt & Whitney JT15D-5
Engine Serial Numbers: Left - PCE-100382
Right - PCE-1000380
hereinafter referred to as the "Aircraft".
B. Lessor wishes to lease to Lessee, and Lessee wishes to lease
from Lessor, the Aircraft subject to the terms and conditions, and for the
consideration set forth herein:
NOW, THEREFORE, in consideration of the mutual agreements and
covenants set forth herein, the parties hereto agree as follows:
ARTICLE I
1. Term.
(a) This Lease shall have a term from June 10, 1999 to
December 31, 2000 (the "Term") unless the aircraft is sold
prior to the ending date.
(b) The Lessee acknowledges that the aircraft may be sold by
Lessor at any time during the term of the lease and that
Lessor shall have the right to terminate the lease, with
written notice, prior to the ending date, as identified
in 1.(a) above.
ARTICLE II
1. Rent. Lessee shall pay Lessor rent of Twenty Eight Thousand
Six Hundred Ninety Eight Dollars and Thirteen Cents ($28,698.13 USD)
per month. Lessee understands that the actual rent shall be subject to
fluctuation of the Prime Rate and shall vary from month to month and
agrees to pay such varying amount. Prime Rate shall mean the Prime Rate
as published in the Wall Street Journal, and which is described as the
base rate on corporate loans at large U.S. money center commercial
banks, as such rate may vary from time to time. If such base rate is
expressed in a range in said publication, the higher rate of the
reported range will apply. In the event the Wall Street Journal ceases
to publish a Prime Rate, Lessor shall use a similar source to determine
said Prime Rate. The Prime Rate shall be determined on the last day of
each Calendar month anniversary of this Lease. Rent shall be due and
payable upon presentation of a monthly invoice from Lessor.
ARTICLE III
1. Delivery. The Aircraft will be delivered to Lessee at
Raytheon Aircraft Services, in Rockford, IL and will be brought current on all
maintenance and shall have all systems, equipment, radios and appliances in
working order.
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2. Return. Lessee shall return Aircraft and all related log
books and any other items received by Lessee along with the Aircraft to Lessor
at Rochester, MN on December 31, 2000 or such time as agreed by the parties in
the event the aircraft is sold and the Lease is terminated early. Subject to the
provisions of Article VII, Section 2, Lessee agrees that it will return the
Aircraft to Lessor current on all maintenance, and that the Aircraft will be in
the same and as good a condition as when accepted by Lessee, normal wear
excepted, and that the Aircraft will have all systems, equipment, radios and
appliances in working order. Immediately prior to return, the Aircraft shall
have had its interior and exterior cleaned and washed at Lessee's expense. In
the event Lessee does not return the Aircraft in such condition, Lessor will
provide written notice to Lessee of reasonable repairs necessary to restore the
Aircraft to such condition. If Lessee refuses to pay for the cost of such
repairs, Lessor may have the Aircraft repaired and invoice Lessee for such
costs.
ARTICLE IV
1. Base of the Aircraft. Lessor and Lessee agree that the
Aircraft shall be permanently based and hangared at Rochester, MN. Lessee shall
not make any change in such permanent base without notifying Lessor in writing
of such change and receiving Lessor's prior written consent thereto, which
consent shall not be unreasonably withheld.
ARTICLE V
1. Representation and Warranties of Lessor. Lessor
represents, covenants and warrants as follows:
(a) Condition of Aircraft. At the time of delivery
to Lessee, the Aircraft shall be, in all respects, fit for use and in good,
safe, serviceable and airworthy condition.
(b) Ownership. Lessor is the owner of the full legal
and beneficial title to the Aircraft, has full right to lease the Aircraft to
Lessee pursuant to the terms hereof and free from encumbrances and defects of
any kind whatsoever, other than those liens in favor of First Source Bank or
its successors or assigns which secure the financing of the Aircraft.
(c) Risk of Loss: Inspection. Lessor assumes all
risk of loss of the Aircraft for any reason whatsoever until Lessee has
accepted delivery of said Aircraft and Lessee has delivered to Lessor a signed
delivery receipt acknowledging acceptance thereof. All risk of loss for any
reason whatsoever will thereafter be borne by Lessee. Lessor shall permit
Lessee to make a ground inspection of the Aircraft prior to delivery and
acceptance upon reasonable request.
