**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(Mark One)**

**x****                         ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended September 30, 2006**

**OR**

**o****                            ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from           to           **

**CommissionFile No. 1-8183**

**SUPREME INDUSTRIES, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                     |   | **75-1670945**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

**2581 E. Kercher Rd., P.O. Box237, Goshen, Indiana  46528**

(Address ofprincipal executive offices)

Registrant’stelephone number, including area code:  **(574) 642-3070**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x   No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer.  Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act (check one):

Large accelerated filer   o  Accelerated filer  o  Non-accelerated filer  x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o  No  x

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

| Common Stock ($.10 Par  Value) | ** ** | **Outstanding at October 31, 2006** |
|--------------------------------|------------|-------------------------------------|
| **Class A**                    |       | **10,650,826**                      |
| **Class B**                    |       | **2,024,133**                       |

 

 

----

SUPREMEINDUSTRIES, INC.

CONTENTS
|                   | ** **                                                                                  | **Page No.** |
|-------------------|---------------------------------------------------------------------------------------------|--------------|
|              |                                                                                        |         |
| PART I.           | FINANCIAL  INFORMATION                                                                      |         |
|              |                                                                                        |         |
| ITEM 1.           | Financial  Statements:                                                                      |         |
|              |                                                                                        |         |
|              | Consolidated  Balance Sheets                                                                | 1            |
|              |                                                                                        |         |
|              | Consolidated Statements of Income                                                           | 3            |
|              |                                                                                        |         |
|              | Consolidated Statements of Cash Flows                                                       | 4            |
|              |                                                                                        |         |
|              | Notes to Consolidated Financial Statements                                                  | 5            |
|              |                                                                                        |         |
| ITEM 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11           |
|              |                                                                                        |         |
| ITEM 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 19           |
|              |                                                                                        |         |
| ITEM 4.           | Controls and  Procedures                                                                    | 19           |
|              |                                                                                        |         |
| PART II.          | OTHER INFORMATION                                                                           |         |
|              |                                                                                        |         |
| ITEM 1.           | Legal Proceedings                                                                           | 22           |
|              |                                                                                        |         |
| ITEM 1A.          | Risk Factors                                                                                | 22           |
|              |                                                                                        |         |
| ITEM 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 25           |
|              |                                                                                        |         |
| ITEM 3.           | Defaults  Upon Senior Securities                                                            | 25           |
|              |                                                                                        |         |
| ITEM 4.           | Submission  of Matters to a Vote of Security Holders                                        | 25           |
|              |                                                                                        |         |
| ITEM 5.           | Other Information                                                                           | 25           |
|              |                                                                                        |         |
| ITEM 6.           | Exhibits                                                                                    | 26           |
|              |                                                                                        |         |
|              |                                                                                        |         |
| SIGNATURES        |                                                                                        |
|              |                                                                                        |
| INDEX TO EXHIBITS |                                                                                        |
|              |                                                                                        |
| EXHIBITS          |                                                                                        |

 

----

 

**PART I. FINANCIAL INFORMATION**

**ITEM1.    FINANCIALSTATEMENTS.**

**Supreme Industries, Inc. andSubsidiaries**

ConsolidatedBalance Sheets
| ** **                                       | ** ** | **September 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**              | ** **  | ** **                  | ** ** |
| **Assets**                                       |       |                         |        |                        |       |
|                                             |       |                         |        |                        |       |
| Current assets:                                  |       |                         |        |                        |       |
| Cash and cash  equivalents                       |       | $                            | 326,378     |                        | $          | 1,515,532 |   |
| Investments                                      |       | 2,401,379                    |        | 1,168,922                   |       |
| Accounts  receivable, net                        |       | 30,609,159                   |        | 29,594,819                  |       |
| Inventories                                      |       | 52,334,135                   |        | 50,730,205                  |       |
| Other current  assets                            |       | 4,215,935                    |        | 5,600,299                   |       |
|                                             |       |                         |        |                        |       |
| **Total  current assets**                        |       | 89,886,986                   |        | 88,609,777                  |       |
| ** **                                       |       |                         |        |                        |       |
| **Property, plant and equipment,  at cost**      |       | 90,228,062                   |        | 86,801,354                  |       |
| Less,  Accumulated depreciation and amortization |       | 42,078,876                   |        | 39,343,641                  |       |
|                                             |       |                         |        |                        |       |
| **Property,  plant and equipment, net**          |       | 48,149,186                   |        | 47,457,713                  |       |
| ** **                                       |       |                         |        |                        |       |
| **Goodwill and intangible assets,  net**         |       | 1,460,569                    |        | 735,014                     |       |
| **Other assets**                                 |       | 621,003                      |        | 549,350                     |       |
| ** **                                       |       |                         |        |                        |       |
| **Total assets**                                 |       | $                            | 140,117,744 |                        | $          | 137,351,854 |   |

 

The accompanying notesare a part of the consolidated financial statements.

