-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UX4ZhAcegMVdkOL8LakWvaXKITvjNgNQmufTB664XT4JYtn2vEdI0wHwl0dBhCCX XoDBpKJBWc98obAPI8UgeA== 0000914190-98-000131.txt : 19980330 0000914190-98-000131.hdr.sgml : 19980330 ACCESSION NUMBER: 0000914190-98-000131 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEATHERLITE MFG INC CENTRAL INDEX KEY: 0000928064 STANDARD INDUSTRIAL CLASSIFICATION: TRUCK TRAILERS [3715] IRS NUMBER: 411621676 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24804 FILM NUMBER: 98575342 BUSINESS ADDRESS: STREET 1: HIGHWAYS 63 & 9 STREET 2: PO BOX 320 CITY: CRESCO STATE: IA ZIP: 52136 BUSINESS PHONE: 3195476000 MAIL ADDRESS: STREET 1: HWY 63 & 9 STREET 2: PO BOX 320 CITY: CRESCO STATE: IA ZIP: 52136 10-K 1 FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File No.: December 31, 1997 0-24804 FEATHERLITE MFG., INC. (Exact Name of Registrant as Specified in its Charter) Minnesota 41-1621676 (State of Incorporation) (IRS Employer Identification Number) Highways 63 and 9 Cresco, Iowa 52136 (319) 547-6000 (Address of principal executive offices; Issuer's telephone number) ------------------------ Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, without par value ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock held by non-affiliates of the registrant as of March 9, 1998, was $18,087,292 (based on the last sale price of the registrant's Common Stock on such date). Shares of without par value Common Stock outstanding at March 9, 1998: 6,255,000. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into the indicated Part of this Form 10-K: (1) Annual report to shareholders for the fiscal year ended December 31, 1997 - Part II; (2) Proxy statement for 1998 Annual Meeting - Part III. PART I ITEM 1. DESCRIPTION OF BUSINESS General Featherlite Mfg., Inc. was organized by current management as a Minnesota corporation in 1988 to acquire the assets of a non-affiliated business which manufactured trailers since the early 1970s under the FEATHERLITE(R) brand name. The Company designs, manufactures and markets over 400 models of both custom made and standard model specialty aluminum and steel trailers through a network of over 240 full-line dealers and over 900 limited-line dealers located in the United States and Canada. In 1996, the Company began manufacturing and marketing a custom luxury motorcoach primarily through the acquisition of the assets of Vantare International, Inc., which is among the leaders and fastest growing companies in the high end motorcoach industry. Entry into the luxury motorcoach market was consistent with Featherlite's long-term growth strategy of product diversification. These motorcoaches are marketed under the trade name "VANTARE by Featherlite(TM)". The Company markets its primary products under the FEATHERLITE(R) brand name. FEATHERLITE(R) trailers are made of aluminum, which differentiates the Company from most of its competitors which primarily make steel trailers. Aluminum trailers are superior to steel in terms of weight, durability, corrosion resistance, maintenance and weight-to-load ratio. Although the Company's focus is on manufacturing and marketing aluminum trailers, it also markets a line of composite steel and aluminum trailers under the FEATHERLITE-STL(R) series (replaced Econolite beginning in 1997) and DIAMOND D(R) brands in order to provide dealers and customers with a high quality, but less expensive, alternative to the aluminum trailer. Management believes that the Company's growth is being caused by overall market expansion, particularly in uses related to entertainment and leisure, and by the Company increasing its share of a fragmented market. Demand for the Company's products is being significantly driven by the lifestyles, hobbies and events that are important to Featherlite's target customers. Growth in those product and service categories which could use or require a high quality trailer is creating increased demand for the Company's products. Those categories and uses include pickup trucks, sport utility vehicles, all-terrain-vehicles, personal watercraft and snowmobiles; auto races, classic car shows and motorcycle rallies; hobby farming and raising and showing horses; art and craft fairs and expositions; and vending trailers for selling crafts, food and other concessions, such as T-shirts or novelty items. Examples of other users of the Company's trailers include lawn care services, house painters, construction crews, traveling museum exhibitions, concert tours, musical groups and fiber optic utility crews that require clean environments in which to splice and store cable. The Company continually monitors the market for opportunities to leverage the FEATHERLITE(R) brand name and its expertise. Featherlite pioneered the introduction of standard model aluminum horse and livestock trailers, which traditionally had been custom made. It has also responded to the increasing demand for customizing the interiors of trailers, a capability which helps distinguish the Company from its competition. Typical interiors range from a simple interior, such as a dressing room, closet and mirror in the nose of a horse trailer, to sophisticated, such as upholstered seating and sleeping areas, kitchens, bathrooms and modern electronics, including fax machines, cellular phones and satellite dishes, in race car transporters and luxury custom coaches. In addition, Featherlite refines the products it already offers by introducing new features to satisfy the increasing demands of its customers. The Company pays special attention to its target customers and attempts to reach them through a variety of media. Unlike most of its competition, Featherlite is large enough to benefit from national advertising and sponsorship of major events which are visible to its customers. These sponsorships include Featherlite's designation as the "Official Trailer of NASCAR, CART, IRL, ARCA, ASA, World of Outlaws and the Indianapolis Motor Speedway," a major sponsor of NHRA drag racing and association with the All American Quarter Horse Congress, the International Arabian Horse Association and others. Vantare, the Company's luxury motorcoach division is the "Official Coach" of NASCAR, IRL and Sportscar. Featherlite intends to expand its promotional activities as the Company enters new markets. Specialty Trailer and Motorcoach Industry The Company operates in two principal industries and business segments: specialty trailers and motorcoaches, as discussed in the section labeled "Management's Discussion and Analysis" which appears in the Company's Annual Report to Shareholders for the year ended December 31, 1997 which is incorporated herein by reference. Specialty Trailer Industry Specialty trailers are designed for specific hauling purposes rather than for general commercial freight. The customers of the specialty trailer industry consist of broad segments of the general public, such as hobbyists, sports enthusiasts, farmers and ranchers, engaged in the activities for which particular trailers are designed. In contrast, commercial freight trailers are generally made for non-specific purposes and the customers are typically trucking companies and manufacturers with fleets of trucks and trailers. Unlike the commercial freight trailer industry which is dominated by a few large manufacturers, the specialty trailer industry is comprised of many small manufacturers. No published statistics are available on the size of the specialty trailer industry or its subcategories. However, the Company believes that there may be as many as 500 manufacturers of specialty steel trailers in the United States, of which approximately 20 manufacture specialty aluminum trailers. Historically, specialty trailers were made of steel, principally because they cost approximately 30% to 40% less than trailers made primarily of aluminum. Entry into the production of steel trailers is relatively easy and inexpensive because of the widespread availability of steel components and simple production techniques. The relative lack of barriers to entry into the steel trailer industry, differing regional demands for trailer types and the relatively high cost of long distance delivery have contributed to the fragmented status of the specialty trailer industry. As a result, specialty trailer manufacturers generally produce relatively small numbers of trailers for sale in limited geographical markets without the efficiencies of high volume production, quality controls, significant warranty and service capabilities, substantial dealer networks, or national advertising and marketing programs. In comparison, production of aluminum trailers requires larger capital investment in dies, extrusion molds and equipment, more sophisticated welding and production techniques, and greater design capabilities to maximize the strength-to-weight ratio advantage of aluminum over steel. In dollar sales, the Company estimates that aluminum trailers presently constitute five to ten percent of the total market for specialty trailers and that this percentage is increasing. The trend of the trailer market to migrate toward aluminum models is driven by a number of factors. Aluminum trailers offer substantial advantages over steel trailers in weight, ease of maintenance, durability and useful life. Aluminum trailers do not rust and weigh 30% to 40% less than comparable steel models. Maintenance is substantially less on aluminum trailers because of the absence of rust and because they typically are not painted or are pre-painted with a baked-on enamel. As a result, aluminum trailers can be offered with superior warranties and provide greater customer satisfaction. The lighter weight of aluminum trailers reduces the demands on the towing vehicle, affords better gas mileage and allows a greater percentage of gross trailer weight for carrying cargo. Motorcoach Industry Bus conversion motorcoaches are the most luxurious of all recreational vehicles. They represent a unique market niche, with selling prices ranging from $500,000 to $900,000 or more. These motorcoaches are made from a bus shell for conversions that is purchased and completed to provide an interior area designed to the customers specifications. It has been estimated that this segment to the RV market experienced more than a 30% growth between 1990 and 1994 and this growth is expected to continue in the future. A large part of the target market, the 45 to 64 age group, is expected to grow 33% this decade alone. Sales of these vehicles will be boosted because this group is expected to retire earlier and have a greater affluence than previous generations. The Company believes that there are presently seven or more companies in this industry. Products and Services The Company's primary business activity is the manufacture and sale of specialty aluminum trailers under the FEATHERLITE(R) brand name. In 1996, the Company began manufacturing and marketing a custom motorcoach under the name "VANTARE by Featherlite". In addition, the Company manufactures and sells combination steel and aluminum trailers under its FEATHERLITE-STL(R) series (formerly Econolite) and DIAMOND D(R) brand names, sells replacement and specialty parts, and coordinates delivery of completed trailers to customers. Rework and warranty services are also provided for Company built trailers at the Company's facilities and dealer locations. For 1997, over 95% of the Company's revenues were derived from trailer and motorcoach sales. The following data illustrate the percentage of the Company's net trailer and motorcoach sales by product type in 1995, 1996 and 1997 (dollars in thousands):
Years ended December 31 ------------------------------------------------------------ 1995 1996 1997 ------------------------------------------------------------ Amount Percent* Amount Percent* Amount Percent* ------------------------------------------------------------ Horse $23,985 34.7% $29,697 29.9% $31,202 23.2% Livestock 13,604 19.7% 17,789 17.9% 21,468 16.0% Car and race car/specialty 14,333 20.7% 15,847 15.9% 24,797 18.5% transporters Utility and recreational 4,468 6.4% 7,206 7.3% 8,897 6.6% Commercial 8,786 12.7% 10,150 10.2% 7,244 5.4% Motorcoaches ---- ---- 14,785 14.9% 34,355 25.6% ------------------------------------------------------------- Net Trailer & Motorcoach 65,176 94.3% $95,474 96.1% $127,963 95.2% Sales Parts, Deliver & Scrap 3,983 5.8% 3,855 3.9% 6,424 4.8% ------------------------------------------------------------- Net Sales $69,159 100.0% $99,329 100.0% $134,387 100.0% -------------------------------------------------------------
*Product mix percentages in 1996 and 1997 affected by addition of motorcoaches. Prior year percentages differ from amounts previously reported due to reclassifications made to be consistent with 1997 classifications. Trailers The Company is unique among trailer manufacturers because of the many types of trailers it makes. The Company's FEATHERLITE(R), FEATHERLITE-STL(R) series and DIAMOND D(R) trailers may be broadly classified into several trailer types, which can be further subdivided into over 400 models depending on their intended use and resulting design. The Company's primary trailer types are horse, livestock, utility/recreational, commercial and car trailers as well as race car and specialty transporters. Within these broad product categories, the Company generally offers different features, such as various lengths, heights and widths, open and enclosed models, gooseneck and bumper pulls, straight and slant loaders, and aluminum, steel, fiberglass and wood frames, floors, sides and roofs. In 1996, the Company discontinued manufacturing semi trailers which were included in the commercial category. The Company believes FEATHERLITE(R) brand trailers, which are "all aluminum" with the exception of steel axle and hitch parts, enjoy a premier image in the industry. Sales of FEATHERLITE(R) brand trailers currently represent over 90% of the Company's total trailer sales. FEATHERLITE-STL(R) series and DIAMOND D(R) brand trailers, which generally are a composite of steel frame, aluminum skin and galvanized roof, allow the Company to place its product line at the lower-priced end of the market. FEATHERLITE(R), FEATHERLITE-STL(R) series and DIAMOND D(R) trailers are built as standard models or to customer order from selected options. Depending on the model, the Company's trailers generally include name brand tires, reflectors and exterior running and license plate lights, sealed and enclosed wires, and safety chains and breakaway switches. Popular options to standard designs include paint schemes, logos, lettering and graphics, winches and generators, viewing platforms, workbenches and cabinets, vents and other airflow designs, roll-up doors, access and side doors and windows, aluminum wheels and hubcaps, and hydraulic or air brakes. Trailer design traditionally has been utilitarian. Recently, however, the demand for trailers with special amenities and custom designed features has increased dramatically. For that reason, the Company's Interiors Division offers options ranging from simple shelves, cupboards, lockers and dressing rooms to complete living quarters, including upholstered furniture, electronics, wood or laminated Formica finishes, air conditioning, refrigerators, dinettes and bath packages. The Company stresses its ability and willingness to build trailers "from the ground up" with unique, even luxurious, custom designed features and amenities tailored to customer specifications. This distinguishes the Company from many other trailer manufacturers. In addition to custom designed trailers, the Company manufactures standard model trailers for inventory which are available for immediate delivery to dealers. In an industry consisting primarily of manufacturers who custom build trailers, the Company's introduction in 1991 of standard model aluminum trailers represented an innovative step. Standard model