UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
===========================================================================
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
JUNE 30, 1998 0-13611
SPARTAN MOTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-2078923
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 REYNOLDS ROAD
CHARLOTTE, MICHIGAN 48813
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (517) 543-6400
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS AUGUST 12, 1998
----- ---------------
Common stock, $.01 par value 12,566,491 shares
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SPARTAN MOTORS, INC.
INDEX
=========================
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1998
(Unaudited) and December 31, 1997 1
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1998 and 1997
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPARTAN MOTORS, INC.
CONSOLIDATED BALANCE SHEETS
======================================
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 955,421 $ 4,812,438
Investment securities 2,837,257 2,893,167
Accounts receivable, less allowance
for doubtful accounts of $413,000
in 1998 and $924,000 in 1997 29,304,306 26,875,828
Inventories (Note 4) 38,334,595 27,033,117
Deferred tax benefit 3,057,586 2,861,250
Federal taxes receivable 88,678 513,379
Other current assets 697,298 591,909
----------- -----------
TOTAL CURRENT ASSETS 75,275,141 65,581,088
PROPERTY, PLANT, AND EQUIPMENT,
net of accumulated depreciation
of $10,537,000 and $9,734,000 in
1998 and 1997, respectively 11,789,662 11,891,496
Equity Investment in Affiliate (Note 5) -- --
GOODWILL, net of accumulated amortization
of $269,000 and $77,000 in 1998 and
1997, respectively 5,488,101 3,378,408
-1-
OTHER ASSETS 13,830 394,638
----------- -----------
TOTAL ASSETS $92,566,734 $81,245,630
=========== ===========
See notes to consolidated financial statements.
-2-
SPARTAN MOTORS, INC.
CONSOLIDATED BALANCE SHEETS
======================================
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 55,000
Accounts payable 13,944,401 $12,001,995
Other current liabilities and
accrued expenses 1,946,624 1,469,211
Accrued warranty expense 3,194,523 3,070,780
Accrued customer rebates 495,819 695,367
Taxes on income 1,973,304 1,708,090
Accrued compensation and related taxes 1,266,033 1,301,525
Accrued vacation 702,380 720,788
Deposits from customers 1,391,712 3,184,367
----------- -----------
TOTAL CURRENT LIABILITIES 24,969,796 24,152,123
LONG-TERM DEBT 19,122,156 9,603,785
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value: 2,000,000
shares authorized (none issued)
Common Stock, $.01 par value, 23,900,000
authorized, issued 12,566,491 shares
in 1998 and 12,335,960 shares in 1997 125,665 123,360
Additional Paid in Capital 24,210,129 22,700,965
Retained earnings 24,188,317 24,683,476
Valuation allowance (49,329) (18,079)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 48,474,782 47,489,722
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $92,566,734 $81,245,630
=========== ===========
See notes to consolidated financial statements.
-3-
SPARTAN MOTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
======================================
THREE MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
----------- -----------
SALES $55,504,257 $39,126,432
COST OF PRODUCTS SOLD 47,932,264 33,323,658
----------- -----------
GROSS PROFIT 7,571,993 5,802,774
OPERATING EXPENSES
Research and development 1,301,747 1,140,892
Selling, general and administrative 4,635,631 3,917,338
----------- -----------
OPERATING INCOME 1,634,615 744,544
OTHER INCOME/(EXPENSE)
Interest Expense (267,082) (192,885)
Interest and Other Income 201,440 342,169
----------- -----------
EARNINGS BEFORE TAXES AND EQUITY
IN LOSS OF AFFILIATE 1,568,973 893,828
EQUITY IN LOSS OF AFFILIATE 1,521,000 961,770
----------- -----------
EARNINGS (LOSS) BEFORE TAXES ON INCOME 47,973 (67,942)
TAXES ON INCOME 502,109 353,400
----------- -----------
NET LOSS $ (454,136) $ (421,342)
=========== ===========
BASIC AND DILUTED NET EARNINGS PER SHARE $ (0.04) $ (0.03)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 12,564,000 12,411,000
=========== ===========
-4-
SPARTAN MOTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
----------- -----------
Net Loss $ (454,136) $ (421,342)
Unrealized gains/(losses) on investment securities,
net of tax 8,909 (17,482)
---------- ----------
TOTAL COMPREHENSIVE LOSS $ (445,227) $ (438,824)
========== ==========
See notes to consolidated financial statements.
