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 endedSeptember 30, 2000
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
incorporation or organization) 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.
6,535,104 Shares as of November 13, 2000
<PAGE>
FEATHERLITE, INC.
INDEX
Page No.
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I. Financial Information:
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance sheets
September 30, 2000 and December 31, 1999 . . . . . . . . . 3
Condensed Consolidated Statements of Income Three and
Nine Month Periods Ended September 30, 2000 and 1999. . . . 4
Condensed Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 2000 and 1999. . . . 5
Notes to Consolidated 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 . . . 17
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
Part I: FINANCIAL INFORMATION
Item 1:
Featherlite, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
-------- --------
<S> <C> <C>
Current assets
Cash $ 268 $ 248
Receivables 10,833 8,915
-------- --------
Inventories
Raw materials 11,810 14,195
Work in process 23,061 21,476
Finished trailers/motorcoaches 55,686 38,961
-------- --------
Total inventories 90,557 74,632
-------- --------
Prepaid expenses 1,518 1,547
Deferred taxes 1,665 1,159
-------- --------
Total current assets 104,841 86,501
-------- --------
Property and equipment,net 20,372 19,880
Goodwill and other assets, net 13,119 13,403
-------- --------
$138,332 $119,784
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 2,054 $ 1,770
Other notes payable 25,175 22,919
Accounts payable 28,755 18,664
Accrued liabilities 7,466 6,405
Customer deposits 6,602 4,678
-------- --------
Total current liabilities 70,052 54,436
-------- --------
Long-term debt, net of current maturities 32,200 30,563
Other long-term liabilities 1,052 1,059
Commitments and contingencies (Note 4)
Shareholders' equity 35,028 33,726
-------- --------
$138,332 $119,784
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
Featherlite, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 51,745 $ 53,598 $ 187,306 $ 168,793
Cost of sales 45,088 45,544 161,673 143,850
--------- --------- --------- ---------
Gross profit 6,657 8,054 25,633 24,943
Selling and administrative expenses 6,565 5,952 20,901 17,408
--------- --------- --------- ---------
Income from operations 92 2,102 4,732 7,535
Other(expense), net
Interest (1,233) (893) (3,548) (2,665)
Gain on aircraft and property sales -- 179 118 408
Other, net 93 143 584 529
--------- --------- --------- ---------
Total other expense (1,140) (571) (2,846) (1,728)
--------- --------- --------- ---------
Income(loss) before income taxes (1,048) 1,531 1,886 5,807
Provision(benefit)for income taxes (411) 485 734 2,207
--------- --------- --------- ---------
Net income (loss) $ (637) $ 1,046 $ 1,152 $ 3,600
========= ========= ========= =========
Net income(loss)per share-basic and diluted $ (.10) $ 0.16 $ 0.17 $ 0.55
--------- --------- --------- ---------
Average common shares outstanding-basic 6,535 6,507 6,535 6,502
--------- --------- --------- ---------
Average common shares outstanding-diluted 6,535 6,531 6,535 6,520
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements
<PAGE>
Featherlite, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months ended
September 30
2000 1999
------- -------
<S> <C> <C>
Cash provided by (used for) operating activities
Net income $ 1,152 $ 3,600
Depreciation & amortization 2,154 1,736
Other non-cash adjustments, net (39) (475)
Decrease (increase) in working capital, net (5,351) (4,909)
------- -------
Net cash provided by(used for) operating activities (2,084) (48)
------- -------
Cash provided by (used for) investing activities
Purchases of property and equipment, net (2,170) (4,608)
Purchases of aircraft (2,912) (7,475)
Proceeds from sale of aircraft and other property 3,010 7,552
------- -------
Net cash used for investing activities (2,072) (4,531)
------- -------
Cash provided by (used for) financing activities
Increase in short-term debt 2,256 3,342
Increase in long-term debt 1,920 1,118
Exercise of stock options -- 60
------- -------
Net cash provided by financing activities 4,176 4,520
------- -------
Net cash increase (decrease) for period 20 (59)
Cash balance, beginning of period 248 186
------- -------
Cash balance, end of period $ 268 $ 127
======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
FEATHERLITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The accompanying condensed consolidated 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, 1999 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 consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, necessary to fairly state the results of operations for the three
months and nine months ended September 30, 2000 and 1999. The results of interim
periods may not be indicative of results to be expected for the year. 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, 1999.