trailer sales now represent approximately 40% of the Company's total trailer sales. The Company's dealer network has enthusiastically endorsed and supported the standard model concept. Retail prices for the Company's standard aluminum model trailers range from approximately $1,200 for the least expensive snowmobile trailer to over $300,000 for a custom built race car transporter and hospitality trailer and over $900,000 for a luxury coach. Representative FEATHERLITE(R) aluminum trailer retail prices are approximately $7,200 for a bumper pull livestock trailer, $8,200 for a two horse trailer, $16,000 for a gooseneck car trailer. Motorcoaches The Company offers three motorcoaches based on various models made from a single bus shell manufacturer (Prevost Car Company), the XL-40 and XL-45 and the H3-45. Even though the "H" body style is much taller and the layout is considerably different than a typical XL motorcoach, it has become the most popular model requested by customers. The Company also now offers a "slide-out" model which expands the livable space within the motorcoach. The Company's goal is to produce the best performing and most reliable coach while keeping a low overall gross weight and extremely low ambient noise level. It incorporates into motorcoaches many of the good features and quality often present in luxury yachts which were previously developed by Vantare International, Inc. when it was in the business of building yachts. About 75% of the coaches are built to specific customer order from selected options. The remainder are motorcoaches which are built for potential retail customers and for demonstration at particular shows or events. Retail prices range from $500,000 to $900,000 or more. There is a risk that certain of the coaches built on a speculative basis may not be sold on a timely basis and at normal profit margins. The Company also sells used motorcoaches which are taken as trade-ins from customers on new coaches or on a consignment basis. Repair services are provided for coaches of customers and others at the Vantare facility in Sanford, Florida, as well as at a Company service center in Mocksville, North Carolina and Cresco, Iowa. Other Business Activities In addition to the manufacture and sale of specialty trailers, the Company sells replacement and specialty trailer parts to its dealers and to others. It coordinates delivery of completed trailers to customers and to dealers for a fee and in 1997 delivered approximately 50% of the trailers sold to dealers, with the remainder picked up at its Iowa facilities. The Company owns and maintains a fleet of trucks and leases semi tractors for this purpose. The Company is a licensed aircraft dealer and believes that dealing in used aircraft is complementary to its principal business. Featherlite Aviation Company, a wholly-owned subsidiary of the Company, conducts such aircraft dealer activities. Featherlite Aviation Company currently holds for resale three used aircraft. The purchase, sale, use and operation of aircraft and the volatility in the sales volume and value of aircraft, create risks to the Company and its operating results. The Company maintains liability insurance policies relating to its aircraft in an amount it believes to be adequate, but there is no assurance that its coverage will continue to be available at an acceptable price or be sufficient to protect the Company from adverse financial effects in the event of claims. Gains on aircraft sales are included in other income. The Company's other business activities, excluding aircraft, in the aggregate, accounted for approximately 5.8%, 3.9% and 4.8% of the Company's net sales for 1995, 1996 and 1997, respectively. In October, 1997, the Company signed a joint venture agreement with GMR Marketing to form Featherlite/GMR Sports Group, LLC. The joint venture will focus on developing promotional events and implementing marketing strategies in the rapidly growing motorsports industry. Marketing and Sales Dealer Network The Company markets its products primarily through a network of over 240 full-line dealers and over 900 limited-line dealers located in the United States and Canada, and one distributor serving Alberta and British Columbia, Canada. Dealers typically handle only a portion of the entire FEATHERLITE(R), FEATHERLITE-STL(R) series and DIAMOND D(R) product lines and may sell other steel trailer brands. Featherlite volume dealers exclusively sell Featherlite aluminum trailers. Limited line dealers are not prohibited by their agreements with the Company from selling other brands of aluminum trailers. No single dealer represents more than 10% of the Company's net sales. The Company's top 50 dealers accounted for approximately 76%, 54% and 54% of the Company's net trailer sales for 1995, 1996 and 1997, respectively. For these periods, 82% or more of the Company's trailer sales were made by its dealer network, with the remainder representing direct Company sales to end users. Company sales to end users are primarily drop deck trailers, specialty trailers and race car transporters. For these periods, approximately 98% of the number of units sold were sold by the dealer network. Dealers sell FEATHERLITE(R), FEATHERLITE-STL(R) series and DIAMOND D(R) products under contractual arrangements which can be terminated by either party on specified notice. Laws in certain states govern terms and conditions under which dealers may be terminated. Such laws have not materially adversely affected the Company to date. Changes in dealers take place from time to time. The Company believes that a sufficient number of prospective dealers exists across the United States and Canada to permit orderly transitions whenever necessary. The Company is continually seeking to expand the size and upgrade the quality of its dealer network. The Company believes that significant areas of the United States and Canada are not served by a sufficient number of dealers and the Company intends to increase substantially its number of dealers over the next several years. The Company employs territory managers to assist in the marketing and sales process. These managers assist the Company's dealers in coordinating the selection of custom options by customers and the production of orders. They also participate with the dealers at trade shows, fairs, rodeos, races and other events to promote the FEATHERLITE(R) brand. Factory representatives also actively seek out potential new dealers. All motorcoaches are sold directly by Company personnel to end user customers. Company sales representatives participate in trade shows, fairs, motorsports races and other events to promote the "VANTARE by Featherlite(TM)" motorcoach. Financing A substantial portion of the Company's sales of motorcoaches and trailers are paid for within 10 days of invoicing. The Company has arrangements with NationsCredit Commercial Corporation, Deutsche Financial Services Corp. (formerly ITT Commercial Finance Corp.), Bombardier Capital, Green Tree Financial Servicing Corporation and with TransAmerica Commercial Finance Corp. to provide trailer floor plan financing for its dealers. Green Tree Financial Servicing Corporation and Featherlite Credit Corporation, a corporation owned by certain of the Company's officers and directors, provides retail financing to end user customers of the Company's dealers. Under these floor plan arrangements, the Company is required in certain circumstances to guarantee certain debt, or repurchase for the remaining unpaid balance including finance charges plus costs and expenses, any repossessed trailers financed through such arrangements. Although the Company has not been required to make any significant payments or repurchases to date, there can be no assurance that such obligations will not, in the future, adversely impact the Company. There is no recourse to the Company on these retail financing arrangements. The Company has arrangements with several companies to provide motorcoach retail financing to end user customers. There is no recourse to the Company on these retail financing arrangements. The Company has a wholesale floor plan agreement with a company to finance a portion of the new and used motorcoaches held in inventory. Promotion The Company's marketing activities are designed primarily to communicate directly with consumers and to assist with selling and marketing efforts of the dealer network. The Company promotes its products directly using print advertising in user group publications, such as Quarter Horse Journal, Successful Farming, Snowmobile, Sno Goer and National Association of Stock Car Auto Racing ("NASCAR") Winston Cup Series event programs. A series of product brochures, product videotapes and other promotional items are available for use by the dealers. The Company also advertises on television, primarily on cable television racing programs. The Company promotes its motorcoaches directly in user group publications, such as the Family Motorcoaching Magazine, The Robb Report, The DuPont Registry and the RV Trader. In addition, the Company participates in the Family Motor Coach Association rallies twice each year, the Tampa RV Show and numerous other shows and rallies and is represented at motorsports events where other Featherlite products are promoted and where Featherlite already has a customer base. An example of the Company's specialized niche market promotional efforts is the motor sports industry. Featherlite currently is the "Official Trailer of NASCAR, CART, IRL, ARCA, ASA, NHRA, World of Outlaws and the Indianapolis Motor Speedway" and Vantare is the "Official Coach" of NASCAR, IRL, NHRA and Sportscar. Featherlite is the title sponsor of the NASCAR Featherlite Southwest Tour and the NASCAR Featherlite Modified Tour, and a major sponsor of the National Hot Rod Association ("NHRA"). The 1997 NASCAR Featherlite Southwest Tour is comprised of sixteen events in various cities in Arizona, California, Nevada and Colorado. The NASCAR Featherlite Modified Tour schedule takes place primarily in the northeastern United States. The Company expects to continue to design and build trailers to fit the needs of all types of racing, including NASCAR, NHRA, Automobile Racing Club of America ("ARCA"), IndyCar, nostalgic, sprint car, off road, boat, motorcycle and motocross. In addition to the racing industry, the Company sponsors or is associated with the All American Quarter Horse Congress, United States Team Roping Championship, the American Paint Horse Association and the National Western Livestock Show as well as various rodeos and state and local fairs and expos. Annually, Featherlite territory managers attend in excess of 250 races, rodeos, fairs, trade shows and other special events. The Company's dealers attend approximately 1,200 to 1,400 such events each year. Competition - Specialty Trailers The specialty trailer industry is highly competitive, especially with respect to the most commonly sold models, such as one and two horse trailers. Competition is based upon a number of factors, including brand name recognition, quality, price, reliability, product design features, breadth of product line, warranty and service. The primary competition to FEATHERLITE(R) aluminum trailers are steel trailers, which typically sell for approximately 30% to 40% less but are subject to rust and corrosion and are heavier. There are no significant technological or manufacturing barriers to entry into the production of steel trailers and only moderate barriers to the production of aluminum trailers. Because the Company has a broad based product line, its competition varies by product category. There is no single company that provides competition in all product lines. Certain of the Company's competitors and potential competitors are better established in segments of the Company's business. The Company's principal competitors, all of which are located domestically, include the following: Trailer Types Principal Competitors' Brands - ----------------------------------------------------------------------- Horse and Livestock 4 Star, Barrett, Sooner, Wilson, Sundowner, Kiefer Built, W-W Utility Wells Cargo, PACE, Haulmark Drop Frame Vans Kentucky Car Trailers and HighTech, Competition, Concept, Wells Race Car Transporters Cargo, Haulmark, PACE, Sooner Competition - Motorcoaches The motorcoach industry is highly competitive, particularly in XL models, with seven or more manufacturers. Vantare is the dominant producer of H model coaches. Competition is based primarily on quality and price although other factors such as brand name, reliability, design features, warranty and service are also important. The brand names of the Company's principal competitors in this industry, all of which are located domestically, include, among others: Marathon, Liberty, Country Coach, Angola, Monaco, Vogue and Custom. Manufacturing The Company manufactures substantially all of its trailers at plants located in Cresco, Nashua and Shenandoah Iowa. It has agreements with two companies to manufacture certain trailers. Under the agreements, the Company supplies trailer materials and specifications to those manufacturers. The manufacturers, which are prohibited from manufacturing trailers for any other entities without Featherlite's consent, cover labor and overhead expenses and manufacture the trailers for contractually agreed upon prices. Such trailers constituted approximately 3% of net trailer sales for 1997. Except for tires, brakes, couplers, axles and various other purchased items, the Company fabricates its component parts for its trailers. Most raw materials and standard parts, including aluminum extrusions and sheet metal, are available from multiple sources. Prices of aluminum, the principal commodity used in the Company's business, fluctuate daily in the open market. The Company has obtained fixed price contracts from suppliers for 1998 to reduce the risk related to fluctuations in the cost of aluminum. There is a risk to future operating results if the Company is unable to obtain fixed contracts to reduce the affect of fluctuations in the price of aluminum. The Company presently purchases substantial amounts of aluminum extrusions from two major suppliers, Alumax Extrusions Inc. and Easco Aluminum, and the majority of its sheet metal from two large suppliers, Reynolds Aluminum Co. and Samuel Whittar. The identity of particular suppliers and the quantities purchased from each varies from period to period. The Company has not engaged in hedging or the purchase and sale of future contracts other than contracts for delivery to fill its own needs. The Company has contracts with suppliers to fill a substantial part of its projected need for aluminum in 1998. In the event that one or more of the Company's suppliers were unable to deliver raw materials to the Company for an extended period of time, the Company's production and profits could be materially and adversely affected if an adequate replacement supplier could not be found within a reasonable amount of time. The Company has never been unable to obtain an adequate supply of raw materials. Increases in prices of aluminum and other supplies may adversely affect sales of the Company's products. In addition to obtaining long term contracts from suppliers, the Company may in the future also try to reduce the price risk associated with aluminum by buying London Metal Exchange hedge contracts or options for future delivery. These contracts would "lock in" the aluminum cost for the Company for anticipated aluminum requirements during the periods covered by the contracts. There is a potential risk of loss related to such contracts if the quantity of materials hedged significantly exceeds the Company's actual requirements and the contract is closed without taking physical delivery of the aluminum or if there is a substantial drop in the actual cost of aluminum in relation to the hedge contract price which would effect the