-5-
SPARTAN MOTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
======================================
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
------------ -----------
SALES $114,660,512 $84,914,015
COST OF PRODUCTS SOLD 98,402,743 71,977,160
------------ -----------
GROSS PROFIT 16,257,769 12,936,855
OPERATING EXPENSES
Research and development 2,619,047 2,252,220
Selling, general, and administrative 8,855,314 7,243,595
------------ -----------
OPERATING INCOME 4,783,408 3,441,040
OTHER INCOME/(EXPENSE)
Interest Expense (484,709) (447,453)
Interest and Other Income 495,390 715,083
------------ -----------
EARNINGS BEFORE TAXES AND EQUITY
IN LOSS OF AFFILIATE 4,794,089 3,708,670
EQUITY IN LOSS OF AFFILIATE 2,771,000 2,630,971
------------ -----------
EARNINGS BEFORE TAXES ON INCOME 2,023,089 1,077,699
TAXES ON INCOME 1,538,988 1,448,400
------------ -----------
NET EARNINGS (LOSS) $ 484,101 $ (370,701)
============ ===========
BASIC AND DILUTED NET EARNINGS PER SHARE $ 0.04 $ (0.02)
============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 12,488,000 12,411,000
============ ===========
-6-
SPARTAN MOTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
------------ -----------
Net Earnings (Loss) $484,101 $(370,701)
Unrealized losses on investment securities,
net of tax (31,250) (120,383)
-------- ---------
TOTAL COMPREHENSIVE EARNINGS/(LOSS) $452,851 $(491,084)
======== =========
See notes to consolidated financial statements.
-7-
SPARTAN MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
======================================
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 484,101 $ (370,701)
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,175,992 984,500
Gain on sales of assets and
marketable securities -- (74,576)
Equity in net loss of affiliate 2,771,000 2,630,971
Decrease (increase) in:
Accounts receivable (2,078,692) 4,530,138
Inventories (8,088,080) (3,453,095)
Deferred tax benefit -- 471,632
Federal taxes receivable 424,701 925,000
Other assets 478,308 (205,834)
Increase (decrease) in:
Accounts payable 563,627 547,027
Other current liabilities and accrued expenses 383,681 (892,644)
Accrued warranty expense (111,257) 743,242
Accrued customer rebates (199,548) 35,028
Taxes on income 265,214 385,300
Accrued vacation (163,762) 52,003
Accrued compensation and related taxes (331,889) 188,016
Deposits from customers (2,251,794) --
----------- -----------
TOTAL ADJUSTMENTS (7,162,499) 6,866,748
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (6,678,398) 6,496,047
-8-
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (493,992) (731,150)
Proceeds from sales of property, plant
and equipment 25,245 18,600
Purchases of investment securities (364,976) (600,000)
Proceeds from sales of investment securities 400,000 5,086,322
Investment in Affiliate (2,771,000) (10,000,000)
Acquisition of subsidiary, net of cash received (1,661,787) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,866,510) (6,226,228)
(Continued)
-9-
SPARTAN MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
=======================================
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ 55,000 _________
Payments on notes payable (236,177) _________
Proceeds from long-term debt 9,500,000 $ 5,000,000
Payments on long-term debt (677,137) (541,217)
Net proceeds from exercise of stock options 63,265 80,124
Purchase of treasury stock (137,225) (556,036)
Dividends paid (879,655) (865,513)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES: 7,687,891 3,117,358
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,857,017) 3,387,177
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,812,438 4,912,001
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 955,421 $ 8,299,178
=========== ===========
SUPPLEMENTAL DISCLOSURES: Cash paid for interest was $563,000 and $450,000
for the six months ended June 30, 1998 and 1997, respectively. Cash paid
for income taxes was $1,359,000 and $124,000 for the six months ended
June 30, 1998 and 1997, respectively.
-10-
SPARTAN MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
======================================
NOTE 1 For a description of the accounting policies followed refer to the
notes to the Company's annual consolidated financial statements for
the year ended December 31, 1997, included in Form 10-K filed with
the Securities and Exchange Commission on March 31, 1998.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," which requires that all items recognized as components of
other comprehensive income be reported in the financial statements.