Financial Accounting Standards Board Emerging Issues Task Force (EITF) released
a tentative conclusion on Issue No. 00-10, "Accounting for Shipping and Handling
Revenues and Costs," in May 2000. This EITF Issue proposes that revenues related
to shipping and delivery be included as a component of net sales and the related
shipping costs be included as a component of cost of sales. Previously, the
Company included such costs in selling and administrative expenses. The
accompanying condensed consolidated statements of income have been prepared in
accordance with the tentative conclusions of this EITF Issue and amounts
presented for prior periods have been restated to be consistent with the
treatment of current period delivery expenses. This restatement had the effect
of increasing cost of sales and reducing selling and administrative expenses by
$1.2 million and $1.3 million for the three months September 30, 2000 and 1999,
respectively, and $3.7 million and $3.8 million for the nine months ended
September 30, 2000 and 1999, respectively. This reclassification had no effect
on income before taxes.
Note 2: Goodwill and Other Assets
During the nine month period ended September 30, 2000, an aircraft was purchased
at a cost of $2.9 million and subsequently resold for $3.0 million, with a gain
of $105,000 realized on the sale in the first quarter. During the nine month
period ended September 30, 1999, aircraft were sold for $7.6 million with a
gains totaling $403,000 realized in the second and third quarters and other
aircraft purchased at a cost of $7.5 million.
Note 3: Financing Arrangements
In September 2000, the Company's Wholesale Financing Agreement with DFS was
amended to reduce the minimum current ratio, as defined, to be maintained by the
Company from 1.5 to 1.25 until June 29, 2001. In October, 2000, the Company's
Revolving Loan and Security Agreement with Firstar Financial Services was
amended to waive compliance with the minimum fixed charge coverage ratio as
defined, for the quarter ended September 30, 2000.
<PAGE>
Note 4: 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 these arrangements for a maximum of $12.3 million at
September 30, 2000 and $14.5 million at December 31, 1999. During the nine
months ended September 30, 2000, the Company was required to make repurchases
totaling $2.3 million, including a $2.2 million repurchase of inventory of a
defaulting dealer in September, 2000.
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 is approximately $6.4 million, including $2.0
million accrued for estimated unpaid claims at September 30, 2000, and $1.3
million at December 31, 1999. The Company has obtained an irrevocable standby
letter of credit in the amount of $1.7 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 Inc., 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.
The Company has obtained fixed price commitments from certain suppliers for
substantially all of its expected aluminum requirements in 2000 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.
The Company has a commitment to the City of Cresco, Iowa to construct a hangar
facility at a cost of $300,000 as part of an airport expansion project that may
be deferred beyond the year 2000. This expansion will be financed with new
borrowings from banks or other financial institutions.
<PAGE>
Note 5: Shareholders' Equity
Shareholders' equity may be further detailed as follows (in thousands):
Sept. 30, Dec. 31,
2000 1999
-------- --------
Common stock - without par value;
Authorized- 40 million shares;
Issued- 6,535 shares at Sept. 30,2000
6,510 shares at Dec. 31,1999 $16,595 $16,445
Additional paid-in capital 4,062 4,062
Retained earnings 14,371 13,219
------- -------
Total Shareholders' equity $35,028 $33,726
======= =======
In March 2000, 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, 1999. An
additional 50,000 shares may still be earned under this agreement based on the
performance of the Vantare Division through December 31, 2000. Goodwill related
to this acquisition was increased by $150,000 for this stock issue.
Note 6: 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 498,159 shares at September 30, 2000 and 536,160 at December 31,1999.
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 32,000 shares have been granted in 2000. Options totaling
70,001 were forfeited during the nine months ended September 30, 2000.