competitive price of the Company's product. In the manufacturing process, the Company seeks to maximize production efficiency by using weekly production schedules which allocate scheduled trailers to specific production lines within each plant. The Company generally follows a build-to-order policy to control inventory levels. If orders cannot be filled from any inventory maintained by the Company, they are scheduled for production. Inventory trailers may be scheduled to maximize the efficiency of the production lines. The Company also utilizes certain production lines solely for standard model trailers. The Company manufactures all of its motorcoaches at its plant located in Sanford, Florida. Except for the coach shell and electronic equipment, various kitchen and bathroom fixtures and accessories and other purchased items, the Company fabricates all the components for its coaches. The Company completes the conversion by finishing the interior of the purchased shell to the layout and design requirements of the customer or its specifications. All design engineering, plumbing, cabinetry and upholstery required to complete the coach is done by company personnel. The Company purchases its motorcoach shells from one manufacturer, Prevost Car Company, Inc. of Sainte-Claire, Quebec, Canada, although the Company could purchase certain shells from other manufacturers. The Company does not have any long or short term manufacturing contracts with Prevost. However, the Company provides Prevost with its estimated yearly motorcoach requirements. Once Prevost releases an order to production, Prevost becomes obligated to fill the order and the Company becomes obligated to take delivery of the order. In the event Prevost was unable to deliver motorcoach shells to the Company, the Company's revenues and profits could be materially and adversely affected. Backlog At December 31, 1997, the Company had unfilled confirmed orders from its customers in the amount of approximately $27 million, including $14 million in motorcoach orders, and $28 million, including $16 million in motorcoaches, at December 31, 1996. All orders at December 31, 1997 are expected to be filled during 1998. Quality Assurance The Company monitors quality at various points of the manufacturing process. Due to the variety of custom products that the Company builds, employee skill training and individual responsibility for workmanship are emphasized. Inventory specialists assess the overall quality, physical dimensions, and imperfections or damage to the raw materials. Extruded and sheet aluminum which is outside of specified tolerances is rejected and replaced by the vendor. Line foremen train and monitor work cells of employees. Quality control inspectors inspect trailers for quality of workmanship, material quality and conformity of options to order specifications. Government and Industry Regulation The Company and its products are subject to various foreign, federal, state and local laws, rules and regulations. The Company builds its trailers and motorcoaches to standards of the federal Department of Transportation. The Company is a member of the National Association of Trailer Manufacturers ("NATM") and manufactures its trailers to NATM standards. The quality assurance program in the Company's Interiors Division includes being a member of the Recreational Vehicle Industry Association ("RVIA"), which requires plumbing, electrical and gas testing on trailers with living quarters. These tests are recorded before RVIA certification numbers are affixed to trailers. RVIA inspectors periodically check the production facility and work in progress to assure that codes and procedures are met. Infractions can lead to fines or loss of RVIA membership. The Company is also governed by regulations relating to employee safety and working conditions and other activities. A change in any such laws, rules, regulations or standards, or a mandated federal recall by the National Highway Transportation Safety Board, could have a material adverse effect on the Company. Patents and Trademarks The Company has registered FEATHERLITE(R) as a trademark for use in conjunction with trailers in the United States, Canada and Germany. In general, such registrations are effective through the year 2001, with continuous ten-year renewal periods thereafter. The Company has a United States trademark with respect to FEATHERLITE-STL(R) series. In October 1995, the Company acquired the rights to the DIAMOND D(R) trademark and has registered it as a trademark in the United States and has a trademark application pending in Canada. In 1993, the Company purchased the rights to two design patents, which expire in 1997, relating to the V-nose design of certain of its horse, livestock and snowmobile trailers. The Company believes that the patented designs are useful, but that the expiration of the patents will not have a material effect on the Company. In addition, the Company has filed for certain trailer design and utility patents relating to race car transporters. The Company has a trademark for "VANTARE by Featherlite(R)" for use in conjunction with motorcoaches and yachts in the United States. Warranty The Company warrants the workmanship and materials of certain parts of the main frame of its aluminum trailers under a limited warranty for a period of six years and such parts of certain other Company trailers as well as other products manufactured by the Company for periods of one to four years. The limited warranty does not include normal wear items, such as brakes, bearings and tires. The Company's warranty obligations are expressly limited to repairs and replacement of parts. Historically, there have been no recalls of the Company's trailers for replacement of major components or parts and the expense of warranty claims for repairs or replacement of parts has been less than 1% of the Company's net sales. The Company warrants for one year the workmanship and materials related to certain parts of the motorcoach conversion. Otherwise, warranties applicable to components purchased from vendors are applicable. The warranty of the manufacturer of the shell generally is for two years. Product Liability Although the Company has never been required to pay any significant amount in a product liability action, as a manufacturing company it is subject to an inherent risk of product liability claims. The Company maintains product liability insurance policies in an amount it believes is adequate, but there is no assurance that its coverage will continue to be available at an acceptable price or be sufficient to protect the Company from adverse financial effects in the event of product liability claims. Employees As of December 31, 1997, the Company had 1,333 employees, of whom 1,312 are full-time and 21 are part-time as follows: Production and production support - 1,243, Sales and Marketing - 48, and Administration - 42. The Company is not a party to any collective bargaining agreement and believes that it has good working relationships with its employees. The Company's success is highly dependent on its senior management, including Conrad D. Clement, President and Chief Executive Officer. During 1997, the responsibilities held by Michael Guth, President of the Vantare Division of Featherlite were assumed by Norm Allen, a vice president of Featherlite. Mr. Guth will concentrate on customer relations, design innovation and product development. The loss of Mr. Clement's services could have a material adverse affect on the Company's business and development. There can be no assurance that an adequate replacement could be found for Mr. Clement in the event of his departure. The Company does not carry any key man life insurance on any of its officers or employees. The Company has two separate agreements with Iowa community colleges which provided approximately $620,000 for job training purposes. The amounts are to be repaid, together with interest, over a ten year period from state withholding taxes on employees at the Company's Iowa facilities. The Company may be required to provide funds for the repayment of these training credits if sufficient withholding and unused training funds are not available. Former S Corporation Status From February 1, 1989 to September 27, 1994, the Company was treated for federal income tax purposes as an S corporation under the Internal Revenue Code of 1986, as amended, and was treated on a similar basis for state income tax purposes under comparable state tax laws. As a result, the Company's earnings from such period were, for federal and certain state income tax purposes, taxed directly to the Company's shareholders rather than to the Company. The termination date of the Company's S corporation status occurred upon completion of the Company's initial public offering. The Company historically made distributions to its shareholders in amounts approximately equal to the shareholders' federal and state income tax liabilities arising from the Company's status as an S corporation. The amounts of these cash distributions were $1,795,000 and $305,000 in 1994 and 1995, respectively. The 1995 payment was accrued at December 31, 1994 and represents the final distribution to be made to S corporation shareholders. Cautionary Statements Featherlite wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, Featherlite's actual results and could cause Featherlite's actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Featherlite: A moderating growth rate in the overall demand or in specific market segment demand, in the US and to some extent Canada, for existing models of aluminum or steel specialty trailers and motorcoaches manufactured by Featherlite and in acceptance by the market of new trailer models and luxury coaches introduced by Featherlite; and general or specific economic conditions, pricing, purchasing, operational, advertising and promotional decisions by intermediaries in the distribution channels, which could affect their supply or end user demand for Featherlite products; Increased competition from competitors and potential competitors which have greater financial and other resources than Featherlite; and competitors that are better established in segments of Featherlite's business; Fluctuation in aluminum prices; inability of a major supplier of aluminum extrusion or sheets utilized by Featherlite to deliver raw materials on a timely basis; Inability of motorcoach shell manufacturer to deliver shells on a timely basis; inability to sell motorcoaches made on a spec basis at normal profit margins; The effects of changes within Featherlite's organization, including the loss of the services of key management personnel, particularly Mr. Conrad Clement, President and Chief Executive Officer. Continued availability of adequate financing and cash flow from operations to support operations and expansion plans, including the amount, type and cost of financing which Featherlite has and changes to that financing; Continued pressure to increase the selling prices for Featherlite's products to reduce the impact on margins of increasing aluminum and other materials costs, labor rates and overhead costs related to the expanded production facilities and organization to support expected increases in sales; underutilization of Featherlite's manufacturing facilities, resulting in production inefficiencies and higher costs; The inability to obtain adequate insurance coverage at an acceptable price or in a sufficient amount to protect Featherlite from the adverse effects of product and other liability claims; The risks related to being a licensed aircraft dealer which deals in used business aircraft, including the purchase, sales, use and operation of aircraft and the volatility in the sales volume and value of aircraft; Payments or repurchases by Featherlite related to guarantees of debt or the repurchase of trailers under certain circumstances in connection with dealer and retail product financing arrangements; The costs and other effects of legal and administrative cases and proceedings (whether civil, such as environmental and product-related, or criminal), settlements and investigations, claims and changes in those items; A change in foreign, federal, state and local laws, rules and regulations related to Featherlite, its products, or activities. ITEM 2. PROPERTIES The Company's principal sales, marketing and executive offices are located in a recently completed 20,000 square foot building owned by the Company near Cresco, Iowa. Adjacent to it is a Company-owned 50,000 square foot (including 20,000 added in 1997) parts distribution center and a rework, maintenance and trailer distribution facility, from which substantially all trailer deliveries to dealers are made. The Company has production and warehouse facilities in Cresco, Nashua and Shenandoah, Iowa. The Cresco facilities presently consist of five buildings and include approximately 238,000 square feet including 140,000 square foot expansion completed in March 1995. Three buildings, totaling approximately 136,000 square feet of Company owned space and 30,000 square feet of leased space, are used for production of trailers and fabrication of components. A 58,000 square foot building is used, pursuant to a lease, for custom interior finishing and a 14,000 square foot building, which the Company owns, is used for storage of raw materials. In 1998, the Company plans to build a warehouse facility for raw material storage at its Cresco location at an approximate cost of $1.8 million which will be financed with new borrowings. The Shenandoah facilities include a 117,000 square foot manufacturing facility acquired in October 1995 in connection with the DIAMOND D(R) acquisition. All of the assets of DIAMOND D Trailer Manufacturing Inc., including the office and production facilities were purchased for $2.4 million in cash. The consideration paid was based primarily on the book value of the acquired assets on the date of purchase. The Company-owned Nashua facilities include a 51,000 square foot manufacturing plant and an 18,000 square foot plant office building. The Company also owns three buildings in Grand Meadow, Minnesota that were used as the Company's corporate office and rework/distribution center prior to the relocation of these activities to Iowa in 1993. The Company currently is attempting to sell the Grand Meadow facilities which are being leased on a short term basis to offset real estate taxes and other costs of holding the property. In July 1996, the Company acquired office and production facilities and other assets of Vantare International, Inc. in Sanford, Florida. (See Note 10 to financial statement). This facility includes approximately 55,000 square feet of production and office space and is used for the manufacture of luxury motorcoaches. This facility is owned by Seminole Port Authority and is being leased by the Company under the terms of an operating lease. These facilities were expanded in 1997 to add 24,000 square feet to the production and office space as well as 6,000 square feet for outside service bays. The outside parking area was also improved and vacant land near the Vantare facilities was purchased for future expansion, possibly beginning in late 1998 or early 1999 on some phases. The Company's profit margins will depend in part on its ability to increase unit sales volume to fully utilize its new facilities and integrate operations efficiently. In the future, the Company may determine to build or acquire existing manufacturing facilities outside of Northeastern Iowa, which would create additional risks to the Company's ability to manage growth. ITEM 3. LEGAL PROCEEDINGS 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 consultation 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the executive officers of the Company: Name of Executive Officer Age Present Position with Company - -------------------------------------------------------------------------------- Conrad