Comprehensive income for the Company generally represents items
that are reported as components of shareholders' equity in
accordance with generally accepted accounting principles but have
not been recognized as part of net income such as unrealized gains
or losses on investment securities and foreign currency translation
adjustments.
NOTE 2 The accompanying unaudited interim consolidated financial
statements reflect all normal and recurring adjustments that are
necessary for fair presentation of the financial position as of
June 30, 1998, and the results of operations for the six month
periods ended June 30, 1998 and 1997.
NOTE 3 The results of operations for the six-month period ended June 30,
1998, are not necessarily indicative of the results to be expected
for the full year.
NOTE 4 Inventories consist of raw materials and purchased components, work
in process, and finished goods and are summarized as follows:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Finished goods $ 3,684,776 $ 2,801,432
Raw materials and
purchased components 31,505,011 21,721,297
Work in process 4,464,808 3,612,888
Obsolescence reserve (1,320,000) (1,102,500)
----------- -----------
$38,334,595 $27,033,117
=========== ===========
-11-
SPARTAN MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
======================================
NOTE 5 The Company has a 33% interest in Carpenter Industries, Inc.
("Carpenter"). Carpenter is a manufacturer of school bus bodies
and chassis. The Company made additional equity investments in
Carpenter in the first and second quarters of $1,250,000 and
$1,521,000, respectively, which were written off to record the
Company's share of Carpenter's net loss for the respective
quarters. The Company accounts for its investment in Carpenter
using the equity method of accounting. A summary of Carpenter's
balance sheet as of June 30, 1998 and the results of its operations
for the six-month period ended June 30, 1998 are as follows:
NOTE 5
(continued)
JUNE 30, 1998
-------------
BALANCE SHEET
Current Assets $ 20,746,592
Total Assets 356,466,698
Current Liabilities 35,768,560
Total Liabilities 46,610,993
Stockholders' Equity (10,964,325)
Total Liabilities and Shareholders' Equity 35,646,668
INCOME STATEMENT
Revenues 29,527,204
Loss from Operations (12,373,939)
Net Loss (14,393,634)
Carpenter received a going concern opinion from its auditors for
its year ended December 31, 1997. Therefore, the Company's
investment in Carpenter had been impaired. The Company has written
down their investment in Carpenter to zero.
On March 31, 1998, the shareholders of Carpenter, including the
Company, entered into a Contribution, Subscription and Stock
Purchase Agreement whereby $1.0 million of new capital was invested
by two shareholders and a commitment was made by the third
shareholder to invest approximately $0.5 million.
-12-
SPARTAN MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
======================================
NOTE 6 During the six months ended June 30, 1998, shareholders' equity
changed as follows:
Balance at December 31, 1997 $47,489,722
Net earnings 484,101
Exercise of stock options 63,265
Purchase of treasury stock (137,225)
Stock issued in purchase of subsidiary 1,485,824
Valuation allowance-investment
securities (31,250)
Dividends paid (879,655)
-----------
Balance at June 30, 1998 $48,474,782
===========
NOTE 7 On January 7, 1998, the Company purchased all of the outstanding
stock of Road Rescue, Inc., ("Road Rescue") a manufacturer of
emergency vehicles, including ambulances, rescue vehicles and
critical care units. The purchase price paid for Road Rescue was
approximately $3.3 million, including cash consideration of
approximately $1.8 million with the balance funded through the
issuance of 240,133 shares of the Company's Common Stock. The fair
market value of the Company's Common Stock on the effective date of
the transaction was $6-3/16 per share. Funds for the payment of the
purchase price were provided primarily through the Company's line
of credit. The acquisition was accounted using the purchase method
and, accordingly, the assets and liabilities of the acquired entity
have been recorded at their estimated fair value at the date of the
acquisition. The excess of purchase price over the estimated fair
value of the net assets acquired, approximately $2.4 million, has
been recorded as goodwill, which is being amortized over 15 years.
The fair values of the assets acquired and the liabilities assumed
-13-
SPARTAN MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
======================================
were as follows: current assets of approximately $3.9 million;
property, plant and equipment of approximately $0.4 million; other
assets of approximately $0.1 million; current liabilities of
approximately $3.3 million; and long-term liabilities of
approximately $0.3 million.