1

----

 
| ** **                                           | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| ** **                                           | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **Liabilities and Stockholders’  Equity**       |       |                   |        |                  |       |
|                                                 |       |                   |        |                  |       |
| **Current liabilities:**                             |       |                   |        |                  |       |
| Current  maturities of long-term debt                |       | $                      | 1,980,596   |                  | $          | 1,816,092 |   |
| Trade accounts  payable                              |       | 15,387,221             |        | 15,675,073            |       |
| Accrued income  taxes                                |       | 533,085                |        | 380,721               |       |
| Other accrued  liabilities                           |       | 9,783,781              |        | 9,947,869             |       |
|                                                 |       |                   |        |                  |       |
| **Total  current liabilities**                       |       | 27,684,683             |        | 27,819,756            |       |
|                                                 |       |                   |        |                  |       |
| **Long-term debt**                                   |       | 33,538,950             |        | 31,378,367            |       |
|                                                 |       |                   |        |                  |       |
| **Deferred income taxes**                            |       | 3,053,275              |        | 2,988,275             |       |
|                                                 |       |                   |        |                  |       |
| **Total  liabilities**                               |       | 64,276,908             |        | 62,186,398            |       |
|                                                 |       |                   |        |                  |       |
| **Stockholders’ equity**                        |       | 75,840,836             |        | 75,165,456            |       |
|                                                 |       |                   |        |                  |       |
| **Total liabilities and  stockholders’ equity** |       | $                      | 140,117,744 |                  | $          | 137,351,854 |   |

 

Theaccompanying notes are a part of the consolidated financial statements.

2

----

**SupremeIndustries, Inc. and Subsidiaries**Consolidated Statements of Income (Unaudited)
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **September 30,**           | ** ** | **September 24,**          | ** ** | **September 30,** | ** ** | **September 24,** | ** ** |
| ** **                                                 | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                 |       |                             |       |                            |       |   |   |   |   |
| Net  sales                                                 |       | $                                | 79,678,398 |                            | $          | 77,055,374 |   | $ | 264,289,048 |   | $ | 262,594,085 |   |
| Cost  of sales                                             |       | 70,122,112                       |       | 68,797,402                      |       | 234,596,119 |   | 230,464,233 |   |
| Gross profit                                               |       | 9,556,286                        |       | 8,257,972                       |       | 29,692,929 |   | 32,129,852 |   |
| ** **                                                 |       |                             |       |                            |       |   |   |   |   |
| Selling,  general and administrative expenses              |       | 7,171,292                        |       | 5,984,152                       |       | 21,372,025 |   | 19,736,568 |   |
| Other  expense (income)                                    |       | (202,475                         | )          | (231,583                        | )          | (406,566 | ) | (531,801 | ) |
| Operating income                                           |       | 2,587,469                        |       | 2,505,403                       |       | 8,727,470 |   | 12,925,085 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Interest  expense                                          |       | 760,108                          |       | 510,595                         |       | 2,295,693 |   | 1,567,628 |   |
| Income before income taxes                                 |       | 1,827,361                        |       | 1,994,808                       |       | 6,431,777 |   | 11,357,457 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Income  taxes                                              |       | 585,000                          |       | 709,000                         |       | 2,251,000 |   | 4,077,000 |   |
| Net income                                                 |       | $                                | 1,242,361  |                            | $          | 1,285,808 |   | $ | 4,180,777 |   | $ | 7,280,457 |   |
| ** **                                                 |       |                             |       |                            |       |   |   |   |   |
| **Earnings  Per Share:**                                   |       |                             |       |                            |       |   |   |   |   |
| Basic                                                      |       | $                                | .10        |                            | $          | .10 |   | $ | .33 |   | $ | .59 |   |
| Diluted                                                    |       | .10                              |       | .10                             |       | .32 |   | .57 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| **Shares  used in the computation of earnings per share:** |       |                             |       |                            |       |   |   |   |   |
| Basic                                                      |       | 12,702,632                       |       | 12,561,453                      |       | 12,701,639 |   | 12,379,668 |   |
| Diluted                                                    |       | 12,835,523                       |       | 12,948,791                      |       | 12,888,703 |   | 12,792,411 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| **Cash dividends per common share**                        |       | $                                | .095       |                            | $          | .095 |   | $ | .285 |   | $ | .165 |   |

 

The accompanying notesare a part of the consolidated financial statements.