D. Clement 54 President, Chief Executive Officer and Director Jeffery A. Mason 57 Chief Financial Officer and Director Tracy J. Clement 31 Executive Vice President and Director Gary H. Ihrke 51 Vice President of Operations & Secretary Eric P. Clement 28 Vice President of Sales Steven J. Sheldon 47 Vice President of Market Development Larry D. Clement 52 Treasurer The term of office of each executive officer is from one annual meeting of directors until the next annual meeting of directors or until a successor is elected. The business experience of the executive officers during the past five years is as follows: Conrad D. Clement has been the Chairman, President and Chief Executive Officer and a director of the Company since its inception in 1988. From 1969 to 1988, Mr. Clement was the President and principal owner of several farm equipment and agricultural businesses. Mr. Clement is also the President and Chief Executive Officer and a shareholder of Featherlite Credit Corporation, an affiliate of the Company ("Featherlite Credit"). Mr. Clement is the brother of Larry D. Clement and the father of Tracy J. Clement and Eric P. Clement. Jeffery A. Mason has been the Chief Financial Officer and Controller of the Company since August 1989 and has been a director of the Company since June 1993. From 1969 to 1989, Mr. Mason served in various financial management capacities with several companies, including Arthur Andersen & Co. and Carlson Companies. Mr. Mason is a certified public accountant. Tracy J. Clement has been Executive Vice President and a director of the Company since 1988. Prior to 1988, Mr. Clement was a shareholder and manager of several farm equipment and agricultural businesses with his father, Conrad D. Clement. Mr. Clement is also an officer and shareholder of Featherlite Credit. Gary H. Ihrke was appointed Secretary in August 1996 and Vice President of Operations in March 1996 after service as Vice President of Manufacturing since June 1993 and was previously a director of the Company. From January 1989 to June 1993, Mr. Ihrke was the General Manager of the Company's Cresco, Iowa facilities. From 1969 to 1989, he served as general manager and branch manager of an agricultural equipment manufacturing company. Eric P. Clement has been Vice President of Sales since March 1996 after service as Vice President of Operations since January 1991 and was previously a director of the Company. Prior to that time, Mr. Clement attended college and worked part time for businesses owned by his father, Conrad D. Clement. Mr. Clement is also an officer and shareholder of Featherlite Credit. Steven J. Sheldon has been Vice President of Market Development since March 1996 after service as Vice President of Sales since June 1993 and was previously a director of the Company. From 1988 to June 1993, he was the national sales manager of the Company. Larry D. Clement has been Treasurer of the Company since 1988 and was previously secretary and a director of the Company. He has also been the owner and President of several auto and truck dealerships since 1971. Mr. Clement is the President and Secretary of Clement Auto & Truck, Inc., a FEATHERLITE(R) dealer. Mr. Clement is the brother of Conrad D. Clement. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Item 5 is incorporated herein by reference to the section labeled "Corporate Information" and "Financial Information" which appears in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 is incorporated herein by reference to "Selected Financial Information" which appears in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 is incorporated herein by reference to the section labeled "Management's Discussion and Analysis" which appears in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is incorporated herein by reference to the consolidated financial statements, notes thereto and Independent Auditors' Report thereon which appear in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Other than "Executive Officers of the Registrant" which is set forth at the end of Part I of this Form 10-K, the information required by Item 10 is incorporated herein by reference to the section labeled "Election of Directors" which appears in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the section labeled "Executive Compensation" which appears in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the sections labeled "Principal Shareholders" and "Management Shareholdings" which appear in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section labeled "Certain Transactions" which appears in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) Consolidated Financial Statements: Page Report of Independent Auditor * Balance Sheets at December 31, 1997 and 1996 * Statements of Operations for each of the years ended December 31, 1997, 1996 and 1995 * Statements of Cash Flows for each of the years ended December 31, 1997, 1996 and 1995 * Statements of Shareholders' Investment for each of the years ended December 31, 1997, 1996 and 1995 * Notes to Consolidated Financial Statements * (2) Financial Statement Schedules: None (3) Exhibits. See Exhibit Index on page following signatures. (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report. - -------------- *Incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997, a copy of which is included with this Form 10-K as Exhibit 13. SIGNATURES In accordance with the requirements of Section 13 or 15(d) 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 MFG., INC. By:/s/ Conrad D. Clement Conrad D. Clement Date: March 20, 1998 President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. POWER OF ATTORNEY Each person whose signature appears below constitutes CONRAD D. CLEMENT and TRACY J. CLEMENT his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature Title Date - -------------------------------------------------------------------------------- /s/ Conrad D. Clement President, Chief Executive March 20, 1998 Conrad D. Clement Officer and Director (Principal Executive Officer) /s/ Jeffery A. Mason Chief Financial Officer and March 20, 1998 Jeffery A. Mason Director (Principal Financial and Accounting Officer) /s/ Tracy J. Clement Executive Vice President and March 20, 1998 Tracy J. Clement Director /s/ Donald R. Brattain Director March 20, 1998 Donald R. Brattain /s/ Thomas J. Winkel Director March 20, 1998 Thomas J. Winkel /s/ Kenneth D. Larson Director March 20, 1998 Kenneth D. Larson /s/ John H. Thomson Director March 20, 1998 John H. Thomson SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- EXHIBIT INDEX TO FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 ------------------------- FEATHERLITE MFG., INC. EXHIBIT NUMBER DESCRIPTION 2.2 Agreement and Plan of reorganization dated July 1, 1996, among the Registrant, Vantare International, Inc. and Michael Guth -- incorporated by reference to Exhibit 2 to the Company's Form 8-K filing dated July 1, 1996* 2.3 Amendment to Agreement and Plan of Reorganization between Registrant, Vantare International, Inc. and Michael Guth dated December 30, 1996 3.1 The Company's Articles of Incorporation, as amended -- incorporated by reference to Exhibit 3.1 to Company's S-1 Registration Statement, Reg. No. 33-82564* 3.2 The Company's Bylaws, as amended -- incorporated by reference to Exhibit 3.2 to Company's S-1 Registration Statement, Reg. No. 33-82564* 4.1 Specimen Form of the Company's Common Stock Certificate -- incorporated by reference to Exhibit 4.1 to Company's S-1 Registration Statement, Reg. No. 33-82564* 10.2**1994 Stock Option Plan, including Form of Incentive Stock Option Agreement -- incorporated by reference to Exhibit 10.2 to Company's S-1 Registration Statement, Reg. No. 33-82564* 10.10 Industrial New Jobs Training Agreement between the Company and Northeast Iowa Community College -- incorporated by reference to Exhibit 10.10 to Company's S-1 Registration Statement, Reg. No. 33-82564* 10.11 Industrial New Jobs Training Agreement between the Company and Hawkeye Institute of Technology -- incorporated by reference to Exhibit 10.11 to Company's S-1 Registration Statement, Reg. No. 33-82564* 10.12 Inventory Repurchase Agreement, dated September 12, 1990, between the Company and NationsCredit Commercial Corporation (formerly Chrysler First Commercial Corporation Limited) -- incorporated by reference to Exhibit 10.12 to Company's S-1 Registration Statement, Reg. No. 33-82564* 10.13 Floorplan Agreement, dated March 27, 1992, between the Company and ITT Commercial Finance Corp. -- incorporated by reference to Exhibit 10.13 to Company's S-1 Registration Statement, Reg. No. 33-82564* 10.15 Agreement, effective January 1, 1995, between the Company and Polaris Industries, L.P. --incorporated by reference to Exhibit 10.15 to Company's Form 10-K for the fiscal year ended December 31, 1994* 10.16 Inventory Repurchase Agreement, dated February 27, 1995, between Featherlite Mfg., Inc. and TransAmerica Commercial Finance Corporation -- incorporated by reference to Exhibit 10.23 to Company's Form 10-K for the fiscal year ended December 31, 1995* 10.17 Agreement between Featherlite Mfg., Inc. and Featherlite Credit Corporation -- incorporated by reference to Exhibit 10.2 to Company's 10-Q for the quarter ended June 30, 1996* 10.19 Agreement dated August 1, 1996 between the Company and Dolton Aluminum. -- incorporated by reference to Exhibit 10.1 to Company's 10-Q for the quarter ended September 30, 1996* 10.20 Agreement dated August 1, 1996 between the Company and Alumax Extrusions, Inc. -- incorporated by reference to Exhibit 10.2 to Company's 10-Q for the quarter ended September 30, 1996* 10.21 Amended and restated Credit and Security Agreement dated December 30, 1996 between Featherlite Mfg., Inc. and Firstar Bank -- incorporated by reference to Exhibit 10.21 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.22 Agreement for wholesale financing dated October 3, 1996 between Deutsche Financial Services and Featherlite Mfg., Inc. -- incorporated by reference to Exhibit 10.22 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.23**Amendment to 1994 Stock Option Plan dated May 14, 1996 -- incorporated by reference to Exhibit 10.23 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.24 Agreement dated August 26, 1996 between the Company and Reynolds Aluminum -- incorporated by reference to Exhibit 10.24 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.25 Agreement dated September 13, 1996 between the Company and Samuel Whittar Inc. -- incorporated by reference to Exhibit 10.25 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.26 Agreement dated November 27, 1996 between the Company and Dolton Aluminum -- incorporated by reference to Exhibit 10.26 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.27 Agreement dated November 27, 1996 between the Company and Alumax Transportation Products -- incorporated by reference to Exhibit 10.27 to Company's 10-K for the fiscal year ended December 31, 1996.* 10.28 First Amendment to Amended and Restated Credit and Security Agreement -- incorporated by reference to Exhibit 10.1 to Company's 10-Q for the quarter ended June 30, 1997.* 10.29 Second Amendment to Amended and Restated Credit and Security Agreement-- incorporated by reference to Exhibit 10.1 to Company's 10-Q for the quarter ended September 30, 1997.* 10.30 Agreement dated October 16, 1997 with Tifton Aluminum Company, Inc. -- incorporated by reference to Exhibit 10.2 to Company's 10-Q for the quarter ended September 30, 1997.* 10.31 Agreement dated October 15, 1997 with EASCO Aluminum, Dolton Works-- incorporated by reference to Exhibit 10.3 to Company's 10-Q for the quarter ended September 30, 1997.* 10.32 Agreement dated October 22, 1997 with Alumax Transportation Products-- incorporated by reference to Exhibit 10.4 to Company's 10-Q for the quarter ended September 30, 1997.* 13 Portions of annual report to shareholders for the fiscal year ended December 31, 1997 incorporated as reference in this Form 10-K 21 Subsidiaries of the Company: State of Name Incorporation ------------------------------------------------------ Featherlite Aviation Company Minnesota 23 Consent of Independent Auditors 24 Powers of Attorney of directors-- included under the "Signatures" section of this Form 10-K 27 Financial Data Schedule (filed in electronic format only) - ---------------- *Incorporated by reference to a previously filed document or report (File #0-24804, unless otherwise indicated). **Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form 10-K. EX-2.3 2 AMENDMENT TO AGREEMENT EXHIBIT 2.3 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION THIS AMENDMENT is made and entered in to effective as of December 30, 1996, by and among Featherlite Mfg., Inc., a Minnesota corporation ("Featherlite"), Vantare International, Inc., a Florida corporation ("Vantare"), and Michael Guth ("Guth"). RECITALS: A. Pursuant to an Agreement and Plan of Reorganization (the "Exchange Agreement") dated as of July 1, 1996, among the parties hereto, Vantare transferred substantially all of its assets to Featherlite in exchange for shares of common stock of Featherlite and the assumption by Featherlite of certain of its liabilities, upon the terms and conditions set forth in the Exchange Agreement. B. Section 2.7 of the Exchange Agreement provided for the escrow of 100,000 of the aggregate shares issuable to Vantare pursuant to the Exchange but, as contemplated by the Exchange Agreement, the parties have determined that the test period and other factors set forth in the Exchange Agreement for calculating the number of shares so issuable do not permit the parties to accurately reflect the performance of the Vantare Division (as defined in the Exchange Agreement), and the parties therefore desire to amend the Exchange Agreement to establish more appropriate performance standards. NOW, THEREFORE, in consideration of the premises and the agreements contained herein, and for other valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties mutually agree as follows: 1. Subject to and conditioned upon the approval of this Amendment by the Board of Directors of Featherlite, which approval shall be sought at the first meeting of the Board of Directors that occurs following the date hereof (with notice of such approval, or failure to approve, to be provided to Guth and Vantare promptly thereafter), section 2.7 of the Exchange Agreement is hereby amended to read as follows: "2.7 Adjustments to Exchange Consideration; Contingent Shares. An aggregate 100,000 of the 400,000 shares of Featherlite Common Stock comprising the Exchange Consideration, as described in section 2.4 hereof, shall be issuable to Vantare only as and to the extent described in this section 2.7. The "Earnout Period" shall be the period beginning on January 1, 1997, and ending on December 31, 2000. During the Earnout Period, a maximum of 100,000 shares may be earned. The actual number of shares earned during the Earnout Period shall be determined annually based on the Net Income (as defined below) earned, on a cumulative basis, through the year of determination. During the first three years of the Earnout Period, Vantare shall earn 25,000 shares upon achievement of each of the following levels of cumulative Net Income: $1,200,000, $2,800,000, and $4,400,000; provided, however, that (i) shares shall not be prorated on the basis of the achievement of less than the full amount of cumulative Net Income required for any of such levels; and (ii) no more than 25,000 shares may be earned for each completed year since the beginning of the Earnout Period, but such annual limitation may (if not earned in any year) be carried over to the succeeding year(s) of the first three years of the Earnout Period. In the fourth year of the Earnout Period, Vantare shall earn shares equal to the following: (i) the number of shares of Featherlite Common Stock that