As described in the Company's financial statements for the year
ended December 31, 1997, the Company acquired two other emergency
vehicle manufacturers in 1997. The following unaudited pro forma
results of operations for the six months ended June 30, 1998 and
1997, assume all three acquisitions occurred at the beginning
of the respective periods. These unaudited pro forma results
have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the
acquisitions been in effect on the dates indicated, or of the
results which may occur in the future.
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1997
------------ ------------
Net sales $114,660,512 $109,168,774
Net earnings 484,101 193,338
Basic and diluted earnings per share $ 0.04 $ 0.02
NOTE 8 The Financial Accounting Standards Board has issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related
Information." This statement is effective for fiscal years
beginning after December 15, 1997. As interim financial statements
are not required to reflect this statement in the first year of
adoption, the Company will adopt SFAS No. 131 during the fourth
quarter of 1998.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the major elements impacting the Company's
financial and operating results for the period ended June 30, 1998 compared
to the period ended June 30, 1997. The comments that follow should be read
in conjunction with the Company's consolidated financial statements and
related notes contained in this Form 10-Q.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of the Company's consolidated statements of net earnings, on an actual
basis, as a percentage of revenues:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of Product Sold 86.4% 85.2% 85.8% 84.8%
----- ----- ----- -----
Gross Profit 13.6% 14.8% 14.2% 15.2%
Operating Expenses:
Research and development 2.3% 2.9% 2.3% 2.7%
Selling, general, and administrative 8.3% 10.0% 7.7% 8.5%
----- ----- ----- -----
Income from operations 3.0% 1.9% 4.2% 4.0%
Other (0.2)% 0.4% 0.0% 0.3%
----- ----- ----- -----
Earnings before loss on equity investment,
minority interest and taxes on income 2.8% 2.3% 4.2% 4.3%
Equity in loss of affiliate 2.7% 2.5% 2.4% 3.1%
Taxes on income 0.9% 0.9% 1.4% 1.7%
----- ----- ----- -----
Net earnings (loss) (0.8)% (1.1)% 0.4% (0.5)%
===== ===== ===== =====
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
THREE-MONTH PERIOD ENDED JUNE 30, 1998, COMPARED TO THE THREE-MONTH PERIOD
ENDED JUNE 30, 1997
For the three months ended June 30, 1998, consolidated sales increased
$16.4 million (41.9%) over the amount reported for the same period in the
previous year. The Emergency Vehicle Group ("EVG") provided approximately
$12.6 million in sales during the second quarter of 1998 and was not
consolidated with the Company during the second quarter of 1997.
Sales from the Chassis Group for the three months ending June 30, 1998
increased $3.8 million (9.7%) compared to the sales reported for the same
period in 1997. For the second quarter of 1998, Motorhome chassis sales
increased 24.9% compared to the second quarter of 1997, primarily due to
the increase in market demand for recreational vehicles. Fire Truck
chassis sales decreased 20.5% during the second quarter of 1998 compared to
the same period for 1997. With the acquisition of two of the Company's
fire truck chassis customers, Luverne Fire Apparatus Co., Ltd. ("Luverne")
and Quality Manufacturing, Inc. ("Quality"), $2.1 million of chassis
that were in the inventory of the new subsidiaries at June 30, 1998 had to
be eliminated from consolidated sales. In previous years, these chassis
would have been considered sales for the Company. Bus sales for the second
quarter of 1998 have increased 70.1% over the same period for 1997
primarily due to the introduction of Z2, the Company's new tour bus
chassis.
Gross profit increased $1.8 million for the second quarter of 1998 compared
to the second quarter of 1997. The increase is primarily due to the
contribution of the EVG and from the increased sales of the Chassis Group.
Gross profit as a percentage of sales declined from 14.8% for the second
quarter of 1997 to 13.6% for the second quarter of 1998. The EVG operates
at lower margins than the Chassis Group since their value added is in the
body and not the chassis. Also, the change in product mix, the increase
in bus chassis sales and decrease in fire truck chassis sales during the
second quarter of 1998 compared to the second quarter of 1997, depressed
the Company's gross margin percentage.