3

----

**Supreme Industries, Inc. andSubsidiaries**

ConsolidatedStatements of Cash Flows (Unaudited)
| ** **                                                                                  | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                  | ** ** | **September 30,  2006**    | ** ** | **September 24,  2005** | ** ** |
| **Cash  flows from operating activities:**                                                  |       |                            |       |   |   |
| Net income                                                                                  |       | $                               | 4,180,777  |   | $ | 7,280,457 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:          |       |                            |       |   |   |
| Depreciation and amortization                                                               |       | 3,182,038                       |       | 3,083,652 |   |
| Loss on disposal of property and equipment                                                  |       | 13,630                          |       | 11,764 |   |
| Share-based payment expense                                                                 |       | 74,857                          |       | — |   |
| Provision for losses on doubtful receivables                                                |       | 101,879                         |       | 24,622 |   |
| Changes in operating assets and liabilities, net of  effect of business acquisition in 2006 |       | (3,245,962                      | )          | (6,018,747 | ) |
|                                                                                        |       |                            |       |   |   |
| **Net cash provided by operating activities**                                               |       | 4,307,219                       |       | 4,381,748 |   |
| ** **                                                                                  |       |                            |       |   |   |
| **Cash  flows from investing activities:**                                                  |       |                            |       |   |   |
| Business acquisition                                                                        |       | (1,050,000                      | )          | — |   |
| Additions to property, plant and equipment                                                  |       | (3,899,691                      | )          | (4,002,903 | ) |
| Proceeds from disposal of property and equipment                                            |       | 1,947,749                       |       | 48,961 |   |
| Purchase of short-term investments                                                          |       | (1,232,457                      | )          | (1,166,241 | ) |
| Decrease in restricted cash deposit                                                         |       | —                          |       | 300,000 |   |
| Decrease in other assets                                                                    |       | 31,559                          |       | 34,337 |   |
|                                                                                        |       |                            |       |   |   |
| **Net cash used in investing activities**                                                   |       | (4,202,840                      | )          | (4,785,846 | ) |
| ** **                                                                                  |       |                            |       |   |   |
| **Cash  flows from financing activities:**                                                  |       |                            |       |   |   |
| Proceeds from revolving line of credit and other  long-term debt                            |       | 69,853,150                      |       | 88,321,302 |   |
| Repayments of revolving line of credit and other  long-term debt                            |       | (67,528,063                     | )          | (89,121,302 | ) |
| Payment of cash dividends                                                                   |       | (3,618,620                      | )          | (2,055,064 | ) |
| Proceeds from exercise of stock options                                                     |       | —                          |       | 2,058,006 |   |
|                                                                                        |       |                            |       |   |   |
| **Net cash used in financing activities**                                                   |       | (1,293,533                      | )          | (797,058 | ) |
| ** **                                                                                  |       |                            |       |   |   |
| **Change  in cash and cash equivalents**                                                    |       | (1,189,154                      | )          | (1,201,156 | ) |
| ** **                                                                                  |       |                            |       |   |   |
| **Cash  and cash equivalents, beginning of period**                                         |       | 1,515,532                       |       | 1,736,483 |   |
| ** **                                                                                  |       |                            |       |   |   |
| **Cash  and cash equivalents, end of period**                                               |       | $                               | 326,378    |   | $ | 535,327 |   |
| ** **                                                                                  |       |                            |       |   |   |
| **Supplemental  disclosure of noncash investing and financing activities:**                 |       |                            |       |   |   |
| Liabilities  assumed in business acquisition                                                |       | $                               | 163,221    |   | $ | — |   |

 

The accompanying notesare a part of the consolidated financial statements.

4

----

**SUPREME INDUSTRIES, INC. ANDSUBSIDIARIES**

Notes ToConsolidated Financial Statements

NOTE 1 - BASIS OF PRESENTATION AND OPINION OFMANAGEMENT

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and therefore do not include all of theinformation and financial statement disclosures necessary for a fairpresentation of consolidated financial position, results of operations and cashflows in conformity with accounting principles generally accepted in the UnitedStates of America.  In the opinion ofmanagement, the information furnished herein includes all adjustments necessaryto reflect a fair statement of the interim periods reported.  All adjustments are of a normal and recurringnature, including the physical inventory adjustments recorded in the thirdquarters of 2006 and 2005.  The December31, 2005 consolidated balance sheet data was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

The Company hasadopted a 52 or 53 week fiscal year ending the last Saturday in December.  The results of operations for the three andnine months ended September 30, 2006 and September 24, 2005 are for 13 and 39week periods, respectively.

Certain amounts inthe consolidated statements of income for 2005 have been reclassified toconform to the presentation of the 2006 consolidated statements of income.  The reclassifications had no impact on netsales, cost of sales, pretax income or net income as previously reported.  For further information refer to theconsolidated financial statements and footnotes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2005.

NOTE 2 - OTHER COMPREHENSIVE INCOME (LOSS)

Othercomprehensive income (loss) includes unrealized gains on hedge-activity, net oftax, and unrealized depreciation on available-for-sale securities, net oftax.  Other comprehensive income (loss)for the three and nine months ended September 30, 2006 was $(196,294) and$65,213, respectively.  There were noitems of other comprehensive income or loss during the 2005 periods.  Total comprehensive income combines netincome and other comprehensive income (loss). Total comprehensive income for the three and nine months ended September30, 2006 was $1,046,067 and $4,245,990, respectively.

NOTE 3 - INVENTORIES

Inventories, whichare stated at the lower of cost or market with cost determined using thefirst-in, first-out method, consist of the following:

|                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Raw materials    |       | $                      | 28,481,747 |                  | $          | 28,160,860 |   |
| Work-in-progress |       | 10,169,707             |       | 8,880,436             |       |
| Finished goods   |       | 13,682,681             |       | 13,688,909            |       |
|             |       | $                      | 52,334,135 |                  | $          | 50,730,205 |   |

 

5

----

The valuation of rawmaterials, work-in-progress and finished goods inventories at interim dates isbased upon a gross profit percentage method, bills of materials, scrap andother estimated factors that affect inventory relief.  The Company has historically experienced bothfavorable and unfavorable adjustments resulting from physical inventories.  Favorable (unfavorable) physical inventoryadjustments recorded during the three-month periods ended September 30, 2006and September 24, 2005 were $1.9 and $(1.1) million, respectively.  The Company continues to refine its inventoryrelief in an effort to minimize book to physical inventory adjustments (seePart I, Item 4, Controls and Procedures).