(d) Limitation of Warranties. The Aircraft is leased
on an "As Is" basis
LESSOR DISCLAIMS ANY IMPLIED WARRANTIES AND
REPRESENTATIONS INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
ARTICLE VI
1. Title and Use.
(a) Title to the Aircraft shall remain with
Lessor, and the Aircraft shall remain under United States Registry.
Lessee shall have no right title or interest in the Aircraft except for
possession and use during the Term of this Lease.
(b) Lessee shall have complete use of the
Aircraft, restricted, however, to the ordinary purposes of Lessee's business
and pleasure. Lessee will not use, operate, maintain or store the Aircraft in
violation of this Lease, or any applicable law or regulation federal or state,
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or any instructions furnished therefore by Lessor. Furthermore, Lessee shall
not operate the Aircraft in any manner which would contravene the uses and
purposes stipulated in the insurance policies discussed herein in Article VIII.
Nothing herein shall authorize Lessee or any person to operate the Aircraft or
to incur any liability or obligation on behalf of Lessor.
(c) Lessee will not allow any lien or
encumbrance to be taken against the Aircraft other than those caused by the
actions or omissions of Lessor, its agents and employees as a result of events
to which the Lessor, its agents or employees had reasonable control, and will
not represent itself as the owner of the Aircraft or take any action
inconsistent with the Terms of this Lease.
(d) Lessee shall not offer the Aircraft for
charter to third parties.
ARTICLE VII
1. Lessee's Obligation. Lessee is the operator of this
Aircraft and is responsible for all operating costs during the Lease, including,
but not limited to the following:
(a) Fuel, oil and associated taxes;
(b) Crew, salaries, expenses and employee
benefits;
(c) Landing fees, customs, etc.;
(d) Hangar rent or other storage charges;
(e) Any and all applicable excise, sales, use or
property tax, or registration fees levied on the Aircraft as a result of
Lessee's use;
(f) Ferry flights necessary to perform routine
maintenance.
2. Maintenance. Lessee shall be responsible for all ordinary
or extraordinary maintenance or repairs occurring during the Term. All
maintenance shall be performed at a Raytheon authorized service center or as
agreed to by the parties.
3. Operation. Lessee agrees at all times to operate the
Aircraft in a mechanical condition adequate to comply with regulations as set
forth by the Federal Aviation Administration and any other regulations as set
forth by any federal, state or local governing body, domestic or foreign, having
power to regulate or supervise the Aircraft or the maintenance, use or operation
thereof and to maintain its log books appropriately. Lessor shall have the right
at all reasonable times to inspect the Aircraft for purposes of ascertaining
compliance with this section. Each of the parties hereto agrees to reasonably
cooperate with the other in the maintenance and repair of the Aircraft. Lessee
shall operate the Aircraft in such a manner as to conform to the requirements of
the insurers of the Aircraft and the provider of engine warranties.
4. Log Books. Lessee shall maintain the log books which are
delivered to it in accordance with all relevant regulations and shall keep the
log books and any other required documentation in the Aircraft at all times
during the Term.
5. Inspection. Lessee agrees that Lessor or its
representatives may, upon reasonable request and bearing all costs, inspect the
Aircraft and its log books and records at any time during the Term.
ARTICLE VIII
1. Insurance.
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(a) Lessee shall secure and maintain in
effect throughout the Term hereof insurance policies, naming both Lessee
and Lessor as named insured, covering said Aircraft as follows:
(i) Full hull coverage, including all
risks, both in flight and not in flight, in the amount Four Million One
Hundred Thousand Dollars ($4,100,000.00).
(ii) Third Party liability insurance in
the amount of at least Fifty Million Dollars $50,000,000.00) covering in a
single limit bodily injury and property damage including passenger injuries.
Said policy will state that as a contractual assumption of liability, Lessee's
insurance company will defend, indemnify and hold Lessor and its owners harmless
against any claims, liabilities, complaints, expenses, including attorneys fees,
or any nature, incurred by or asserted against Lessor and its owners for injury
or death to any person or persons or for loss or damage to property.
(iii) Full war risk and confiscation.