Operating expenses declined from 12.9% of sales for the second quarter of
1997 compared to 10.6% for the second quarter of 1998. The decline is
primarily due to a 12.3% decline in Chassis Group operating expenses when
comparing the second quarter of 1998 to the second quarter of 1997. Also,
the reduction in operating expenses as a percentage of sales reflect the
Company's continued efforts to increase efficiencies and reduce costs.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The equity in loss of affiliate is the result of Carpenter losing $9.8
million during the second quarter of 1998. In an effort to minimize the
impact of the loss, during the first quarter of 1998, Carpenter management
began to dispose of fixed assets and inventory that are nonessential to
continuing operations and have streamlined their production efforts and
reduced production and operating costs.
On March 31, 1998, the shareholders of Carpenter, including the Company,
entered into a Contribution, Subscription and Stock Purchase Agreement
whereby $1.0 million of new capital was invested by two shareholders and a
commitment was made by the third shareholder to invest approximately $0.5
million. Carpenter is actively pursuing the refinancing of its entire debt
and upon the completion of such refinancing, with certain termination
rights, the shareholders have agreed to make additional contributions to
Carpenter.
Total chassis orders received decreased 31% during the three months ended
June 30, 1998 compared to the same period in 1997. The decrease in orders
is primarily attributed to the Company's school bus and fire truck product
lines. Based on average order lead-time, the Company estimates that
approximately one-half of the motorhome, one-third of the bus/specialty
and none of the fire truck orders received during the six-month period
ended June 30, 1998 were produced and delivered by June 30, 1998.
At June 30, 1998, the Company had approximately $108.6 million in backlog
chassis orders compared with a backlog of approximately $56.1 million for
the same period in 1997. The backlog for transit buses, at June 30, 1998,
is 156.0% above the previous year due to the Z2 chassis sales, while
motorhome backlog is 63.0% above the comparable date in 1997 in response to
the strengthening of the recreational vehicle market. Also, the EVG
represents backlog of $28.1 million that would not have been included
in the 1997 backlog. While orders in backlog are subject to
modification, cancellation or rescheduling by customers, the Company has
not experienced significant modification, cancellation or rescheduling of
orders in the past. Although the backlog of unfilled orders is one of
many indicators of market demand, several factors, such as changes in
production rates, available capacity, new product introductions and
competitive pricing actions, may affect actual sales. Accordingly, a
comparison of backlog from period to period is not necessarily indicative
of eventual actual shipments.
SIX-MONTH PERIOD ENDED JUNE 30, 1998, COMPARED TO THE SIX-MONTH PERIOD
ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998 were $114.7 million
compared with $84.9 million for the same period in 1997, an increase of
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
26.0%. Net income for the six months ended June 30, 1998 was $0.5 million
compared with a net loss of $0.4 million for the six months ended June 30,
1997, an increase of 225.0%. The increase in revenues and income is
primarily attributable to the contribution of the EVG and the reduction of
operating expenses. Total chassis production increased 10.1% with fire
truck production down 31.7%, which includes the elimination of inter-
company sales to Quality and Luverne. These entities were customers
in the previous year before being acquired by the Company in the third
quarter of 1997. Motorhome production increased 17.5% from the previous
year due to the strong market demand in the recreational vehicle market.
Gross profit as a percentage of sales declined 6.6%, from 15.2% to 14.2%,
during the six months ended June 30, 1998. The EVG operates at lower
margins than the Chassis Group since their value added is in the body
and not the chassis. Also, the change in product mix, the increase
in bus chassis sales and decrease in fire truck chassis sales, in
comparison to the same six-month period in the previous year, depressed
the Company's gross margin percentage.
Operating expenses for the six months ended June 30, 1998 declined as a
percentage of sales from 11.2% to 10.0% which is a decrease of 10.7%. The
decline is primarily due to a 7.5% decline in Chassis Group operating
expenses when comparing the first six months of 1998 to the first six
months of 1997. The reduction in operating expenses reflects the Company's
continued efforts to increase efficiencies and reduce costs.
Total chassis orders received increased 13.6% during the six months ended
June 30, 1998 compared to the same period in 1997. The increase in orders
is primarily attributed to the Company's motorhome and transit bus product
lines. Based on average order lead-time, the Company estimates that
approximately one-half of the motorhome, one-third of the bus/specialty and
none of the fire truck orders received during the six-month period ended
June 30, 1998 were produced and delivered by June 30, 1998.