Note 7: Net Income 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 and six months
ended September 30, 2000 and 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income(loss) available to common shareholders $ (637) $ 1,046 $ 1,152 $ 3,600
Weighted average number of shares outstanding- basic
6,535 6,507 6,535 6,502
Dilutive effect of stock options -- 24 -- 18
Weighted average number of shares outstanding- dilutive
6,535 6,531 6,535 6,520
Net income(loss) per share - basic and diluted $ (.10) $ .16 $ .17 $ .55
</TABLE>
<PAGE>
Note 8: Segment Reporting
The Company has two principal business segments that manufacture and sell
trailers and luxury motorcoaches to many different markets, including
recreational, entertainment and agriculture. Management evaluates the
performance of each segment based on income before income taxes.
The Company's sales are not materially dependent on a single customer or small
group of customers.
Information on business segment sales, income before income taxes and assets are
as follows for the three and nine month periods ended September 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
Corporate
Trailers Motorcoaches and other Total
<S> <C> <C> <C> <C>
Three Months Ended September 30:
2000
Net sales to unaffiliated customers $ 31,073 $ 20,672 $ -- $ 51,745
Income (loss) before income taxes 1,047 (1,714) (381) (1,048)
Identifiable assets 39,409 92,030 6,893 138,332
1999
Net sales to unaffiliated customers $ 26,051 $ 27,547 $ -- $ 53,598
Income (loss) before income taxes 1,217 402 (88) 1,531
Identifiable assets 41,244 67,501 9,096 117,841
Nine Months Ended September 30:
2000
Net sales to unaffiliated customers $ 101,038 $ 86,268 $ -- $ 187,306
Income (loss) before income taxes 6,526 (3,728) (912) 1,886
Identifiable assets 39,409 92,030 6,893 138,332
1999
Net sales to unaffiliated customers $ 85,081 $ 83,712 $ -- $ 168,793
Income (loss) before income taxes 5,058 1,095 (346) 5,807
Identifiable assets 41,244 67,501 9,096 117,841
</TABLE>
<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 and nine month periods ended September 30,
2000 and 1999.
Results of Operations
Three months ended September 30, 2000 and 1999
On a consolidated basis, the Company's net loss for the three months ended
September 30, 2000, was $637,000 or .10 cents per diluted share, compared with
net income of $1.0 million, or 16 cents per diluted share, in the third quarter
of 1999.
Net sales for the quarter decreased by 3 percent to $51.7 million in 2000
compared with $53.6 million in 1999. This decrease in net sales was primarily
the result of a 25 percent decrease in motorcoach segment sales which was
partially offset by a 19 percent increase in trailer segment sales. Sales of new
bus conversion coaches decreased 22 percent and there was a 45 percent decrease
in sales of used coaches. Sales of the Featherlite Vogue 5000 motorcoach were 13
percent higher than last year. This model is being replaced by the 6000 model
which is to be introduced later in 2000. Sales of specialty trailers and
transporters were up in all categories except utility trailers. A price increase
for most models of specialty trailers was announced in the third quarter of
2000. As this increase is only for new orders received and does not affect
orders in process, it had no impact on the third quarter and will not be fully
effective until late in the fourth quarter.
Gross profit decreased by 18 percent to $6.7 million in the third quarter of
2000 from $8.1 million in 1999. As a percentage of sales, gross profit margin
for the quarter was 12.9 percent compared to 15.0 percent in 1999. These margin
percentages are 2.3 percent and 2.0 percent lower than would have been
previously reported due to a reclassification of delivery expense to cost of
sales from selling expenses as proposed by the FASB's Emerging Issues Task Force
recent pronouncement,"Accounting for Shipping and Handling Revenues and Costs."
This decrease for the quarter reflects reduced margins realized on sales in both
the trailer segment and the motorcoach segment. Trailer segment margins were 3.5
percentage points lower than 1999 due to above average material usage in
comparison to last year's strong level and a decline in labor and overhead
utilization, in part, a result of recent increases in the production workforce.
Delivery costs reduced trailer margins in 2000 by .3 percentage points compared
to 1999 due to increased fuel costs and changes in delivery loads. Motorcoach
gross profit margins declined by .9 percentage points as lower margins were
realized on used motorcoach sales due to lower than average selling prices on
units sold from inventory. The margin was also adversely impacted by cost
overruns and labor inefficiencies related to new model introductions.