NOTE 4 - BUSINESS ACQUISITION

On February 28,2006, the Company acquired the business operations and assets of Pony Xpress,Inc. (“Pony XPress”) for a total purchase price of $1,213,221 which consistedof $1,050,000 in cash and the assumption of certain liabilities.  Pony Xpress is a manufacturer of highlyspecialized luxury totor home products. This acquisition broadens the Company’s product line and the Company haspurchased a facility in White Pigeon, Michigan for the operations of thisacquired business.  The acquisition hasbeen accounted for as a purchase and, accordingly, the operating results havebeen included since the date of acquisition. Pro forma financial information reflecting the acquired business has notbeen presented as it is not materially different from the Company’s historicalresults.  The final allocation ofpurchase price is subject to completion of valuations and analysis required byStatement of Financial Accounting Standards No. 141, “Business Combinations”.  The preliminary allocation of purchase priceis as follows:

| Trade accounts receivable       |   | $       | 156,200   |   |
|---------------------------------|--------|---------|-----------|--------|
| Inventories                     |   | 241,872 |      |
| Other current assets            |   | 29,305  |      |
| Equipment                       |   | 60,289  |      |
| Goodwill and intangible  assets |   | 725,555 |      |
|                            |   | $       | 1,213,221 |   |

 

6

----

NOTE 5 - EARNINGSPER SHARE

The number ofshares used in the computation of basic and diluted earnings per share are asfollows:
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | **September 30,  2006**     | ** ** | **September 24,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 24,  2005** | ** ** |
| Weighted average number  of shares outstanding (used in computation of basic earnings per share) |       | 12,702,632                       |       | 12,561,453                      |       | 12,701,639 |   | 12,379,668 |   |
|                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Effect of dilutive  stock options                                                                |       | 132,891                          |       | 387,338                         |       | 187,064 |   | 412,743 |   |
|                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Diluted shares outstanding (used in computation of diluted earnings  per share)                  |       | 12,835,523                       |       | 12,948,791                      |       | 12,888,703 |   | 12,792,411 |   |

 

NOTE 6 - STOCK-BASED COMPENSATION

The Companycurrently has three stock option plans: the 1998 Stock Option Plan under which 869,087 shares of Class A CommonStock are reserved for grant, the 2001 Stock Option Plan under which 825,000shares of Class A Common Stock are reserved for grant and the 2004 Stock OptionPlan, as recently amended, under which 850,000 shares of Class A Common Stockare reserved for grant.  Under the termsof these stock option plans, both incentive stock options and non-statutorystock options can be granted by a specially designated Stock OptionCommittee.  The 2004 Stock Option Plan,as amended, also allows for awards of common stock and restricted stock.  Options granted under the stock option plansgenerally vest and become exercisable in annual installments of 33 1/3%beginning on the first anniversary date and the options expire five years afterthe date of grant.  On August 4, 2005,the Company’s Board of Directors approved a plan to accelerate vesting of alloutstanding stock options which were unvested at December 31, 2005.  Under Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees”, there was nocompensation expense related to the vesting of these options.  As a result of the board’s action, stockoptions to purchase 430,831 shares of the Company’s common stock becameexercisable effective December 31, 2005. The Company generally issues new shares to satisfy stock optionexercises.

A summary of thestatus of the Company’s outstanding stock options as of September 30, 2006, andchanges during the nine months ended September 30, 2006 are as follows:

7

----

 

|                                 | ** ** | ** **         | ** ** | **Weighted-** | ** ** |
|---------------------------------|------------|--------------------|------------|---------------|------------|
| ** **                      | ** ** | ** **         | ** ** | **Average**   | ** ** |
| ** **                      | ** ** | **Number of** | ** ** | **Exercise**  | ** ** |
| ** **                      | ** ** | **Shares**         | ** ** | **Price**     | ** ** |
| Outstanding, January 1,  2006   |       | 921,823            |       | $             | 5.67       |   |
| Granted                         |       | 352,831            |       | 7.12          |       |
| Exercised                       |       | (11,000            | )          | 4.80          |       |
| Outstanding, September 30, 2006 |       | 1,263,654          |       | 6.09          |       |
|                                 |            |                    |            |               |            |  |

 

The intrinsicvalue of the options exercised during the nine months ended September 30, 2006was $29,850.  The intrinsic value of alloptions outstanding at September 30, 2006 was $675,602 and outstanding optionshad a weighted-average remaining contractual life of 2.88 years.

A summary ofrestricted stock activity as of September 30, 2006 and changes for the threemonths then ended is presented below:

|                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Unvested as of July 2,  2006      |       | —     |       | $                                                        | —     |   |
| Granted                           |       | 10,000     |       | 6.65                                                     |       |
| Vested                            |       | (556       | )          | 6.65                                                     |       |
| Unvested as of September 30, 2006 |       | 9,444      |       | $                                                        | 6.65       |   |

 

As of September30, 2006, there was approximately $62,800 of total unrecognized compensationexpense related to restricted stock, which is expected to be recognized over aperiod of three years.  The total fairvalue of shares vested during the three months ended September 30, 2006 wasapproximately $3,700.

Prior to January1, 2006, the Company accounted for its stock options under the recognition andmeasurement principles of APB Opinion No. 25, and related interpretations.  Accordingly, no stock-based employeecompensation cost was reflected in net earnings prior to January 1, 2006 as alloptions to purchase common stock of the Company had an exercise price equal to,or greater than, the market value of the underlying common stock on the date ofgrant.

Effective January1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), “Share-Based Payment” as interpreted by SEC StaffAccounting Bulletin No. 107.  SFAS No.123R supersedes APB Opinion No. 25, and amends SFAS No. 95, “Statement of CashFlows.” Generally, the approach in SFAS No. 123R is similar to the approachdescribed in SFAS No. 123, “Accounting for Stock-Based Compensation.”  However, SFAS No. 123R requires allstock-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values at the dateof grant.