At June 30, 1998, the Company had approximately $108.6 million in backlog
chassis orders compared with a backlog of approximately $56.1 million for the
same period in 1997. Part of the increase is due to backlog for transit
buses at June 30, 1998, which is 156.0% above the previous year due to
the Z2 chassis sales, while motorhome backlog is 63.0% above the
previous in response to the strengthening of the recreational vehicle
market. Also, the EVG represents backlog of $28.6 million that would not
have been included in the 1997 backlog. While orders in backlog are
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
subject to modification, cancellation or rescheduling by customers, the
Company has not experienced significant modification, cancellation or
rescheduling of orders in the past. Although the backlog of unfilled orders
is one of many indicators of market demand, several factors, such as
changes in production rates, available capacity, new product
introductions and competitive pricing actions, may affect actual sales.
Accordingly, a comparison of backlog from period to period is not
necessarily indicative of eventual actual shipments.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, cash used in operating activities
was $6.7 million compared to cash provided by operations of $6.5 million
for the six months ended June 30, 1997. The use of cash primarily relates
to an increase in inventory since December 31, 1997. This inventory build
up was due to the change in engine design to meet EPA requirements and the
components associated with this design change. Working capital increased
$9.1 million, from $50.5 million to $41.4 million, during the six months
ended June 30, 1998. See the Consolidated Statement of Cash Flows
contained in this Form 10-Q for further information regarding the $3.8
million decrease in cash and cash equivalents from $4.8 million at December
31, 1997 to $955,421 at June 30, 1998.
Shareholders' equity increased by approximately $1.0 million as of June 30,
1998. This change primarily is due to the result of net earnings of $0.5
million and stock issued in the purchase of Road Rescue of $1.5
million, offset by payment of $0.9 million in dividends. See Note 7 of the
financial statements in this Form 10-Q for further information regarding the
acquisition of Road Rescue.
The Company's debt to equity ratio increased to 39.4% on June 30, 1998,
compared with 20.2% at December 31, 1997 due to the $1.5 million of term
debt used to finance the acquisition of Road Rescue and the increase in
borrowing due to the increased inventory.
The Company's primary unsecured line of credit with a bank provides for
maximum borrowings of $20.0 million at 45 basis points above the 30-day
LIBOR, which was 6.0% at June 30, 1998. As of June 30, 1998, there were
borrowings of $19.1 million against this line. In addition, under the
terms of its credit agreement with its bank, the Company has the ability to
issue letters of credit totaling $0.4 million. At March 31, 1998, the
Company had outstanding letters of credit totaling $0.2 million. The
Company also has unsecured lines of credit at its subsidiary locations for
$0.75 million and $1.0 million. There were borrowings of $55,000 on one of
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
these lines of credit at June 30, 1998. The Company believes it has
sufficient resources from cash flows from operating activities and, if
necessary, from additional borrowings under its lines of credit to satisfy
ongoing cash requirements for the next 12 months.
EFFECT OF INFLATION
Inflation affects the Company in two principal ways. First, the Company's
debt is tied to the prime and LIBOR rates so that increases affecting
interest rates may be translated into additional interest expense. Second,
general inflation impacts prices paid for labor, parts and supplies.
Whenever possible, the Company attempts to cover increased costs of
production and capital by adjusting the selling prices of its products.
However, the Company normally does not attempt to negotiate inflation-based
price adjustment provisions into its contracts. Since order lead times can
be as much as six months, the Company has limited ability to pass on cost
increases to its customers on a short-term basis. In addition, the markets
served by the Company are competitive in nature, and competition limits the
pass through of cost increases in many cases. The Company strives to
minimize the effect of inflation through cost reductions and improved
productivity.
YEAR 2000 COMPLIANCE
The Company is currently in the process of addressing a potential problem
that is facing all users of automated information systems. The problem is
that many computer systems that process transactions based on two digits
representing the year of transaction may recognize a date using "00" as the
year 1900 rather than the year 2000. The problem could affect a wide
variety of automated information systems, in the form of software failure,
errors or miscalculations.
The Company established a Year 2000 task force and developed a plan to
prepare for the year 2000 in 1998. This plan began with the performance of
an inventory of software applications and communicating with third party
vendors and suppliers. The Company has a plan, which regularly is updated
and monitored by technical personnel. Management of the Company regularly
reviews plan status.