Selling and administration expenses increased in 2000 by $613,000, a 10 percent
increase over 1999. As a percentage of sales, these expenses increased to 12.7
percent in 2000 from 11.1 percent in 1999. As discussed above, these pecentages
are 2.3 percent and 2.0 percent lower than would have been previously reported
due to the inclusion of delivery expense in cost of sales rather than selling
expenses. Trailer segment expenses increased by $225,000 (7 percent) in 2000 due
in part to higher marketing costs related to an increase in commissions and
other personnel related costs and expanded media and show advertising for new
promotional initiatives. Motorcoach segment expenses increased by $388,000 (14
<PAGE>
percent) in 2000 compared to 1999 due mainly to increased marketing personnel
and selling costs from a larger sales organization in 2000 in anticipation of
greater sales growth as well as increased research and development costs related
to new model motorcoaches being developed in 2000.
Interest expense increased in 2000 compared to 1999 by $340,000 due to higher
levels of working capital related debt primarily related to increased
inventories in 2000 and a higher variable interest rate. Other income was
$230,000 lower in 2000 than 1999 due mainly to reduced gains of $180,000 on
aircraft sales in 2000.
Income before taxes (IBT) decreased by $2.6 million in the third quarter of 2000
compared to this quarter last year. This decline reflects a decrease in trailer
segment IBT, including corporate and other, of almost $600,000 and a decline of
$2.0 million in motorcoach segment IBT for the reasons discussed above.
The provision for income taxes was 39 percent in 2000 percent and 32 percent in
1999. The reduced provision rate in 1999 reflects a reduction of $97,000 to
consider Federal and state tax credits that were available to the Company on its
1999 Federal and state income tax returns. Such credits are also available in
2000 and have been considered in the tax provision rate used for the current
quarter.
Nine months ended September 30, 2000 and 1999
On a consolidated basis, the Company's net income for the nine months ended
September 30,2000, was $1.2 million or 17 cents per diluted share, compared with
$3.6 million, or 55 cents per diluted share in the nine months ended September
30, 1999.
Net sales for the nine months increased by 11 percent to $187.3 million in 2000
compared with $168.8 million in 1999. This increase included a 19 percent
increase in sales of specialty trailers and transporters, which were up in all
categories except utility trailers which were down 10 percent because the
Company is no longer making private label trailers for Polaris. Motorcoach
segment sales were up about 3 percent, including a decrease of about 3 percent
in sales of new motorcoaches and an 8 percent increase in sales of used coaches.
This decrease in sales of new motorcoaches is primarily due to reduced sales of
the Vogue 5000 model that is being replaced by a new model to be introduced in
the fourth quarter of 2000.
Gross profit increased by 2.7 percent to $25.6 million in the first nine months
of 2000 from $24.9 million in 1999. As a percentage of sales, gross profit
margin for the nine month period was 13.7 percent compared to 14.8 percent in
1999. These margins are 2.0 percent and 1.6 percent, respectively, lower than
would have been previously reported due to the reclassification of delivery
expenses to cost of sales from selling expenses as proposed by the FASB's
Emerging Issues Task Force recent procouncement,"Accounting for Shipping and
Handling Revenues and Costs." This decline of 1.1 percentage points in the
margin percentage in 2000 compared to 1999 primarily reflects lower margins
realized on sales in the luxury motorcoach segment. Trailer margins were .2
percentage points lower than 1999 due to a decline in labor and overhead
utilization because of inefficiencies caused by an increase in the production
labor force in the third quarter. These declines were partially offset by the
favorable impact of reduced aluminum cost. Trailer margins also were adversely
impacted by a .40 percentage point increase in delivery costs in 2000 related to
increased fuel costs as well as an increase in the number of deliveries.
Motorcoach gross profit margins declined by almost 1.9 percentage points as
lower margins were realized on new motorcoach sales due to higher than expected
conversion costs on custom units and lower than expected selling prices on units
sold from inventory. New model introductions and changes have caused labor
<PAGE>
inefficiencies and cost overruns that have adversely impacted the margins.
Margins on sales of used coaches also declined as lower than expected prices
were realized on these units.