8

----

The Company haselected to use the modified prospective transition method for implementing SFASNo. 123R.  Under this transition method,compensation expense will include:  (a)compensation expense for all share-based payments granted prior to, but not yetvested as of, January 1, 2006, based on the grant date fair value estimated inaccordance with the original provisions of SFAS No. 123, and (b) compensationexpense for all share-based payments granted on or after January 1, 2006, basedon the grant date fair value estimated in accordance with the provisions ofSFAS No. 123R.  Because the Companyelected to use the modified prospective transition method, results for priorperiods have not been restated and new awards are valued and accounted forprospectively upon adoption.

The Companycurrently uses the Black-Scholes option pricing model to determine the fair valueof stock options.  The determination ofthe fair value of stock-based payment awards on the date of grant using anoption-pricing model is affected by stock price as well as assumptionsregarding a number of complex and subjective variables.  These variables include expected stock pricevolatility over the term of the awards, actual and projected employee stockoption exercise behaviors, risk-free interest rate and expected dividends.

Compensationexpense, relative to stock-based awards, included in the ConsolidatedStatements of Income for the three and nine month periods ended September 30,2006 was approximately $58,000 and $75,000, respectively.  The following assumptions were utilized inthe determination of the compensation expense:

| Risk free interest rate |   | 5.03    | %      |
|-------------------------|--------|---------|--------|
| Expected life           |   | 5 years |   |
| Expected volatility     |   | 32.23   | %      |
| Expected dividends      |   | 5.39    | %      |

 

The followingtable illustrates the pro forma effect on net earnings and earnings per shareif the Company had applied the fair value recognition provisions of SFAS No.123 in the previous year:

|                                                                                                | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                     | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                                     | ** ** | **September 24,** | ** ** | **September 24,** | ** ** |
| ** **                                                                                     | ** ** | **2005**               | ** ** | **2005**               | ** ** |
| Net income, as reported                                                                        |       | $                      | 1,285,808  |                   | $          | 7,280,457 |   |
| Deduct, Stock-based  compensation expense determined under fair value based method, net of tax |       | (338,409               | )          | (493,216               | )          |
| Pro forma net income                                                                           |       | $                      | 947,399    |                   | $          | 6,787,241 |   |
|                                                                                           |       |                   |       |                   |       |
| Basic earnings per  share, as reported                                                         |       | $                      | .10        |                   | $          | .59 |   |
| Diluted earnings per  share, as reported                                                       |       | .08                    |       | .55                    |       |
|                                                                                           |       |                   |       |                   |       |
| Pro forma basic  earnings per share                                                            |       | .10                    |       | .57                    |       |
| Pro forma diluted earnings per share                                                           |       | .07                    |       | .53                    |       |

 

9

----

NOTE 7 - LONG-TERM DEBT

The Companyamended its existing credit agreement effective November 1, 2006.  The amendment increased availability by $5.0million to $35.0 million, and further increasing to $45.0 million during theperiod January 1 to June 30.  Theremaining terms are substantially the same as disclosed in the Annual Report onForm 10-K for the year ended December 31, 2005.

NOTE 8 - COMMON STOCK

The Company paidcash dividends, to all Class A and Class B common stockholders, of nine andone-half cents ($0.095) and twenty eight and one-half cents ($0.285) per sharefor the three and nine months ended September 30, 2006, respectively, and nineand one-half cents ($0.095) and sixteen and one-half cents ($0.165) per sharefor the three and nine months ended September 24, 2005, respectively.  Also, 85,000 shares of Class B common shareswere converted to Class A common shares during the three months ended September30, 2006.

NOTE 9 - SUBSEQUENT EVENT

On October 26,2006, the Company’s Board of Directors declared a nine and one-half cent($0.095) per share cash dividend payable on November 20, 2006 to all class Aand B common stockholders of record on November 13, 2006.

NOTE 10 - EFFECT OF RECENTLY ISSUED ACCOUNTINGSTANDARDS ON THE FINANCIAL STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD

In July 2006, theFinancial Accounting Standards Board issued Financial Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”). This Interpretation revises the recognition test for tax positions takenin tax returns such that a tax benefit is recorded only when it is more likelythan not that the tax position will be allowed upon examination by taxingauthorities.  The amount of such a taxbenefit to be recorded is the largest amount that is more likely than not to beallowed.  Any reduction in deferred taxassets or increase in tax liabilities upon adoption will correspondingly reduceretained earnings.  The Company has notyet determined the effect of adopting FIN 48 which is effective for the Company’snext fiscal year commencing December 31, 2006.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements”.  SAB 108 provides guidance on how prior yearmisstatements should be taken into consideration when quantifying misstatementsin current year financial statements for purposes of determining whether thecurrent year’s financial statements are materially misstated.  SAB 108 permits registrants to record thecumulative effect of initial adoption by recording the necessary “correcting”adjustments recorded to the carrying values of assets and liabilities as of thebeginning of that year with the offsetting adjustments recorded to the openingbalance of retained earnings only if material under the dual method.  SAB 108 is effective for fiscal years endingon or after November 15, 2006.  TheCompany does not expect the adoption of SAB 108 to have a material impact onthe Company’s consolidated financial position or results of operations.

10

----

 

**ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

**Resultsof Operations**

The following discussion should be read in conjunction with the unauditedconsolidated financial statements and related notes thereto appearing elsewherein this document.