The Company will continue to assess the impact of the Year 2000 issue on
the remainder of its computer-based systems and applications throughout
1998. The Company's goal is to perform tests of its systems and
applications during 1998 and to have all systems and applications compliant
with the century change by December 31, 1998, allowing 1999 to be used for
full validation and testing.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The costs associated with the Year 2000 compliance primarily will consist
of personnel expense for staff dedicated to the effort and professional
fees paid to third party providers of remedial services. It is the
Company's policy to expense such costs as incurred. The Company also may
invest in new or upgraded technology that has definable value lasting
beyond 2000. In these instances, where Year 2000 compliance is merely
ancillary, the Company may capitalize and depreciate such an asset over its
estimated useful life.
In addition to reviewing its own computer operating systems and
applications, the Company will have formal communications with its
significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those of third parties'
failure to resolve their own Year 2000 issues. There is no assurance that
the systems of other companies on which the Company's systems rely will be
timely converted. If such modification and conversions are not made, or
are not completed timely, the Year 2000 issue could have an adverse impact
on the operations of the Company.
Based on currently available information, management does not presently
anticipate that the costs to address the Year 2000 issues will have an
adverse impact on the Company's financial condition, results of operation
or liquidity.
The date on which the Company believes it will complete the Year 2000
modifications is based on management's best estimates. There can be no
guarantee that these estimates will be achieved and actual results could
differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies
on which the Company's systems rely to modify or convert their systems to
be Year 2000 compliant, the ability to locate and correct all relevant
computer code and similar circumstances.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the chassis market, the economy and about Spartan itself.
Words such as "anticipates," "believes," "estimates," "expects,"
"forecasts," 'intends," "is likely," "plans," "projects," variations of
such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions
("Future Factors") that are difficult to predict with regard to timing,
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may differ materially from what may be expressed or forecasted in
such forward-looking statements. The Company undertakes no obligation to
update, amend or clarify forward-looking statements, as a result of new
information, future events or otherwise. Future Factors that could cause a
difference between a ultimate actual outcome and a preceding forward-
looking statement include, but are not limited to, changes in interest
rates; demand for products and services; the degree of competition by
competitors; changes in laws or regulations, including changes related to
safety standards adopted by NFPA; changes in prices, levies and
assessments; the impact of technological advances; government and
regulatory policy changes; trends in customer behaviors; dependence on key
personnel; and the vicissitudes of the world and national economy.
-22-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The annual meeting of shareholders of Spartan Motors, Inc. was held on
May 19, 1998. The purpose of the meeting was to elect directors and
transact any other business that properly came before the meeting.
The name of each director elected (along with the number of votes cast
for or authority withheld) is as follows:
VOTES CAST
AUTHORITY
ELECTED DIRECTORS FOR WITHHELD/AGAINST
Anthony G. Sommer
George Tesseris
David R. Wilson
The following persons continue to serve as directors: George W.
Sztykiel, William F. Foster, John E. Sztykiel, Charles E. Nihart, and James
C. Penman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following documents are filed as exhibits to this
report on Form 10-Q:
EXHIBIT NO. DOCUMENT
----------- --------
3.1 Spartan Motors, Inc. Restated Articles of Incorporation.
Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the period ended December 31, 1995,
and incorporated herein by reference.
3.2 Spartan Motors, Inc. Bylaws (restated to reflect all
amendments). Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1995, and incorporated herein by reference.
4.1 Restated Articles of Incorporation. See Exhibit 3.1 above.
4.2 Bylaws. See Exhibit 3.2 above.
-23-
4.3 Form of Stock Certificate. Previously filed as an exhibit
to the Registration Statement on Form S-18 (Registration No.
2-90021-C) filed on March 31, 1984, and incorporated herein
by reference.
4.4 Rights Agreement dated June 4, 1997, between Spartan Motors,
Inc. and American Stock Transfer and Trust Company.
Previously filed as an Exhibit to the Company's Form 8-A
filed on June 25, 1997, and incorporated herein by
reference.
10.1 Restated Spartan Motors, Inc. 1988 Non-Qualified Stock
Option Plan.* Previously filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1996, and incorporated herein by reference.