bears the same ratio to 100,000 such shares that aggregate Net Income for the Earnout Period bears to $6,000,000, with the result rounded to the nearest whole number of shares, minus (ii) the aggregate number of shares of Featherlite Common Stock earned by Vantare during the first three years of the Earnout Period; provided, however, that no shares shall be earned unless the aggregate Net Income for the Earnout Period equals or exceeds $1,200,000. Vantare shall have the right to earn all or any portion of the aggregate 100,000 shares issuable pursuant to this section 2.7 (less any shares paid in the first three years of the Earnout Period) in the fourth year of the Earnout Period. For these purposes, "Net Income" shall mean the net income of the Vantare Division earned from the operation of its business during the Earnout Period, as included in the Featherlite consolidated financial statements for the applicable year(s), but shall not include income of other divisions, affiliates, or subsidiaries of Featherlite (except to the extent that any such other divisions, affiliates, or subsidiaries subsequently operate, in whole or in part, the business of the Vantare Division), and shall specifically (i) reflect all income and expense related to the operation of the Vantare Division, including interest expense or income on the cumulative Intercompany Balance (as defined below), amortization of intangibles related to the Exchange, and an allocation of income taxes based on the overall corporate income tax rate, which tax rate shall not exceed 40 percent; and (ii) not reflect gains or losses realized on the sale of the 1994 used Marathon and the two Featherlite coaches, serial nos. C002 and C004, transferred to Vantare by Featherlite. As used herein, the "Intercompany Balance" shall (i) include but not be limited to such items as cash transfers between the Vantare Division and the corporate division of Featherlite ("Corporate"), expenses paid by Corporate that directly relate to the Vantare Division (such as salaries and insurance), and interest expense or income calculated at the rate paid by Corporate on its line of credit; and (ii) not include any general corporate allocations or management fees. As used herein, the "Vantare Division" means the division of Featherlite that operates the business and assets of Vantare acquired by Featherlite in the Exchange, from and after the Effective Time, and does not include other divisions or business segments of Featherlite. Any disputes concerning the calculation by the parties of Net Income shall be resolved in the same manner as described in section 2.6 hereof. Following the end of any year of the Earnout Period for which Vantare earns shares of Featherlite Common Stock pursuant to this section 2.7, Featherlite shall cause Firstar Trust Company ("Firstar"), its stock transfer agent, to issue and to distribute to Vantare the shares of Featherlite Common Stock so earned by Vantare, pursuant to the terms set forth in this section. Until the shares are so earned and issued, they shall not be treated as outstanding for any purpose. If the outstanding Featherlite Common Stock changes into a different number of shares or a different class, by reason of any reclassification, recapitalization, split-up, combination, exchange of shares, stock dividend, or similar event, between the Effective Time and the date of any issuance under this section 2.7, the number and class of shares to be so issued shall be appropriately adjusted. As used in this section 2.7 in connection with the issuance of additional Featherlite Shares, references to "Vantare" shall mean and refer to Guth following the distribution by Vantare to Guth of the Featherlite Shares, or rights with respect to the Featherlite Shares included in the Escrow Amount." 2. The remaining provisions of the Exchange Agreement are hereby deemed amended solely to the extent necessary so as not to be inconsistent with the amendment made to section 2.7, and the Exchange Agreement shall otherwise remain in full force and effect. IN WITNESS WHEREOF, each of the parties has duly executed this Amendment effective as of the day and year first above written. FEATHERLITE MFG., INC. By Its President and Chief Executive Officer VANTARE INTERNATIONAL, INC. By Its President Michael Guth EX-13 3 PORTIONS OF ANNUAL REPORT EXHIBIT 13 SELECTED FINANCIAL INFORMATION (In thousands, except per share and stock price data)
- ----------------------------------------------------------------------------------------------------------------------------------- FIVE YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Statement of Income Data: Net sales $134,387 $99,329 $69,159 $60,172 $39,763 Cost of goods sold 111,764 84,643 58,673 47,521 31,269 - ----------------------------------------------------------------------------------------------------------------------------------- Gross profit 22,623 14,686 10,486 12,651 8,494 Selling and administrative expenses 15,998 12,492 9,993 8,075 6,308 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income 6,625 2,194 493 4,576 2,186 Interest expense (1,800) (1,450) (799) (667) (550) Other income, net 646 660 1,478 344 480 - ----------------------------------------------------------------------------------------------------------------------------------- Income before taxes 5,471 1,404 1,172 4,253 2,116 Provision for Income taxes 2,189 562 471 392 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income $3,282 $842 $ 701 $ 3,861 $ 2,116 - ----------------------------------------------------------------------------------------------------------------------------------- Pro Forma Statement of Income Data Net income, as reported $ - $ - $ - $ 3,861 $ 2,116 Pro forma provision for taxes - - - 1,152 811 - ----------------------------------------------------------------------------------------------------------------------------------- Pro forma net income $ - $ - $ - $ 2,709 $ 1,305 =================================================================================================================================== Net income per share - Basic & Diluted $ 0.52 $ 0.13 $ 0.12 $ 0.60 $ 0.33 =================================================================================================================================== Cash Distributions for taxes* $ - $ - $ 305 $ 1,795 $ 746 =================================================================================================================================== Weighted average common shares outstanding Basic 6,255 6,106 5,955 4,509 4,000 Diluted 6,314 6,107 6,006 4,518 4,000 =================================================================================================================================== Balance Sheet Data (End of Period) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Working capital $21,643 $15,128 $15,360 $ 9,516 $ 782 Total assets 75,508 53,534 46,084 33,258 19,098 Total long-term debt, net current maturities 22,075 13,346 15,194 5,282 4,230 Total shareholders' investment 23,877 20,595 17,953 17,252 4,517 - ----------------------------------------------------------------------------------------------------------------------------------- *Represent only distribution for estimated share holders' federal and state inocme tax liabilities from Company's status as S corporation prior to initial public stock offering. No other dividends were paid. The Company is restricted from paying dividends. See Liquidity & Capital Resources in MD&A for a discussion of these restrictions.
Quarterly Financial Data (Unaudited)
Gross Operating Net Net Income Common Stock Price Net Sales Profit Income Income Per Share** High Close Low Close =================================================================================================================================== 1997 First Quarter $34,034 $5,095 $1,495 $ 756 $0.12 $8.63 $5.75 Second Quarter 32,652 5,201 1,384 614 0.10 8.63 6.63 Third Quarter 32,728 5,802 1,587 889 0.14 9.00 6.63 Fourth Quarter 34,973 6,525 2,159 1,023 0.16 8.94 6.88 =================================================================================================================================== 1996 First Quarter $19,976 $3,018 $ 302 $ 51 $0.01 $6.00 $4.63 Second Quarter 21,169 2,704 85 14 - 6.38 4.75 Third Quarter 28,384 3,938 690 206 0.03 6.88 5.13 Fourth Quarter 29,800 5,026 1,117 571 0.09 6.25 4.75 =================================================================================================================================== **Basic and diluted net income per share are the same.
Stock Market Information The Nasdaq Stock Market: FTHR As of February 15, 1998, there were approximately 229 shareholders of record and approximately 2000 beneficial shareholders. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion pertains to the Company's results of operations and financial condition for the years ended December 31, 1997, 1996 and 1995. Results of Operations Net Sales Featherlite Mfg., Inc. achieved a 35.3% increase in net sales to $134.4 million for the year ended December 31, 1997 following an increase of 43.6% to $99.3 million in 1996 and an increase of 15.0% to 69.2 million in 1995. These gains were the result of strong growth in most product lines in 1997 and 1996 as well as the Vantare acquisition. In 1996, the Company acquired the assets of Vantare International, Inc., a converter of luxury motorcoaches and in 1995, the assets of Diamond D Trailer Manufacturing, Inc., a manufacturer of steel trailers. Gross Profit Significant sales expansion combined with lower aluminum costs and improved labor efficiencies caused gross profit to increase to $22.6 million in 1997 from $14.7 million in 1996 and $10.5 million in 1995. As a percentage of sales, gross profit margin was 16.8% in 1997 compared to 14.8% in 1996 and 15.2% in 1995. Following is a summary of components of the change in the gross profit margin percentage, by year, for the years 1995 through 1997: 1997 vs 1996 Consolidated Trailers Only - -------------------------------------------------------------------------------- Aluminum 2.5% .5% Other Materials (2.8) 2.6 Labor and overhead 2.3 1.2 - -------------------------------------------------------------------------------- Gross Margin Inc 2.0% 4.3% - -------------------------------------------------------------------------------- 1996 vs 1995 Consolidated Trailers Only - -------------------------------------------------------------------------------- Aluminum 7.2% 4.9% Other Materials (9.0) (3.8) Labor and overhead 1.4 (0.9) - -------------------------------------------------------------------------------- Gross Margin Inc(dec) (0.4)% 0.2% - -------------------------------------------------------------------------------- 1995 vs 1994 Trailers Only - -------------------------------------------------------------------------------- Aluminum (2.1)% Other Materials (1.2) Labor and overhead (2.5) - -------------------------------------------------------------------------------- Gross Margin Inc(dec) (5.8)% - -------------------------------------------------------------------------------- The gross margin increase in 1997 over 1996 benefited from reduced aluminum costs, which were approximately 5% lower than in 1996, changes in other materials due to product mix and improved labor efficiency. This increase was partially offset by the effect of certain used and new slide-out model motorcoach sales which had a lower than normal gross margin. If motorcoaches are excluded, the gross margin for 1997 is 19.8% compared to 15.4% in 1996. The gross margin decrease in 1996 compared to 1995 relates primarily to the increased cost of luxury motorcoach conversion shells which offset the effect of aluminum cost decreases during the year. If motorcoaches are excluded, the gross profit margin for 1996 is comparable to 1995. Other materials related to trailers increased due to greater sales of utility trailers, steel horse and livestock trailers and other trailers which have higher percentage of non-aluminum materials. Aluminum is a commodity which is traded daily on commodity markets and fluctuates in price. The average Midwest delivered market cash price per pound for ingot aluminum during the three years ended December 31, 1997, as reported to the Company by its suppliers, was $.78 in 1997, $.72 in 1996, and $.86 in 1995. The Company's cost of aluminum varies from these market prices due to vendor processing charges, timing of purchases, contractual commitments with suppliers for specific prices and other factors. Its average cost of aluminum, which peaked in the third and fourth quarters of 1995, was approximately 5% less in 1997 than 1996 and 6% less in 1996 than in 1995. Selling, Administration and Other Significant sales growth, coupled with expense control, reduced selling and administrative costs as a percent of sales. Selling and administrative expenses decreased as a percentage of sales to 11.9% in 1997 from 12.6 % in 1996 compared with 14.5% in 1995. These costs increased by $3.5 million in 1997 to $15.9 from $12.4 million in 1996 from $10.0 million in 1995. This increase in 1997 reflects greater advertising and marketing expense due to a full year's operation at Vantare as well as other added selling and administrative expenses related to growth. The increase in 1996 mainly reflects sales and other personnel added throughout 1995 to improve product exposure and to build a larger sales organization to support a higher sales volume and expanded dealer network. The acquisition of Vantare increased selling and administrative expenses by $1.4 million in 1997 and $692,000 in 1996. Interest expense increased in 1997 by $350,000 to $1.8 million from $1.5 million in 1996 and $799,000 in 1995 as the result of increased levels of borrowings for working capital and aircraft in 1997 and 1996. Borrowings against the line of credit were reduced in the first half of 1995 as a portion of the proceeds from the initial public offering were available to finance 1995 working capital increases. Other income was approximately the same in 1997 and 1996 and decreased by $853,000 in 1996 over 1995. Other income in 1997 includes gains on sales of aircraft and other property of $264,000 and in 1996 a litigation settlement in the amount of approximately $245,000. The decrease in 1996 compared to 1995 is substantially due to the non-recurrence in 1996 of a $750,000 development grant received in 1995 for working capital and operating costs related to the facilities expansion, and additional sales of aircraft in 1995 which realized gains of $525,000. Provision for Income Taxes The provision for income taxes reflects an effective federal and state income tax rate of 40% in 1997, 1996 and 1995. 