***Net Sales***

Net sales for thethree months ended September 30, 2006 increased $2.6 million, or 3.4%, to $79.7million compared to $77.1 million for the three months ended September 24,2005.  Net sales for the nine monthsended September 30, 2006 increased $1.7 million, or 0.6%, to $264.3 from $262.6million for the nine months ended September 24, 2005. The September 30, 2006quarterly increase in net sales was primarily attributable to an improvement innet sales of our core retail dry freight product line compared to the samequarter last year.** **We partially attribute thisstronger retail demand to customers buying 2006 chassis to avoid the highercosts of 2007 diesel trucks that must comply with new more stringent dieselengine emission standards.  These new standardsbecome effective for engines produced beginning January 1, 2007.  Though difficult to quantify, we believe thisrevenue acceleration could, and most likely will, reduce second half 2007revenues of our retail dry freight truck product line and possibly otherproducts.****With our broad and diverse productline, we are hopeful of mitigating, at least to some extent, the effect of thenew diesel engine standards on second half 2007 revenues. We believe the normalproduct demand cycle will return for calendar year 2008**.**Forthe nine months ended September 30, 2006, the increase in net sales was due toincreased sales in our Startrans Bus Division and increased sales of our retaildry freight product line, offset by a decrease in fleet sales, which resultedfrom a reduction in truck purchases by our major fleet customers.

On February 28,2006, we acquired the business operations and assets of Pony Xpress, Inc. (“PonyXpress”), a manufacturer of highly specialized vehicles.  Though the purchase was not a largeacquisition, it provides us with the foundation for our newly formed “SilverCrown” subsidiary.  Silver Crown hasunique manufacturing expertise that will enable our entry into additionalhighly specialized vehicles including those used in homeland security.  In the fourth quarter of 2006, Silver Crownwill be introducing higher-end products and broadening the Pony Xpress productline.  Sales for the nine months endedSeptember 30, 2006 totaled $2.6 million.

Our sales backlogwas $75.4 million at September 30, 2006 compared to a $69.1 million salesbacklog at September 24, 2005.

***Cost of sales and gross profit***

As a result offavorable physical inventory adjustments of $1.9 million recorded in thecurrent quarter, gross profit increased by $1.3 million, or 15.7%, to $9.6million (12.0% of net sales) for the three months ended September 30,2006.  Gross profit for the prior year’sthird quarter, which included unfavorable annual physical inventory adjustmentsof $1.1 million, was $8.3 million (10.7% of net sales).  For the nine months ended September 30, 2006,gross profit decreased $2.4 million, or 7.5%, to $29.7 million (11.2% of netsales) compared****to****$32.1million (12.2% of net sales) for the nine months ended September 24, 2005.  The following table presents the componentsof cost of sales as a percentage of net sales and the changes fromperiod-to-period:

11

----

 
|               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **September 30,  2006**     | ** ** | **September 24,  2005**    | ** ** | **Percent  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percent  Change** | ** ** |
| Material      |       | 55.0                             | %          | 58.2                            | %          | -3.2 | % | 56.9 | % | 57.1 | % | -0.2 | % |
| Direct labor  |       | 14.3                             |       | 13.7                            |       | 0.6 |   | 14.1 |   | 14.0 |   | 0.1 |   |
| Overhead      |       | 15.7                             |       | 14.5                            |       | 1.2 |   | 15.1 |   | 14.1 |   | 1.0 |   |
| Delivery      |       | 3.0                              |       | 2.9                             |       | 0.1 |   | 2.7 |   | 2.6 |   | 0.1 |   |
|          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Cost of sales |       | 88.0                             |       | 89.3                            |       | -1.3 |   | 88.8 |   | 87.8 |   | 1.0 |   |
|          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Gross profit  |       | 12.0                             | %          | 10.7                            | %          | 1.3 | % | 11.2 | % | 12.2 | % | -1.0 | % |

 

**Material** – Materialcost as a percentage of net sales decreased for the three and nine monthperiods ended September 30, 2006 when compared to the corresponding periods in2005. The large decrease of 3.2% for the three months ended September 30, 2006was primarily attributable to recording the results of physical inventoriesduring the third quarter and adjusting its estimated charge to cost of salesfor the three and nine months ended September 30, 2006.  For the nine months ended September 30, 2006,the slight decrease of 0.2% is due principally to selling price increasesimplemented to offset escalating raw material costs.

With regard to physical inventory adjustments, theCompany has historically experienced and recorded both favorable andunfavorable adjustments.  For the threemonths ended September 30, 2006 the Company recorded a net favorable $1.9million adjustment compared to a net unfavorable $1.1 million adjustment forthe three months ended September 24, 2005. Due to our product diversity, complexity, customization and on-lineengineering, inventory relief using standard bills of material does not providefull relief of our inventory.  Therefore,the Company records an estimated adjustment based on various factors. Beginningin late 2005 and throughout 2006, the Company has intensified its bills ofmaterial accuracy initiatives and cost relief functions in conjunction withselectively performing additional interim physical inventories and recordingany adjustments relating thereto. (See “Inventory Relief” below in ourdiscussion of “Critical Accounting Policies and Estimates” and Part I, Item 4,Controls and Procedures).

Additionally, during the first three quarters of 2006,the Company experienced significant upward cost pressures on aluminum, steeland wood components.  To combat thesecost increases, the Company implemented price increases on a majority of itstruck division products effective in late April and August of 2006. Due to thestrength of our backlog and the fact we honor pricing for existing orders andquotes, we anticipate the benefit of these price increases will increasingly bereflected in our revenues during the fourth quarter of 2006.  We continue to closely monitor and manage ourmajor commodity costs through close communication and negotiation with keysuppliers, utilizing cost monitoring tools (including major commodity indextracking) and developing strategies to mitigate cost and availabilityissues.  However, the Company willconsider additional price increases should commodity prices continue torise.  The Company also continuallystrives to reduce the cost of its product offerings through the development anduse of innovative materials, robotics and improved processes.