Selling and administration expenses increased in 2000 by $3.5 million, a 20
percent increase over 1999. As a percentage of sales, these expenses increased
to 11.2 percent in 2000 from 10.3 percent in 1999. As discussed above, these
percentages are 2.0 percent and 1.6 percent lower, respectively, than would have
been previously reported due to the inclusion of delivery expense in cost of
sales rather than selling expenses as discussed above. Trailer segment expenses
increased by $1.5 million (17 percent) in 2000, due in part to the following:
increased sales personnel wages and commissions due to increased sales,
increased expenses related to a new coop advertising program to stimulate sales,
increased dealer promotion and training costs, and increased legal expenses
related to prosecuting a patent infringement lawsuit. Motorcoach segment
expenses increased by $2.0 million (24 percent) due mainly to increased
marketing personnel and selling costs related to organization growth in
anticipation of expanded sales, and increased research and development costs
related to the development of a new motorcoach model.
Interest expense increased by $883,000 in 2000 compared to 1999 due to higher
levels of debt in 2000 primarily related to growth in inventory as well as a
higher variable interest rate. Other income, including gains on aircraft and
other property sales, was about $235,000 less than 1999, primarily due to
reduced gains related to aircraft sales.
Income before taxes (IBT) deceased by $3.9 million in the first nine months of
2000 compared to this period last year. This decrease reflects an increase in
trailer segment IBT, including corporate and other, of $900,000 and a decline of
$4.8 million in motorcoach segment IBT for the reasons discussed above.
The provision for income taxes was 39 percent in 2000 and 1999.
Liquidity and Capital Resources
The liquidity of the Company is primarily measured by its line of credit
availability. During the quarter ended September 30, 2000, line of credit
availability declined to a level of $6.8 million from $12.8 million at June 30,
2000. This decline was primarily the result of an $8.1 million increase in new
and used motorcoach inventory. These inventories increased for two primary
reasons: sales of motorcoaches produced during the third quarter fell short of
expectations and the buy-back of motorcoaches at a cost of $2.2 million from a
financing institution due to the default of a dealer.
To maintain a level production schedule, production may begin on coaches before
an order has been received from a specific buyer. As of September 30, 2000,
approximately 50 percent of the coaches in production and to be completed over
the next six 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,
these is no assurance this will occur. Accordingly, this could further impact
the liquidity of the Company.
The shell manufacturer has financed a defined number of motorcoach shells
acquired by the Company for a defined 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
<PAGE>
occurs sooner. Shells acquired in excess of the defined limit must be paid for
upon receipt. At September 30, 2000, $17.4 million was owed to the shell
manufacturer. Because of an overall slow down in motorcoach sales and other
factors, the manufacturer has extended the defined repayment period on these
shells for a number of months. As a result, the Company has deferred payments
which otherwise would have been due at September 30 of approximately $4.6
million for varying periods over the next nine months. The Company is in the
process of negotiating increases in existing lines of credits with its lender
and others to finance these shells as they become due. There is no assurance
that these requested increases in the line of credit will be approved.
A number of actions are now being taken by the Company to improve its liquidity,
including the following: (1) special sales incentives and price reductions are
being offered to sell the discontinued Vogue 5000 models and certain used
motorcoach units; (2) reductions have been made in the production workforce and
the production schedule has been adjusted to reduce the number of units being
produced; (3) expenditures are being controlled to reduce the buildup of raw
materials before needed by production, to reduce unnecessary overtime, and to
control show and exhibit costs and other advertising expenditures; and (4)
extension of payment terms for material purchases have been negotiated with
certain vendors. If successful, these actions could significantly improve the
Company's liquidity. On a long-term basis, the Company is investigating the
possibility of increasing existing credit lines and if necessary, issuing
unsecured indebtedness to provide additional liquidity.
Assuming a favorable outcome to the foregoing, 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.