(b) In the event of loss or damage to the
Aircraft, Lessee shall immediately report such loss or damage to Lessor, to the
insurance companies underwriting such a risk, and to any and all applicable
governmental agencies, both federal and state, and shall furnish such
information and execute such documents as may be required and necessary to
collect the proceeds from the insurance policies. In this event, the rights,
liabilities and obligations of the parties hereto shall be as follows:
(i) Lessee shall be responsible for any
deductible owing as a result of such loss or damage to the Aircraft.
(ii) In the event that the Aircraft is
lost or damaged beyond repair, the proceeds of the insurance policy or policies
shall be payable to Lessor or such other party as lessor may direct.
(iii) In the event that the Aircraft is
partially damaged, then this Lease shall remain in full force and effect.
Lessee shall, at its cost and expense, fully repair the Aircraft in order that
the Aircraft shall be placed in as good or the same condition as it was prior
to the damage. Lessor shall approve all repairs made by Lessee or its
representatives in advance.
(c) All policies providing insurance required
by this section shall contain provisions:
(i) Forbidding Lessee without the
prior written consent of lessor, to cancel such insurance or to make any
change restricting or reducing the coverage and providing that, without such
consent, no mortgage, pledge, hypothecation, sale, assignment or transfer or
lessee's interest in such insurance shall be recognized.
(ii) Providing that if the insurers
cancel such insurance for any reason whatsoever, such insurer shall promptly
notify Lessor or such cancellations, and further providing that such
cancellation shall not be effective as to Lessor for thirty (30) days after
Lessor's receipt of such notice;
(iii) Providing that the insurers shall
promptly notify Lessor in the event that any premium or installment of premiums
shall not be paid when due;
(iv) Providing that in the case of
damage or destruction of the Aircraft, the insurers may not effect settlement
of any claim thereunder without first obtaining Lessor's consent;
(v) Providing that the insurers shall
not deny liability to Lessor on any such insurance because of any errors or
omissions in any of the representations or warranties of Lessee;
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(vi) Waiving any right of subrogation of
the Lessee against Lessor;
(vii) Providing coverage on a worldwide
basis; and
(viii) Containing a "Lessor's breach of
warranty form" in favor of Lessor.
(d) Lessee shall furnish Lessor with
certificates evidencing such insurance including an acknowledgement from
Lessee's insurance broker that he has a copy of the Lease, along with a copy of
Lessee's insurance policy or policies prior to the Delivery Date.
ARTICLE IX
1. Default. The following events shall constitute an
event of default hereunder:
(a) Lessee shall fail to make any payment
required under this Lease when due and such failure shall continue unremedied
for a period of three (3) days after written notice thereof by Lessor;
(b) Lessee shall fail to perform or observe any
other material covenant, condition or agreement to be performed or observed by
it hereunder, and such failure shall continue unremedied for a period of five
(5) days after written notice thereof by Lessor;
(c) Any representation or warranty made by
Lessee hereunder or in any document or certificate furnished Lessor in
material respect when made or furnished.
(d) Lessee ceases doing business as a going
concern, a petition is filed by or against Lessee under the bankruptcy act or
any amendment thereto, a receiver is appointed for Lessee or its property,
Lessee commits any act of bankruptcy, makes an assignment for the benefit of
its creditors, offers an extension or any of its indebtedness, becomes
insolvent, or Lessor has reasonable cause to believe that Lessee is financially
unable to meet its obligations hereunder; or
(e) Lessee fails to maintain the required
insurance in accordance with Article VIII hereof.
(f) The loss, theft, substantial damages to or
destruction of the Aircraft unless covered adequately by insurance.