**Direct Labor** –Direct labor as a percentage of net sales increased 0.6% and 0.1% for the threeand nine months periods ended September 30, 2006 when compared to thecorresponding periods in 2005, respectively.

12

----

 

For the three months ended September 30, 2006, theincrease was partially due to labor inefficiencies at our Startrans BusDivision where we experienced flood-related damages that limited production foran approximate five-week period.  For thenine months ended September 30, 2006, the Company experienced a delay in OEMsupplied chassis that caused the Company to temporarily shut down productionlines in the first quarter, thereby negatively affecting labor and overheadabsorption.  Despite these challenges,direct labor as a percentage of net sales remained relatively constant for bothperiods.

**Overhead** – Overheadas a percentage of net sales increased 1.2% and 1.0%, for the three and ninemonth periods ended September 30, 2006 when compared to the same periods in2005, respectively.

The increase was due primarily to increased workers’compensation costs, repairs and maintenance, utility costs, and warrantyexpense. Additionally, overhead expenses increased as a result of the PonyXpress acquisition which occurred on February 28, 2006.  These increases were somewhat offset byreductions in group health insurance costs and other miscellaneousmanufacturing overhead costs.

**Delivery** – Delivery expense as apercentage of net sales was constant for the nine month periods ended September30, 2006 and September 24, 2005 and reflected a small increase in the currentquarter compared to the third quarter of last year.

The Company utilized more cost effective outside deliverymethods versus using its employees and owned equipment to deliver units.  However, fuel costs remain a concern and theCompany will attempt to pass on higher fuel costs despite competitive pressuresin its marketplace, though no assurance can be given in this regard.

***Selling, general and administrative expenses***

For the threemonths ended September 30, 2006, selling, general and administrative (“G&A”)expenses were $7.2 million (9.0% of net sales) which was $1.2 million higherthan the $6.0 million (7.8% of net sales) for the three months ended September24, 2005. For the nine months ended September 30, 2006, selling and G&Aexpenses were $21.4 million (8.1% of net sales) which was $1.7 million higherthan the $19.7 million (7.5% of net sales) for the nine months ended September30, 2005. The following table presents selling and G&A expenses as apercentage of net sales and the changes from period-to-period:
|                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(millions)**             | ** ** | **September 30,  2006**     | ** ** | **September 24,  2005**    | ** ** | **Change** | ** ** | **September 30,  2006** | ** ** | **September 24,  2005** | ** ** | **Change** | ** ** |
| Selling expenses           |       | $                                | 3.0        |                            | 3.7        | % | $ | 2.2 |   | 2.8 | % | $ | 0.8 |   | 0.9 | % | $ | 8.5 |   | 3.2 | % | $ | 7.1 |   | 2.7 | % | $ | 1.4 |   | 0.5 | % |
| General and Adm.  expenses |       | 4.2                              |       | 5.3                             |       | 3.8 |   | 5.0 |   | 0.4 |   | 0.3 |   | 12.9 |   | 4.9 |   | 12.6 |   | 4.8 |   | 0.3 |   | 0.1 |   |
|                       |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                      |       | $                                | 7.2        |                            | 9.0        | % | $ | 6.0 |   | 7.8 | % | $ | 1.2 |   | 1.2 | % | $ | 21.4 |   | 8.1 | % | $ | 19.7 |   | 7.5 | % | $ | 1.7 |   | 0.6 | % |

 

13

----

 

**Selling expenses** –Selling expenses increased by $0.8 million or 36.4%, to $3.0 million for thethree months ended September 30, 2006 from $2.2 million for the three monthsended September 24, 2005.   For the ninemonths ended September 30, 2006, selling expenses increased $1.4 million or19.7%, to $8.5 million compared to $7.1 million for the nine months endedSeptember 24, 2005.

The higher selling expenses in the quarter andyear-to-date relate to a reduction in cooperative marketing funds the Companyreceives from chassis manufacturers. These funds, determined solely by programsestablished by the chassis manufacturers, have historically been used to helpoffset marketing and promotional expenses. Additionally, selling expenses increased as a result of the acquisitionof Pony Xpress and the addition of a two new corporate sales positions topromote the Company’s expanding product line.

**G&A expenses** – G&Aexpenses increased by $0.4 million, or 10.5%, to $4.2 million for the threemonths ended September 30, 2006 from $3.8 million for the three months endedSeptember 24, 2005.   For the nine monthsended September 30, 2006, G&A expenses increased $0.3 million, or 2.4%, to$12.9 million compared to $12.6 million for the nine months ended September 24,2005.

The increase for the three and nine month periods inG&A expenses was primarily due to acquiring Pony Xpress and the addition ofa new corporate position to focus on special projects.  The increase was partially offset by adecrease in the incentive bonus plan which was calculated based on lower pretaxearnings in 2006 versus 2005.

***Other Income***

Other income forthe three-month periods ended September 30, 2006 and September 24, 2005 wasunchanged at $0.2 million.  For the ninemonths ended September 30, 2006, other income totaled $0.4 million compared to$0.5 million for the nine months ended September 24, 2005.  Other income consists of interest income,rental income, gain on sale of assets and other miscellaneous income receivedby the Company.