Following is a discussion of the principal components of the Company's cash flow
for the nine months ended September 30, 2000, as reflected in the Condensed
Consolidated Statements of Cash Flow included in Item 1 of this Form 10-Q:
Operating activities in the first nine months of 2000 used net cash of $2.1
million. Net income was $1.2 million. This amount was increased by adjustments
for depreciation and amortization of $2.2 million and decreased by other
non-cash items in an aggregate net amount of $39,000. Net changes in
receivables, inventories and other working capital assets used cash of $18.3
million with substantially all the change resulting from increased inventories
primarily related to the motorcoach segment where sales increases have not met
expectations. Net increases of accounts payable, customer deposits and other
current liabilities provided cash of $12.9 million. These changes include, among
other reasons: increases of $11.0 million in accounts payable and accrued
liabilities, due in part to an increase in the number of bus shells held on a
consignment basis from the manufacturer, increased accruals for anticipated
health and workers compensation claims, and increased accruals for amounts due
to dealers for holdback discounts. Customer deposits increased by $1.9 million
as deposits were received on trailers and motorcoaches to be completed in future
quarters. Increased expenditures for working capital items may be required to
support production levels in excess of sales from time to time.
Investing activities in the first nine months of 2000 used net cash of $2.1
million, including $2.2 million for property and equipment improvements, $3.0
million provided from an aircraft sale and $2.9 million used for an aircraft
purchase transaction.
Financing activities provided net cash of $4.2 million, including new borrowings
of $1.3 million for property and equipment purchases, a net increase of $5.0
million in borrowings on the wholesale floor plan and revolving line of credit,
a net reduction of $106,000 in aircraft debt and other debt reductions of $2.0
million.
<PAGE>
The Company has a working capital line of credit with its primary lender,
Firstar Bank. This line has a borrowing limit of $25.0 million based on levels
of eligible receivables and inventory and an interest rate of prime less .75%
(8.75 percent at September 30, 2000). 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. On October 23, 2000, the bank waived compliance with the total
fixed charge covenant for the quarter ended September 30, 2000. Borrowings under
the line are secured by substantially all assets of the Company. There was $19.9
million borrowed against this line as of September 30, 2000. The Company also
has available through Firstar various term notes totaling $3 million as future
borrowings for real estate projects and equipment.
There was $1.5 million borrowed on these notes at September 30, 2000.
The Company also has a wholesale floor plan agreement with Deutsche Financial
Services to borrow up to $30.0 million (increased from $23.7 million in March,
2000) for financing new and used motorcoaches held in inventory, with interest
at prime (9.50% at September 30, 2000) on borrowed funds. This agreement
includes covenants requiring maintenance of defined levels of tangible net
worth, leverage and working capital as measured by a current ratio. At September
30, 2000, $25.1 million was borrowed on this line.
As discussed in Note 4 to consolidated financial statements, the Company is
contingently liable under certain dealer floor plan and retail financing
arrangements. These contingent liabilities total approximately $12.3 million at
September 30, 2000. During the quarter ended September 30, 2000, the Company
repurchased $2.2 million of inventory from a lender under the terms of one of
these financing arrangements. Also, the Company is self-insured for a portion of
certain health benefit and workers' compensation insurance claims. At September
30, 2000, the Company's maximum annual claim exposure under these programs is
approximately $6.4 million. The Company has obtained an irrevocable standby
letter of credit in the amount of $1.7 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, Iowa to construct
a hangar facility at a cost of $300,000 as part of an airport expansion project
which does not have a definite start date. This expansion will be financed with
new borrowings from banks or other financial institutions when it occurs.
The Company leases certain office and production facilities under various leases
that expire at varying dates through fiscal year 2011. Minimum lease payments
for 2000 are expected to total $1.1 million. The Company may lease a new sales
and service center in North Carolina from an entity owned by certain of its
principal shareholders. This would be used for selling new and used motorcoaches
and to provide maintenance services for motorcoaches and Featherlite trailers
and transporters. The terms and conditions of this lease have not yet been
finalized but are expected to be comparable to those of the existing facility
lease. It is expected this facility will be completed in the first or second
quarter of 2001.
Looking Forward and Risk Factors
The statements made in this Form 10-Q 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
<PAGE>
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 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 remain strong. This belief is based on a number of
factors, including the strength and quality of the dealer network and positive
response from dealers and retail customers to nine new models of trailers
introduced throughout 1999 and more changes in 2000. Dealer inventories continue
to turn well and inventory levels they maintain have remained stable since the
beginning of the year. Trailer segment order backlog remains strong at September
30, 2000 at a level of $20.5 million, including $18.7 million scheduled to be
completed in 2000. Backlog was $25.4 million at June 30, 2000 and $16.6 million
at September 30, 1999.