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 years ended December 31, 1997, 1996 and 1995 Trailer Segment 1997 1996 1995 - -------------------------------------------------------------------------------- Net sales (000's) $99,703 $84,421 $69,159 Segment income (000's) 11,034 5,680 4,277 Segment income percent 11.1% 6.7% 6.2% Trailer segment sales increased by 18.1% in 1997 and 23.7% in 1996 primarily due to increased sales of Featherlite aluminum and steel trailers plus the added sales of Diamond D trailers (which was acquired in the 4th quarter of 1995). On a product line basis, there were significant sales gains in 1997 in most product lines with horse trailers up 5%, a 20% increase in livestock trailers, a 56% increase in sales of snowmobile and other recreational trailers and a 23% increase in race car/specialty transporter trailers. Commercial trailers were down 28% due mainly to decreased sales of drop frame moving and other specialty van sales as well as the discontinuation of semi-trailer sales in 1996. In 1996, sales of horse and livestock trailers were each up more than 20%, snowmobile and other recreational/utility trailers were up over 60%, car trailer and race car transporter sales were up about 10% and commercial trailers were up by only 15% reflecting the expansion of drop frame moving and specialty van sales offset by the discontinuation of semi-trailers during 1996. Other factors contributing to the trailer sales growth in 1997 and 1996 included: the introduction of new trailer models in existing product lines, the introduction of new product lines and the expanded use of specialty trailers in activities related to hobbies and entertainment of end user customers. A portion of the sales increase in 1997 and 1996 was the result of price increases ranging from 2-5% introduced in those years. Trailer segment income increased in 1997 due to higher sales volume and improvements in gross margin due to reduced aluminum and other material costs as well as improved labor and overhead efficiency. There was a slight improvement in 1996 compared to 1995 primarily due to higher sales volume and improved margins resulting from reduced aluminum costs. These improvements in 1996 were partially offset by increases in other materials, and labor and overhead cost. Segment income also improved due to lower sales and marketing expenses as a percent of sales, which were 5.9% in 1997, 6.3% in 1996 and 6.9% in 1995. Motorcoach Segment 1997 1996 - -------------------------------------------------------------------------------- Net sales (000's) $34,684 $14,908 Segment income (000's) 813 775 Segment income percent 2.3% 5.2% The Company began developing and manufacturing luxury motorcoaches in 1995 and it acquired the assets of Vantare International, Inc. as of July 1, 1996. Net sales for 1997 and 1996 include sales of used trade-ins in the amount of $12.4 and $5.2 million, respectively, which have a lower margin than new unit sales. Also, 1997 segment income was reduced by the costs related to development of slide-out models which was completed in 1997 as well as the sale of certain new and used coaches at lower than normal margins and increased marketing and administrative costs. Marketing and administrative expenses related to this segment increased in 1997 as the organization was expanded to meet anticipated sales growth and were approximately 6.3% of segment income compared to 5.7% in 1995, including amortization of intangibles related to the acquisition of approximately $175,000 and $82,000 in 1997 and 1996, respectively. Looking Forward The statements made in this annual 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 and aircraft purchases and sales. Sales are expected to continue to be strong in 1998. The Company believes its 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% of its revenue from end users in the 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 the strong growth in these markets. The Company will continue to put strong emphasis on its horse and livestock product lines through the introduction of new models and offering new features in existing models. The Vantare Division will continue to add significant luxury motorcoach sales volume in 1998 as we anticipate the strong growth in this segment to continue. Additional sales are expected in snowmobile and other recreational trailers to Polaris and Yamaha dealers. Modest growth is expected in sales of drop frame delivery and moving vans which the company introduced in late 1995; however, increases are anticipated in other models such as kitchen, hospitality and vending trailers. These overall expectations may not be met if there are significant changes in the general economy or in the market for particular types of trailers or motorcoaches. Price increases of 2% announced in late 1997 will be effective for all new orders received in the first quarter of 1998 and another 2% price increase will be effective after March 1, 1998. The total sales order backlog at December 31, 1997 was approximately $27 million, including $14 million in Vantar orders, compared with $28 million at December 31, 1996. All of this backlog will be delivered in 1998. The Company has obtained commitments from suppliers to provide, at an agreed upon fixed price, substantially all of its total aluminum requirements for much of 1998. The average cost of aluminum will increase about 4% in 1998 but this will not adversely impact margins due to price increases already in effect. The overall gross margin percentage is expected to improve due to higher overall margins on Vantare sales. 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. It may take a little longer to replace an extruded aluminum supplier due to the fact that dies are required and would have to be made. The Company routinely tries to keep at least two suppliers of each shape so it has a backup supplier, if necessary. Many of these suppliers have multiple plants that can be used to produce the material the Company requires. There is also a risk if the Company were to lose its sole supplier of motorcoach conversion shells, Prevost Car Company, although it could purchase certain shells from other manufacturers. The Company does have insurance to cover certain losses it may sustain if Prevost's plant is destroyed by fire or certain other catastrophes. Sales and administration expenses are expected to increase at a lower rate than sales. Interest expense will likely remain higher in 1998 as the average level of debt is expected to be greater in 1998 than 1997 although the effective interest rate will be lower unless the prime rate of interest changes. In 1997, the Company signed a joint venture agreement with GMR Marketing to form Featherlite/GMR Sports Group, LLC. This joint venture which will focus on developing promotional events and implementing marketing strategies in the motorsports industry. It is not expected that the Company's share of the operating results related to its investment in this joint venture will be significant until 1999 and thereafter. The Company has made increased use of leverage and incurred increased interest and related expenses in the three years ended December 31, 1997. Increased debt incurred in connection with acquisition of Diamond D (fourth quarter of 1995), financing operations of Vantare (third quarter of 1996) and financing additional working capital. The Company was temporarily out of compliance with certain covenants in its loan agreements at certain times in 1996 and at December 31, 1997 but has received waivers from its lenders for these variances and expects to be in compliance with all covenants throughout 1998. Increased leverage and related expenses create a risk to future operating results of the Company. Liquidity and Capital Resources In 1997, the Company generated net cash of $1.4 million, including $5.0 million used for operating activities, $13.0 million provided by increased debt and $6.6 million used for capital expenditures for property, equipment and aircraft. Operating activities used net cash of $ 5.0 million for the year 1997, primarily for investment in working capital. Net income for the year ended December 31, 1997, provided cash of $3.3 million. This amount was increased by adjustments for depreciation and amortization of $1.6 million and reduced by other non-cash items in a net amount of $1.3 million. Increases in receivables and inventories used cash of $14.7 million and other working capital items provided cash of $6.1 million. Inventories increased by $14.4 million including $8.7 million to support the increased level of sales at the Vantare operation and the anticipated strong sales in the first quarter of 1998. Additional increases may be required in working capital in the future to support higher sales levels throughout the next year. Investing activities in the year ended December 31, 1997 used cash of $2.9 million for plant and other capital improvements including the addition of 20,000 square feet to its parts and rework facility at a cost of $450,000, the puchase of land at a cost of $900,000 for future expansion at Vantare and $3.7 million for aircraft transactions. Luxury motorcoaches with a cost of $907,000 which were leased to outsiders during the year were returned and included in inventory at year end. The Vantare production facility expansion was completed and sold to the Seminole Port Authority at a cost of $975,000 and was then leased back by the Company under the terms of a ten year operating lease. The proceeds from the sale were used to repay the Company's interim bank borrowings for the project. Net cash used for aircraft of $3.7 million primarily represents the replacement of an aircraft sold at the end of 1996. The Company's investment in aircraft for resale of $6.7 million at December 31, 1997 is not anticipated to change significantly in the foreseeable future. Financing activities provided net cash of $13.0 million, after borrowing an additional $24.4 million and repaying $11.4 million of aircraft and other debt. The increased level of debt includes $4.0 million for net aircraft purchases and $9.0 million to finance increased inventory levels and other working capital and capital expenditure requirements including land purchased in Florida for future expansion. The Company has a working capital line of credit with its primary lender, Firstar Bank Iowa, N.A. This line has a defined borrowing limit equal to the lesser of $12.0 million or a defined percentage of eligible receivables and inventory. During the year, the maturity date of this line was extended to July 31, 1999 and is subject to future renewal and extension and the interest rate on borrowings on this line of credit was reduced from prime to prime less .5 percent (8.0% at December 31, 1997). The Company is required by the Bank to maintain defined levels of working capital, tangible net worth and cash flow and to limit leverage and capital expenditures. The Company received permission from the Bank to exceed the leverage requirement at December 31, 1997. Borrowings under the line are secured by substantially all assets of the Company. There was $9.8 million borrowed against this line as of December 31, 1997. The Company also has a wholesale floor plan agreement with Deutsche Financial Services to provide up to $7.5 million (increased from $3.5 million during the year) financing for new and used motorcoaches held in inventory. This agreement includes covenants requiring maintenance of defined levels of tangible net worth, leverage and working capital. The Company received permission from Deutsche to exceed the leverage requirement at December 31, 1997. At December 31, 1997, $6.0 million was borrowed against this line. The Company has requested and received approval for this line be increased to $11 million. The Company believes that its current cash balances, cash flow generated from operations and available borrowing capacity will be sufficient to fund operations and capital requirements for the next year. As discussed in Note 6 to financial statements, the Company is contingently liable under certain dealer floor plan and retail financing arrangements. These contingent liabilities total approximately $14.8 million at December 31, 1997. Also, the Company is self-insured for a portion of certain health benefit and workers' compensation insurance claims. At December 31, 1997 the Company's maximum annual claim exposure under these programs is approximately $2.4 million. The Company has obtained an irrevocable standby letter of credit in the amount of $1,245,000 in favor of the workers compensation claim administrator. The Company has made a commitment to the City of Cresco to construct a hangar facility at a cost of approximately $300,000 as part of an airport expansion project expected to be completed in 1998. In 1998, the Company also plans to build a warehouse facility for raw material storage at its Cresco location at an approximate cost of $1.8 million which will be financed with new borrowings and may begin some phases of the Vantare facilities expansion. In October, 1997, the Company signed a joint venture agreement with GMR Marketing to form Featherlite/GMR Sports Group, LLC. The joint venture will focus on developing promotional events and implementing marketing strategies in the rapidly growing motorsports industry. It is not expected that this venture will require significant capital from the Company to begin and maintain its operations. The Company leases certain office and production facilities under various leases that expire at varying dates through fiscal year 2007 as described more fully in Note 6 to the financial statements. Minimum lease payments for 1998 are expected to total $497,000. For the foreseeable future, the Company does not plan to pay dividends but instead will follow the policy of reinvesting earnings in order to finance the expansion and development of its business. As discussed in Note 5 to financial statements, the Company is a party to certain loan agreements which prohibit the payment of dividends without the lender's consent. Based on a recent assessment by the Company of its computer software programs and communications with significant third party vendors providing the Company payroll and benefit services, the Company has determined that certain modification may be required to properly utilize dates beyond December 31, 1999. The Company believes that with modification to existing software and conversions to new software, the year 2000 issue can be mitigated at a nominal cost and that such changes can be made on a timely basis and will not have a material impact on the operations of the Company. FINANCIAL STATEMENTS
Featherlite Mfg., Inc. Consolidated Balance Sheets December 31, 1997 and 1996 (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash $ 1,632 $ 256 Trade accounts receivable 7,050 6,783 Inventories 39,664 25,235 Prepaid expenses 1,110 1,094 Deferred taxes 824 481 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 50,280 33,849 - ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY AND EQUIPMENT: Land and improvements 2,098 1,111 Building and improvements 7,954 7,300 Machinery and equipment 10,280 9,276 Accumulated depreciation (6,280) (4,914) - ------------------------------------------------------------------------------------------------------------------------------------ Net property and equipment 14,180 12,773 - ------------------------------------------------------------------------------------------------------------------------------------ GOODWILL AND OTHER ASSETS 11,048 6,912 - ------------------------------------------------------------------------------------------------------------------------------------ $ 75,508 $ 53,534 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt $ 1,173 $ 1,146 Other notes payable 6,515 2,255 Trade accounts payable 11,984 9,776 Accrued liabilities 4,510 3,110 Customer deposits 3,585 2,157 Income taxes payable 870 240 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 28,637 18,684 - ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT: Bank line of credit 9,800 9,100 Other debt, net of current maturities 12,275 4,246 - ------------------------------------------------------------------------------------------------------------------------------------ Total long term debt 22,075 13,346 - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED GRANT INCOME 237 310 DEFERRED INCOME TAXES 682 599 - ------------------------------------------------------------------------------------------------------------------------------------ CONTINGENCIES AND COMMITMENTS (Note 6) SHAREHOLDERS' INVESTMENT Common stock 14,220 14,220 Additional paid-in capital 4,062 4,062 Retained earnings 5,595 2,313 - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' investment 23,877 20,595 - ------------------------------------------------------------------------------------------------------------------------------------ $ 75,508 $ 53,534 ==================================================================================================================================== See Notes to Consolidated Financial Statements.