10.2 Restated Spartan Motors, Inc. 1984 Incentive Stock Option
Plan.* Previously filed as an Exhibit to the Registration
Statement on Form S-8 (Registration No. 33-28432) filed on
April 28, 1989, and incorporated herein by reference.
10.3 Restated Spartan Motors, Inc. 1994 Incentive Stock Option
Plan.* Previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1996, and incorporated herein by reference.
10.4 The Spartan Motors, Inc. 1996 Stock Option and Restricted
Stock Plan for Outside Market Advisors. Previously filed as
an Exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996, and incorporated herein
by reference.
10.5 Carpenter Industries, Inc. Stockholders' Agreement.
Previously filed as an Exhibit to the Company's Form 8-K
Current Report filed on January 21, 1997, and incorporated
herein by reference.
10.6 Contribution Agreement between Carpenter Industries LLC and
Carpenter Industries, Inc. Previously filed as an Exhibit
to the Company's Form 8-K Current Report filed on January
21, 1997, and incorporated herein by reference.
10.7 Carpenter Industries, Inc. Registration Rights Agreement.
Previously filed as an Exhibit to the Company's Form 8-K
Current Report filed on January 21, 1997, and incorporated
herein by reference.
27 Financial Data Schedule.
-24-
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during
the fiscal quarter ended June 30, 1998.
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Spartan Motors, Inc. has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SPARTAN MOTORS, INC.
Date: August 14, 1998 By /S/RICHARD J. SCHALTER
Richard J. Schalter
Secretary, Treasurer and Chief
Financial Officer
-26-
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT
----------- --------
3.1 Spartan Motors, Inc. Restated Articles of Incorporation.
Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the period ended December 31, 1995,
and incorporated herein by reference.
3.2 Spartan Motors, Inc. Bylaws (restated to reflect all
amendments). Previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1995, and incorporated herein by reference.
4.1 Restated Articles of Incorporation. See Exhibit 3.1 above.
4.2 Bylaws. See Exhibit 3.2 above.
4.3 Form of Stock Certificate. Previously filed as an exhibit
to the Registration Statement on Form S-18 (Registration No.
2-90021-C) filed on March 31, 1984, and incorporated herein
by reference.
4.4 Rights Agreement dated June 4, 1997, between Spartan Motors,
Inc. and American Stock Transfer and Trust Company.
Previously filed as an Exhibit to the Company's Form 8-A
filed on June 25, 1997, and incorporated herein by
reference.
10.1 Restated Spartan Motors, Inc. 1988 Non-Qualified Stock
Option Plan.* Previously filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1996, and incorporated herein by reference.
10.2 Restated Spartan Motors, Inc. 1984 Incentive Stock Option
Plan.* Previously filed as an Exhibit to the Registration
Statement on Form S-8 (Registration No. 33-28432) filed on
April 28, 1989, and incorporated herein by reference.
10.3 Restated Spartan Motors, Inc. 1994 Incentive Stock Option
Plan.* Previously filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1996, and incorporated herein by reference.
10.4 The Spartan Motors, Inc. 1996 Stock Option and Restricted
Stock Plan for Outside Market Advisors. Previously filed as
an Exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996, and incorporated herein
by reference.
10.5 Carpenter Industries, Inc. Stockholders' Agreement.
Previously filed as an Exhibit to the Company's Form 8-K
Current Report filed on January 21, 1997, and incorporated
herein by reference.
10.6 Contribution Agreement between Carpenter Industries LLC and
Carpenter Industries, Inc. Previously filed as an Exhibit
to the Company's Form 8-K Current Report filed on January
21, 1997, and incorporated herein by reference.
10.7 Carpenter Industries, Inc. Registration Rights Agreement.
Previously filed as an Exhibit to the Company's Form 8-K
Current Report filed on January 21, 1997, and incorporated
herein by reference.
27 Financial Data Schedule.
5
1,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
955,421
2,837,257
29,304,306
413,000
38,334,595
75,275,141
11,789,662
10,537,000
92,566,734
24,969,796
19,122,156
125,665
0
0
48,349,117
92,566,734
114,660,512
115,155,902
98,402,743
98,402,743
11,959,070
128,973
484,709
4,794,089
1,538,988
484,101
0
0
0
48,101
0.04
0.04