ARTICLE X
1. Remedies. Upon the occurrence of any event of default
and at any time thereafter so long as the same shall be continuing, Lessor may,
at its option, declare this Lease to be in default and at any time thereafter,
so long as Lessee shall not have remedied all outstanding defaults, have and
exercise all remedies at law and in equity, including, without limitation, the
following:
(a) Declare any amounts due it hereunder
immediately due and payable without notice or demand to Lessee;
(b) Recover from Lessee an amount equal to any
unpaid balance due to become due during the Term of this Lease;
(c) Cause Lessee, at Lessee's expense, to
return the Aircraft to Lessor at any point in the United States designated by
Lessor; or Lessor, through its employees, agents or attorneys, may enter upon
the premises where the Aircraft is located and take immediate possession of the
same without demand or legal process and free of all rights of Lessee, in which
case the Lessee authorizes lessor or its agents to enter upon any premises
where the Aircraft may be found for the purpose of repossessing the same, and
Lessee specifically waives any right of action it might otherwise have arising
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out of such entry and repossession whereupon all rights of the Lessee in the
equipment shall terminate immediately. No such retaking of possession shall
constitute a termination of this Lease unless Lessor so notifies Lessee in
writing;
(d) Terminate this Lease and retain all prior
payments of rent and retake possession of the Aircraft as herein before
provided;
(e) Lessor shall be entitled to collect interest
on any payment not made by Lessee at the prime rate as announced by the last
day of each month plus 1%.
ARTICLE XI
1. Indemnification of Lessor. Lessee agrees to indemnify
and hold harmless Lessor, its owners and its successors and assigns to the
broadest extent possible from and against any and all risk, loss, damage, injury
or death claims, demands, suits, causes of action and liability of every nature,
from any party including third parties, including reasonable attorney's fees and
costs, arising from or in connection with this Lease, including but not limited
to the possession, maintenance, repair, storage, use or operation of the
Aircraft by Lessee. The provisions of this paragraph will survive termination
of this Agreement.
ARTICLE XII
1. Pilots. Lessee agrees that the Aircraft will at all
times during the Term be operated by safe, careful and duly qualified pilots
employed and paid or contracted for by Lessee. Lessee warrants that each of the
pilots who will pilot such Aircraft shall, at all times during the Term, be duly
qualified pilots, whose licensees are in good standing and who meet the
requirements established and specified by the insurance policies required to be
maintained pursuant to the terms of this Lease, including any certification
requirements established by the insurer of the Aircraft.
ARTICLE XIII
1. Lessee's Right to Assign. Lessee agrees not to
sublease, assign this Lease or any interest therein without the prior written
consent of Lessor, which consent may be withheld by Lessor in its sole
discretion, or to sublet said Aircraft or to part with the possession of the
same either by volunteer act, operation of law or otherwise.
ARTICLE XIV
1. Notices. Any and all notices, demands or other
communications ("Notice") required or desired to be given hereunder by any party
shall be given in writing. A Notice shall be validly given or made to another
party if served either personally or if deposited in the United States mail,
certified or registered, postage prepaid or if sent by overnight courier
service, and if addressed to the applicable party at the address set forth
below. Either party hereto may change its address for the purpose of receiving
such Notices, as herein provided, by giving Notice given in the stated manner to
the other party.
2. Facsimile Notices. Any Notice may also be given by
sending the same by facsimile transmission, effective as of the time of
transmission, to the facsimile number set forth below. Written evidence of the
receipt of the facsimile message shall be deemed to be conclusive evidence of
its receipt unless a request in writing is made for a further facsimile by the
receiving party.
If to Lessor: 319-547-6100 If to Buyer: 319-547-6099
6
<PAGE>
ARTICLE XV
1. Taxes. During the term of this Lease, Lessee shall be
responsible for is prorated portion of all taxes to include all Aircraft
Registration Fees such as may be imposed by the State of Minnesota (except those
measured by the net income of Lessor), fines, fees or penalties arising out of
this Lease or the Lessee's operation of the Aircraft (e.g., in the case of
personal property taxes payable with respect to a given year period, Lessee will
be responsible for only the portion of those yearly taxes which accrue during
the Term). Lessee shall hold Lessor and its owners harmless and indemnify them
from any claim which may be made against them for taxes, duties, fines or
penalties of any sort relating to the operation of the Aircraft by the Lessee
pursuant to this Lease, excluding only federal or state income taxes based upon
the net income of the Lessor.