Featherlite Mfg., Inc. Consolidated Statements of Operations For the years ended December 31, 1997, 1996 and 1995 (In thousands, except for per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $134,387 $99,329 $69,159 Cost of sales 111,764 84,643 58,673 - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 22,623 14,686 10,486 Selling, general and administrative expenses 15,794 12,372 9,979 Amortization of intangibles 204 120 14 - ------------------------------------------------------------------------------------------------------------------------------------ Income from operations 6,625 2,194 493 - ------------------------------------------------------------------------------------------------------------------------------------ Other income (expense): Interest expense (1,800) (1,450) (799) Grant income 73 73 823 Gain on aircraft and other sales 264 60 534 Other income, net 309 527 121 - ------------------------------------------------------------------------------------------------------------------------------------ Total other income (expense) (1,154) (790) 679 - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes 5,471 1,404 1,172 Provision for income taxes 2,189 562 471 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 3,282 $ 842 $ 701 ==================================================================================================================================== Net income per share - basic and diluted $ 0.52 $ 0.13 $ 0.12 ==================================================================================================================================== Weighted average number of common shares outstanding - basic 6,255 6,106 5,955 ==================================================================================================================================== Weighted average number of common shares outstanding - diluted 6,314 6,107 6,006 ====================================================================================================================================
Consolidated Statements of Shareholders' Investment For the years ended December 31, 1997, 1996 and 1995 (In thousands) --Common Stock-- - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding Additional Retained Shares Amount Paid in Capital Earnings - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1994 5,955 $12,420 $4,062 $ 770 Net income for the period 701 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1995 5,955 12,420 4,062 1,471 Net income for the period 842 Issuance of common stock 300 1,800 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1996 6,255 14,220 4,062 2,313 Net income for the period 3,282 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1997 6,255 $14,220 $4,062 $5,595 ====================================================================================================================================
Featherlite Mfg., Inc. Consolidated Statements of Cash Flows For the years ended December 31, 1997, 1996 and 1995 (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES: Net income $3,282 $ 842 $ 701 Adjustments to reconcile net income to net cash from (used for) operating activities Depreciation and amortization 1,610 1,454 1,244 Trailers exchanged for advertising, net of amortization (410) (144) 99 Grant income (73) (73) (823) Deferred taxes (260) 92 190 Gain on sales of aircraft and other property (264) (60) (534) Changes in current operating items, net of effect of business acquisitions Trade accounts receivable (268) (1,150) (1,658) Refundable income taxes - 466 (466) Inventories (14,429) (285) (6,764) Prepaid expense 104 (148) (128) Trade accounts payable 2,208 (1,999) 1,896 Accrued liabilities 1,400 1,306 149 Customer deposits 1,428 (755) (200) Income taxes payable 630 240 - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used for) operations (5,042) (214) (6,294) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES: Acquisition of business - 231 (2,006) Investment in joint venture, net of equity in earnings (11) - - Purchases of property and equipment (2,973) (1,543) (2,941) Proceeds from sale of equipment 57 79 123 Purchase of airplanes for resale (6,839) - (5,514) Proceeds from sale of airplanes 3,166 2,789 4,225 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash from (used for) investing activities (6,600) 1,556 (6,113) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES Distribution for shareholder taxes - - (305) Short-term debt increase 4,288 140 524 Proceeds from long-term debt and grants 20,941 6,106 16,412 Repayment of long-term debt (12,211) (8,143) (6,212) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash from (used for) financing activities 13,018 (1,897) 10,419 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash increase (decrease) for period 1,376 (555) (1,988) Cash, beginning of the period 256 811 2,799 - ------------------------------------------------------------------------------------------------------------------------------------ Cash, end of the period $1,632 $ 256 $ 811 ====================================================================================================================================
Featherlite Mfg., Inc. Notes To Consolidated Financial Statements Note 1. Nature of Business Featherlite Mfg., Inc. (the Company) is engaged in the manufacturing of various types of specialty trailers and luxury motorcoaches as well as related parts and accessories. The trailers are primarily sold at wholesale to authorized dealers throughout the United States and Canada. Dealer terms and conditions for business are defined by standard agreements with each authorized dealer. The luxury motorcoaches are sold directly by the Company to end user customers. The Company is also involved in the purchase and resale of commercial type aircraft used for business purposes. Note 2. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Featherlite Aviation Company. All material intercompany accounts and transactions are eliminated in consolidation. Fair Values of Financial Instruments: The carrying values of cash, accounts receivable and payable, short-term debt and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amount of long term debt, including current maturities, approximates the fair value of long-term debt because the related interest rates either fluctuate with the lending bank's current prime rate or approximate current interest rates for debt of a similar nature and maturity. Financial Statement Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash: At December 31, 1997 and 1996, the Company had cash with a financial institution in excess of the Federal Deposit Insurance Corporation insurance coverage. The Company has performed an evaluation of the relative credit standing of this financial institution and believes it has limited its credit exposure accordingly. Inventories. Inventories are stated at lower of first-in, first-out (FIFO) cost or market and include materials, labor and overhead costs. At December 31, 1997 and 1996 inventories were as follows: (In thousands) 1997 1996 - -------------------------------------------------------------------------------- Raw Materials $ 10,052 $ 8,053 Work in Progress 11,815 8,410 Finished Trailers & Motorcoaches 17,797 8,772 - -------------------------------------------------------------------------------- Total $39,664 $25,235 ================================================================================ Aircraft Held for Resale: Aircraft held by the Company for resale are stated at cost. Charges for depreciation are not taken, but the Company periodically evaluates the aircraft's net realizable value and, if necessary, adjusts the carrying value by charges to operations. Gain or loss on the sale of aircraft is included in other income during the period in which the aircraft are sold. Aircraft held by the Company for resale are classified as noncurrent as prior history indicates that the aircraft may not be sold within the next twelve months. Property and Equipment: Property and equipment are capitalized at cost, while repair and maintenance items are charged to current operations. Depreciation is provided for financial reporting purposes using straight-line and accelerated methods over estimated useful lives of 31 to 39 years for building and improvements and 5 to 7 years for machinery and equipment. Goodwill and Long-lived Assets: The Company assesses long-lived assets for impairment under FASB Statement No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of." Under those rules, property and equipment, goodwill associated with assets acquired in a purchase business combination, idle facilities held for sale and any other long-lived assets are included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. Product Warranty: The Company's products are covered by product warranties ranging from one to six years after date of purchase by the consumer. At the time of sale, the Company recognizes estimated warranty cost, based on prior history and expected future claims, by a charge to operations. Cash Flow Information: Cash payments for interest were $1,675,000, $1,461,000 and $770,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Cash payments for income taxes were $1,819,000 in 1997, $143,000 in 1996 and $825,000 in 1995. Cash provided by (used for) acquisition of businesses in 1996 was as follows (In thousands): 1996 - -------------------------------------------------------------------------------- Fair Value of Assets Acquired $ 9,412 Liabilities Assumed (7,843) Issuance of Common Stock (1,800) - -------------------------------------------------------------------------------- Cash provided $ 231 ================================================================================ Revenue Recognition: The Company recognizes revenue, net of all anticipated discounts, when the title to the trailer or motorcoach passes, normally upon completion of production and issuance of an invoice and the Manufacturer's Statement of Origin. Deferred Grant Income: The Company recognizes revenue related to grants received from various governmental units over the life of the assets to which the funding relates or during the period in which the expense occurs for which grants were received. Revenue recognition begins when there is reasonable assurance that all conditions of the grants, principally job creation goals, have been met. Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net Income Per Common Share: Net income per basic share is computed based upon the weighted average number of common shares issued and outstanding during each year. Dilutive per share amounts assume conversion, exercise or issuance of all potential common stock instruments (stock options and warrants as discussed in note 9) unless the effect is to reduce a loss or increase income per share. Recent Accounting Pronouncements: In June, 1997, the FASB issued SFAS No. 130. "Reporting Comprehensive Income." Statement No. 130 establishes standards for the reporting of comprehensive income and its components in a full set of general-purpose financial statements. The Company will be required to adopt Statement No. 130 in 1998, and does not expect the measure of comprehensive income to be materially different from the measure of net income. In June, 1997, the FASB also issued SFAS No 131. "Disclosures about Segments of an Enterprise and Related Information." Statement No. 131 revises information regarding the reporting of operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will be required to adopt Statement No. 131 in 1998. The Company does not believe that the adoption of this standard will result in segment disclosures that are materially different than those provided under current accounting standards. Note 3. Goodwill and Other Assets Goodwill and other assets consist of the following: 1997 1996 - -------------------------------------------------------------------------------- Goodwill, net $3,461 $3,536 Aircraft held for resale (note 5) 6,726 2,815 Idle Facilities 522 522 Advertising and other 328 39 Investment in Joint Venture 11 -- - -------------------------------------------------------------------------------- Total $11,048 $6,912 ================================================================================ Goodwill: As discussed in Note 10, the excess of the total acquisition cost of Vantare International, Inc. and Diamond D Trailer Manufacturing, Inc. over the fair value of the net assets acquired of $3,648,000 is being amortized on a straight-line basis over periods of up to 20 years. Amortization was $198,000 in 1997, $108,000 in 1996 and $4,000 in 1995 and accumulated amortization was $310,000 and $112,000 at December 31, 1997 and 1996, respectively. Aircraft Held for Resale: The Company is a licensed aircraft dealer and deals in business class aircraft. In 1997, the Company's net aircraft transactions included proceeds of $3.1 million from the sale of aircraft and $6.8 million in aircraft purchases. In 1996, there were aircraft sales of $2.8 million and no aircraft purchases. Idle Facilities: The Company owns land and buildings in Grand Meadow, Minnesota that was previously used as its corporate headquarters and delivery/maintenance facility. The net book value of the facilities have been reclassified from property and equipment to other assets and a provision has been made to reduce the facility to its expected realizable value. Portions of these facilities are being rented under operating leases to cover costs related to holding these properties while they are being marketed for resale. Advertising and Other: In 1997, 1996 and 1995, the Company exchanged trailers and coaches (total sales value $669,000 in 1997, $276,000 in 1996, and $155,000 in 1995) for future personal service, promotional and advertising services of an equivalent value. These contracts were capitalized and are being amortized over the period the services will be rendered. Amortization of these agreements to advertising expense was $254,000 in 1997, $315,000 in 1996, and $254,000 in 1995. Advertising expense was $1,441,000 in 1997, $1,299,000 in 1996 and $1,116,000 in 1995. Investment in Joint Venture: In 1997, the Company signed a joint venture agreement with GMR Marketing to form the Featherlite/GMR Sports Group, LLC. The joint venture will focus on developing promotional events and implementing marketing strategies in the motorsports industry. The Company's investment in and the operations of the joint venture were not significant at December 31, 1997. Note 4. Income Tax Matters The components of the income tax provision charged to operations in 1997, 1996 and 1995 are as follows (In thousands): 1997 1996 1995 - -------------------------------------------------------------------------------- Current Federal $2,145 $425 $259 State 304 45 22 - -------------------------------------------------------------------------------- $2,449 $470 $281 - -------------------------------------------------------------------------------- Deferred Federal (229) 82 171 State (31) 10 19 - -------------------------------------------------------------------------------- (260) 92 190 - -------------------------------------------------------------------------------- Total $2,189 $562 $471 ================================================================================ A reconciliation of the provision for income taxes at the federal statutory rate to the provision for income taxes in the financial statement is as follows: 1997 1996 1995 - -------------------------------------------------------------------------------- Provision at statutory rate $1,910 $478 $421 State income taxes, net of Federal income tax benefit 253 60 38 Other 26 24 12 - -------------------------------------------------------------------------------- Total $2,189 $562 $471 ================================================================================ Deferred tax assets and liabilities consist of the following components as of December 31, 1997 and 1996 (In thousands): 1997 1996 - -------------------------------------------------------------------------------- Deferred Tax Assets: Accrued expenses $383 $270 Accrued warranty reserve 209 100 Inventory allowances 168 64 Receivable allowances 64 47 - -------------------------------------------------------------------------------- $824 $481 - -------------------------------------------------------------------------------- Deferred Tax Liabilities: Depreciation ($682) ($599) - -------------------------------------------------------------------------------- Net deferred tax assets (liabilities)$142 $(118) ================================================================================ Note 5. Financing Arrangements Other Notes Payable: At December 31, 1997 and 1996, other notes payable consisted of the following (In thousands): 1997 1996 - -------------------------------------------------------------------------------- Wholesale floor plan line of credit* $6,072 $1,817 Insurance premiums; interest at 6.0%, payable in monthly installments 443 438 - -------------------------------------------------------------------------------- $6,515 $2,255 ================================================================================ *The Company has a wholesale finance agreement with a financial services company for a $7.5 million line of credit to finance completed new and used motorcoaches held in inventory. Amounts borrowed are subject to defined percentages of eligible inventory. Borrowings bear interest at prime (8.5% at December 31, 1997) and are secured by the motorcoach financed and other assets of the Company. The agreement includes covenants requiring maintenance of defined levels of tangible net worth, leverage and working capital. The Company was allowed by the lender to exceed the leverage requirement as December 31, 1997. The agreement is subject to renewal on October 31, 1999. Bank Lines of credit: The Company has a Credit Agreement with a bank that provides for a working line of credit to provide for borrowing equal to the lesser of $12,000,000 or a defined percentage of eligible trade accounts receivable and inventory. Borrowings under this arrangement, which bear interest at prime less .5% (8.0% at December 31, 1997), are secured by substantially all assets of the Company. The agreement includes covenants requiring maintenance of defined levels of working capital, tangible net worth, leverage, and cash flow and prohibits the payment of dividends without approval of the bank. The Company was allowed by the Bank to exceed the leverage requirements at December 31, 1997. Borrowings against this line of credit were $9,800,000 and $9,100,000 at December 31, 1997 and 1996, respectively. These borrowings are classified as long-term debt as the Credit Agreement matures and is subject to renewal on July 31, 1999. Long term debt: (In thousands) 1997 1996 - -------------------------------------------------------------------------------- Bank notes payable; interest to 8.5%, payable in varying monthly installments plus interest through 2002; contains same collateral and covenant provisions as working capital line of credit. $6,492 $2,176 Bank notes payable; interest at prime plus .75%, adjusted quarterly (9.25% at December 31, 1997); payable in varying monthly installments with interest through November, 1999; collateralized by aircraft 5,457 1,559 Notes and capitalized leases to 1997 1996 banks and others, interest to 11.5%, payable in varying monthly installments through 2003; collateralized by real estate and partial shareholder guarantees. 