We are cautious concerning the motorcoach division. Order backlog has increased
from a level of $16.3 million at June 30, 2000 to $21.1 million at September 30,
2000, including $13.7 million scheduled to be completed in 2000. At September
30, 1999, the backlog was $22.9 million, including $17.1 million scheduled to be
completed in 1999. The backlog at September 30, 1999 also included $3.8 million
of orders for Vogue 5000 units. Production of the Vogue 5000 was discontinued in
2000, as the 6000 model, which will be introduced in the fourth quarter of 2000,
will replace this model. No orders will be taken for this new model until it has
been formally introduced to the market. In the first half of 2000 the Company
also launched a new Featherlite XLII motorcoach and introduced a slide-out
version of this new model in the second half of the year. Start up costs related
to these new model introductions have caused operational inefficiencies and
resulted in cost overruns, which have adversely impacted the motorcoach
division. There is no assurance that these problems will not continue to occur
until the 6000 model has been introduced and is in the production phase. In
support of our focus on direct sales of Featherlite luxury motorcoaches, the
Company plans to open a new sales and service center. This opening has been
delayed to the first half of next year. This new service center will be in
Statesville, N.C. and will further increase Featherlite's brand visibility,
direct sales and proximity of its motorcoach service capabilities to many of its
existing customers in this growing region.
There are a number of risk factors related to the future operating results of
the Company, including the following:
1. The Company has obtained commitments from suppliers to provide, at an agreed
upon fixed price, substantially all of its anticipated aluminum requirements for
2000. If the Company is unable to obtain such commitments from suppliers or
otherwise reduce the price risk related to the purchases of aluminum in years
beyond 2000, this could have an adverse impact on the Company's operating
results if the cost of aluminum increases significantly above levels "locked-in"
for 2000 and the Company is not able to increase prices to cover the higher
costs. The Company does not engage in hedging transactions or other use of
derivatives in connection with its operations.
<PAGE>
2. 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.
3. 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.
4. 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.
5. The Company has made increased use of leverage and incurred increased
interest and related expenses in the three years ended December 31, 1999 and the
nine months ended September 30, 2000. Increased debt has been incurred in
connection with financing the operations and facilities expansion at the
Featherlite Luxury Coach Division and in financing its inventory and other
working capital requirements. The Company may not be able to increase its
current borrowing limits for working capital or obtain additional funding for
future capital expenditures without the consent of its primary lender due to
certain loan covenants related to leverage and fixed charge coverage. Increased
leverage and related expenses create risk to future operating results of the
Company.
6. 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. To a limited extent, the Company manages its
interest rate risk through the use of interest rate swaps. An increase in
interest rates by one percentage point would reduce the Company's future annual
net income by approximately $300,000 at current debt levels.
7. The Company is introducing two models of motorcoaches in the second half of
2000 and has available finished inventory in one of the models being phased out.
There is a risk that the sale of this inventory will not realize normal margins
and that there will be unabsorbed labor and overhead costs related to
inefficiencies in the production of the new models which could adversely impact
the Company's future operating results.
8. The Company builds a certain number of luxury motorcoaches on a speculative
basis. 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 further decrease the liquidity of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The information required by this item is incorporated by reference to
"Management Discussion and Analysis-Looking Forward and Risk Factors" section of
this Form 10-Q for the quarterly period ended September 30, 2000.
<PAGE>
PART II. OTHER INFORMATION
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 filed no Form 8-K reports during the three months
ended September 30, 2000.
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: November 13, 2000 /S/ CONRAD D. CLEMENT
Conrad D. Clement
President & CEO
Date: November 13, 2000 /S/ JEFFERY A. MASON
Jeffery A. Mason
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Form 10-Q
Quarter Ended September 30, 2000
Exhibit No. Description
10.1 Amendment No. 4 dated September 25, 2000 to Amended and Restated
Agreement for Wholesale Financing with Deutsche Financial Services
Corporation
10.2 Letter dated October 17, 2000 amending Revolving Loan and Security
Agreement with Finstar Financial Services Inc
27 Financial Data Schedule (filed in electronic format only)