ARTICLE XVI
1. Truth in Leasing. (SEE FEDERAL AVIATION REGULATION
FAR 91.54.) THE PARTIES ACKNOWLEDGE THAT THIS AIRCRAFT HAS BEEN SUBJECT TO
MAINTENANCE AND INSPECTION UNDER FAR 91 FOR THE TWELVE MONTHS PRIOR TO THE DATE
HEREOF, AND THAT THE AIRCRAFT WILL BE MAINTAINED BY LESSEE UNDER FAR 91 FOR THE
OPERATIONS TO BE CONSTRUED UNDER THIS LEASE. LESSEE IS CONSIDERED RESPONSIBLE
FOR THE OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS LEASE. LESSEE FURTHER
CERTIFIES THAT IT IS SOLELY AND EXCLUSIVELY RESPONSIBLE FOR COMPLIANCE WITH SAID
MAINTENANCE AND INSPECTION REQUIREMENTS DURING THE TERM OF THE LEASE.
AN EXPLANATION OF THE FACTORS BEARING ON OPERATIONAL CONTROL OF
PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FEDERAL
AVIATION ADMINISTRATION FLIGHT STANDARD DISTRICT OFFICE, GENERAL AVIATION
DISTRICT OFFICE OR AIR CARRIER DISTRICT OFFICE.
THE UNDERSIGNED LESSEE CERTIFIES THAT IT IS RESPONSIBLE FOR OPERATIONAL
CONTROL OF THE AIRCRAFT DURING THE TERM OF THIS LEASE AND THAT IT UNDERSTANDS
ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION
ADMINISTRATION REGULATIONS.
LESSEE AGREES TO KEEP A COPY OF THIS LEASE AGREEMENT IN THE AIRCRAFT AT
ALL TIMES DURING THE TERM OF THIS LEASE.
ARTICLE XVII
1. Option To Purchase. Lessor grants to Lessee the
option to purchase the Aircraft at the end of the lease term or at any time,
such as the parties may agree, prior to the end of the lease. Lessor agrees
that Lessee shall have the right of first refusal and the opportunity to
exercise the purchase option for any contemplated sale of the Aircraft. Lessee
shall provide written notice to Lessor at least thirty (30) days prior to the
end of the term of the lease that it intends to exercise the purchase option.
The purchase price shall be Four Million Fifty One Thousand Five Hundred
Dollars ($4,051,500.00).
ARTICLE XVIII
1. Miscellaneous.
(a) Modification. This Lease may be modified
only by a written instrument executed by both parties hereto.
7
<PAGE>
(b) Binding Effect. This Lease shall be binding
upon the parties hereto, their successors, assigns and legal representatives.
(c) Entire Agreement. The terms and conditions
of this Lease constitute the entire agreement and supersede all previous
negotiations, representations and agreements between the parties, whether oral
or written.
(d) Attorneys' Fees. Should any party hereto
engage an attorney whether or not the party proceeds to institute any action
or proceeding at law or in equity, or in connection with an arbitration, to
enforce any provision of this Lease, including an action for declaratory relief,
or for damages by reason of an alleged breach of any provision of this Lease, or
otherwise in connection with this Lease, or any provision thereof, the
prevailing party shall be entitled to recover from the losing party or parties
reasonable attorneys' fees and costs (including fees for experts) for services
rendered tot he prevailing party in such action or proceeding.
(e) Applicable Law; Venue. This Lease shall be
construed and performance shall be governed under the laws of the State of
Minnesota. Any lawsuit or other court proceeding relating to or arising out of
this Lease shall be brought in the state or federal court located in Minnesota.
(f) Counterparts. This Lease may be executed
in separate counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together constitute one and the
same instrument.
(g) Survival of Representations and Warranties.
All representations and warranties contained herein and made by either
party to the other shall survive the execution of this Lease.
(h) Severability. In the event that any
provision of this Lease is found to be illegal or unenforceable, the remaining
provisions of the Lease shall be in full force and effect.
(i) No consequential damages. In the event of a
breach of this Lease, Lessor shall not be liable for any resulting economic
loss including, but not limited to, loss of profits and consequential damages
arising out of such a breach. In the event that any other term of this Lease is
found to be unconscionable or unenforceable for any reason, or any exclusive
remedy fails of its essential purpose, this provision of waiver by agreement of
consequential damages shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have entered into this Lease as
of the day and year first above written.
LESSOR: LESSEE:
Clement Enterprises, Inc. Featherlite, Inc.
BY:______________________________ BY:________________________________
Conrad Clement Tracy Clement
TITLE:President TITLE: Executive Vice President
8
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