1,495 1,656 - -------------------------------------------------------------------------------- Total 13,448 5,391 Less current maturities (1,173) (1,145) - -------------------------------------------------------------------------------- $12,275 $ 4,246 ================================================================================ Annual maturities during the five years subsequent to December 31, 1997 are (In thousands): 1998 - $1,173; 1999 - $7,014; 2000 - $1,061; 2001 - $421; and 2002 - $3,710. 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 the 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 amount of $14,888,000 at December 31, 1997. The Company has two separate agreements which provide approximately $620,000 for job training purposes. The amounts are to be repaid, together with interest, over a ten year period from state withholding taxes on employees at the Company's Iowa facilities. The Company may be required to provide funds for the repayment of these training credits if sufficient withholding and unused training funds are not available. 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 $2.4 million, including $844,000 accrued for estimated unpaid claims at December 31, 1997. The Company has obtained an irrevocable standby letter of credit in the amount of $1,245,000 in favor of the workers compensation claim administrator. The Company leases certain office and production facilities under various operating leases that expire at varying dates through fiscal 2007. Rental expense under these operating leases for the years ended December 31, 1997, 1996 and 1995 was approximately $327,000, $68,000 and $0. The approximate annual minimum future lease payments under these operating leases for the five years after December 31, 1997 are as follows (In thousands): 1998- $497; 1999- $424; 2000-$374; 2001- $366; 2002 - $359. 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 consultation 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. Note 7. Deferred Grant Income Deferred grant income consists of forgivable loans (grants) in an aggregate amount of $2,030,000 provided to the Company by various governmental units to assist with the establishment of the Company's headquarters and production facility in Cresco, Iowa and its Nashua, Iowa production facility. These loans are wholly or partially forgivable based on fulfillment and retention of job creation goals through June, 1999. These grants are being recognized as income as they are earned. Accumulated income recognized for these grants was $1,792,000 at December 31, 1997, $1,719,000 at December 31, 1996, and $1,646,000 at December 31, 1995. Note 8. Related Party Transactions The Company recorded sales to authorized Featherlite dealers and Featherlite Credit, that are related entities under common ownership, of $2,326,000, $3,154,000, and $1,276,000, in 1997, 1996, and 1995, respectively. The Company has leased various equipment from certain shareholders during current and prior periods. Payments related to these leases totaled $57,000 in 1997, $91,000 in 1996, and $91,000 in 1995. In 1997, 1996 and 1995, the Company entered into agreements with Featherlite Credit Corporation, related under common ownership, to compensate it for various credit related services it provided for the Company, including the development of the Featherlite Master Lease program. Expenses under this agreement totaled $42,000 in 1997, $100,000 in 1996 and $170,000 in 1995. Also under the terms of this agreement, Featherlite Credit will reimburse the Company $96,000, $116,000 and $88,000 for salaries and other costs paid by the Company in 1997, 1996 and 1995, respectively. Note 9. Shareholders' Investment Capitalization: The Company's authorized capital is 40,000,000 shares of no par Common Stock and 10,000,000 shares of undesignated stock. In 1994, the Company completed an initial public offering of 1,955,000 shares of Common Stock including an over-allotment option to the underwriter for an additional 255,000 shares at a price of 120 percent of the initial public offering price of $6.00 per share. Stock option Plan: At December 31, 1997, the Company has a stock option plan which reserves up to 550,000 shares of Common Stock for issuance as options. These options may be granted to employees and directors at the discretion of the Board of Directors, which may grant either incentive stock options or non-statutory stock options. All incentive options must be granted at no less than 100 percent of the fair market value of the stock on the date of grant, (110 percent for employees owning more than 10 percent of fair market value on the date of grant.) The options expire at varying dates generally not to exceed ten years from date of grant and are non-transferable. Grants under this plan are accounted for using APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the stock option plan. Had compensation cost for the stock option plan based on the grant date fair value of awards (the method described in FASB Statement No. 123) reported net income and earnings per share would have been reduced to the pro forma amounts shown below. 1997 1996 1995 - -------------------------------------------------------------------------------- Net income (000's) As reported $3,282 $ 842 $ 701 Pro forma 3,164 728 701 ================================================================================ Basic earnings per share As reported $ .52 $ .13 $ .12 Pro forma .51 .12 .11 ================================================================================ Diluted earnings per share As reported $ .52 $ .13 $ .12 Pro forma .50 .12 .11 ================================================================================ The fair value of each option has been estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997, 1996 and 1995, respectively: dividend rate of 0% for all years; price volatility of 47.5, 48.5 and 50.2%, risk-free interest rates of 6.3, 6.3 and 6.6% for the five year options and 6.5 and 6.8% for the ten year options and expected lives of 5 and 10 years for the five and ten year options respectively. A summary of the status of the stock option plan at December 31, 1997, 1996 and 1995 and changes during the years ended on those dates and as follows: Weighted Average 1997 Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding, beginning of year 249,380 $6.02 Granted 62,000 6.77 Exercised/forfeited - - - -------------------------------------------------------------------------------- Outstanding, end of year 311,380 6.17 ================================================================================ Exercisable at end of year 228,380 ================================================================================ Weighted-average fair value per share of options granted during the year $3.87 ================================================================================ Weighted Average 1996 Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding, beginning of year 159,168 $6.28 Granted 90,212 5.54 Exercised/forfeited - - - -------------------------------------------------------------------------------- Outstanding, end of year 249,380 $6.02 ================================================================================ Exercisable at end of year 158,755 ================================================================================ Weighted-average fair value per share of options granted during the year $3.74 ================================================================================ Weighted Average 1995 Shares Exercise Price - -------------------------------------------------------------------------------- Outstanding, beginning of year 152,500 $6.16 Granted 6,668 9.00 Exercised/forfeited - - - -------------------------------------------------------------------------------- Outstanding, end of year 159,168 $6.28 ================================================================================ Exercisable at end of year 97,918 ================================================================================ Weighted-average fair value per share of options granted during the year $4.68 ================================================================================ At December 31, 1997, the options outstanding have exercise prices ranging from $5.50 to $9.00 and a weighted average remaining contractual life of 7.9 years. All but 6,668 shares are exercisable at prices ranging from $5.50 to $7.25. All of the non-vested options are expected to eventually vest. Note 10. Business Combination In July, 1996, the Company acquired all the assets of Vantare International, Inc., a privately-held converter of purchased bus shells into luxury motorcoaches, in exchange for 300,000 restricted shares of the Company's common stock with a value of approximately $1.8 million and the assumption of certain liabilities. An additional 100,000 shares may be issued pending the attainment of certain defined net earnings, as determined annually, through December 31, 2000. None of these additional shares were earned for the year 1997. This acquisition was accounted for as a purchase and accordingly, results of operations of Vantare have been included in the accompanying statement of operations since July 1, 1996, the acquisition date. The Company recorded intangible assets of $3.2 million, including goodwill, trade name and certain other rights which are being amortized over 20 years. In October, 1995, the Company acquired all the assets of Diamond D Trailer Manufacturing, Inc., a privately-held manufacturer of steel trailers, for approximately $2.4 million, including cash and the assumption of certain liabilities. This acquisition was accounted for as a purchase and accordingly, results of operations of the acquired company, which are not significant to the Company's operations, have been included in the accompanying consolidated financial statements since the acquisition date. The purchase price was allocated on the basis of the estimated fair value of assets acquired and liabilities assumed with the remaining excess purchase price of $356,000 to be amortized over 15 years. Note 11. Segment Reporting In 1997 and 1996 the Company had two principal business segments: trailers and motorcoaches. Prior to 1996, the Company only manufactured and distributed trailers. Sales to customers outside of the United States represent less than 10% of consolidated sales. Information on business segments is as follows: (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Net sales Trailers $99,703 $84,421 $69,159 Motorcoaches 34,684 14,908 -- - -------------------------------------------------------------------------------- Total net sales $134,387 $99,329 $69,159 ================================================================================ Income (Loss) from operations Trailers $11,034 $5,680 $4,277 Motorcoaches 813 775 -- General corporate expenses (5,222) (4,261) (3,784) Other income/(expense), net (1,154) (790) 679 - -------------------------------------------------------------------------------- Income before income taxes $5,471 $1,404 $1,172 ================================================================================ Identifiable assets Trailers $39,491 $31,708 $35,881 Motorcoaches 21,882 13,646 968 General corporate assets 14,135 8,180 9,235 - -------------------------------------------------------------------------------- Total assets as reported $75,508 $53,534 $46,084 ================================================================================ Capital Expenditures Trailers $1,382 $ 1,034 $2,066 Motorcoaches 588 18 -- Corporate 1,003 491 876 - -------------------------------------------------------------------------------- Total capital expenditures $2,973 $1,543 $2,942 ================================================================================ Depreciation and Amortization Trailers $713 $ 945 $ 911 Motorcoaches 270 106 -- Corporate 627 403 333 - -------------------------------------------------------------------------------- Total depreciation and amortization $1,610 $1,454 $1,244 ================================================================================ *Certain 1996 and 1995 amounts previously reported have been reclassified between segments to be consistent with 1997 classifications. Note 12. Earnings per Share Effective December 31, 1997 the Company adopted FASB Statement No. 128, Earnings per Share. The statement requires the presentation of earnings per share by all entities that have common stock or potential common stock, such as options, warrants and convertible securities outstanding that trade in a public market. Those entities that have only common stock outstanding are required to present basic earnings per share amounts. All other entities are required to present basic and diluted per share amounts. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce a loss or increase the income per common share from continuing operations. As required by the statement, the Company has restated all per share information from prior years to conform to the statement. The weighted-average number of shares of common stock used to compute the basic earnings per share were increased by 59,354 in 1997, 1,004 in 1996, and 51,431 in 1995, for the assumed exercise of the stock options and warrants (Note 9), in computing the diluted earnings per share data. Basic and diluted earnings per share, as calculated under FAS Statement No. 128, are not materially different than primary and fully diluted earnings per share as previously reported for all prior periods. To the Board of Directors Featherlite Mfg., Inc. Cresco, Iowa We have audited the accompanying consolidated balance sheets of Featherlite Mfg., Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' investment, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Featherlite Mfg., Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Rochester, Minnesota February 2, 1998 EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Featherlite Mfg., Inc. for the year ended December 31, 1997 of our report on the consolidated financial statements dated February 2, 1998 which appears on page 24 of the annual report to shareholders for the year ended December 31, 1997. We also consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-90860) of the Featherlite Mfg., Inc. 1994 Stock Option Plan and Registration Sttement on Form S-3 (No. 333-20969) of our reports, each dated February 2, 1998, on the consolidated financial statements of Featherlite Mfg., Inc., which reports and statements appear, or are incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1997. /s/ McGladrey & Pullen, LLP Rochester, Minnesota March 28, 1998 EX-27 5 FDS FOR YEAR END 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. Dollars YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 1,632 0 7,050 0 39,664 50,280 20,460 (6,280) 75,508 28,637 22,075 0 0 14,220 9,657 75,508 134,387 134,387 111,764 127,762 0 0 1,800 5,471 2,189 3,282 0 0 0 3,282 .52 .52
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