***Interest expense***

Interest expenseincreased by $0.3 million to $0.8 million for the three months ended September30, 2006 from $.5 million for the three months ended September 24, 2005.  For the nine months ended September 30, 2006,interest expense increased $0.7 million to $2.3 million compared to $1.6million for the nine months ended September 24, 2005.

The increase ininterest expense resulted from higher short-term interest rates and financecharges incurred on our consigned chassis inventory. In July 2005, the Companyentered into a derivative swap agreement in an effort to mitigate the effect ofthe rising interest rate environment.  Theswap agreement exchanges the debt obligations floating rate for fixed interestrates over the life of the debt.

***Income before income taxes***

Incomebefore income taxes was $1.8 million for the three months ended September 30,2006 compared to $2.0 million for the three months ended September 24,2005.  For the nine months endedSeptember 30, 2006, income before income taxes was $6.4 million compared to$11.4 million for the nine months ended September 24, 2005. As discussed above,the $1.9 million favorable book to physical inventory adjustments recorded inthe third quarter of the current year and the $(1.1) million unfavorableadjustment recorded in last year’s third quarter had significant impacts onquarterly operating results for both quarterly periods.

14

----

***Income taxes***

The Company’seffective income tax rate was 35.0% for the nine-month period ended September30, 2006 compared to 35.9% for the nine-month period ended September 24,2005.  The reduction is due mainly to anexpected change in the Company’s applicable federal tax bracket from 35% in2005 to 34% in 2006 resulting from lower levels of pre-tax income.

***Netincome and earnings per share***

Net incomedecreased by $.1 million to $1.2 million (1.6% of net sales) for the threemonths ended September 30, 2006 from $1.3 million (1.7% of net sales) for thethree months ended September 24, 2005. For the nine months ended September 30, 2006, net income decreased $3.1million to $4.2 million (1.6% of net sales) compared to $7.3 million (2.8% ofnet sales) for the nine months ended September 24, 2005.

Basic earnings pershare were $.10 and $.33 for the three and nine months ended September 30, 2006compared to $.10 and $.59 per share for the three and nine months endedSeptember 24, 2005.  Diluted earnings pershare were $.10 and $.32 for the three and nine months ended September 30, 2006compared to $.10 and $.57 per share for the three and nine months endedSeptember 24, 2005.

**Liquidityand Capital Resources**

The Company’s cashmanagement system and revolving line of credit are designed to maintain zerocash balances and, accordingly, excess cash generated from operations isutilized to reduce borrowings.

Borrowings underthe Company’s revolving line of credit at September 30, 2006 were $28.8million, a $3.4 million increase since December 31, 2005.  The increased borrowings are directlyassociated with the higher levels of accounts receivable, inventories, and theworking capital requirements associated with the acquisition of PonyXpress.  In order to support ourcontinued growth and product introductions, the Company’s revolving line ofcredit was amended and increased by $5.0 million effective November 1, 2006.

***Operatingactivities***

Operatingactivities provided $4.3 million of cash for the nine months ended September30, 2006 compared to $4.4 million for the nine months ended September 24,2005.  Net income and depreciation werethe largest source of increases from operating activities totaling $4.2 millionand $3.2 million, respectively, for nine months ended September 30, 2006.  For the nine months ended September 30, 2006,the Company used $3.2 million for changes in operating assets and liabilitieswhich resulted from higher levels of accounts receivable, inventories and othercurrent assets.

***Investingactivities***

Investingactivities used $4.2 million of cash for the nine months ended September 30,2006 compared to $4.8 million used by investing activities for the nine monthsended September 24, 2005.

15

----

**Liquidityand Capital Resources, Concluded.**

Major capitalexpenditures for the nine months ended September 30, 2006 related to thepurchase of a manufacturing facility located in White Pigeon, Michigan, for theexpansion of the acquired operations of Pony Xpress and a purchase of amanufacturing facility in Ligonier, Indiana. Major capital disposals during the nine months ended September 30, 2006included the sale of one of our manufacturing facilities in Pennsylvania as aresult of relocating to a larger and more efficient facility in 2005.  A gain of $53 thousand was recorded on thesale of the facility.  Additionally, theCompany had an increase in its short-term investments related to its captiveinsurance subsidiary during the nine months ended September 30, 2006.

***Financing******activities***

Financingactivities used $1.3 million of cash for the nine months ended September 30,2006 compared to $0.8 million of cash used by financing activities for the ninemonths ended September 24, 2005.

The increasedlevel of financing activities occurred primarily as a result of the $3.6million of cash dividends paid during the first three quarters of 2006 comparedto $2.1 million paid in the first three quarters of 2005.  The Company also received no proceeds fromthe exercise of stock options in the first nine months of 2006 whereas $2.1million was received in the first nine months of 2005.  Borrowings under the revolving line of creditand long-term debt increased $2.3 million during the first three quarters of2006 compared to net repayments of $.8 million during the same period in 2005.

The Company’sboard of directors approved an increase in our quarterly cash dividend fromthree and one-half cents per share to nine and one-half cents per sharebeginning with the third quarter 2005 cash dividend.  Business conditions permitting, the quarterlycash dividend will remain at nine and one-half cents per share during 2006which would approximate $4.8 million of cash dividends paid to ourshareholders.  The Company’s credit agreementwas amended in September 2005 to delete negative covenants related to thedeclaration or authorization of dividends and the entering into or theassumption of operating lease obligations. The amendment also involved more favorable performance pricing based onthe Company’s strong balance sheet. All borrowings under the revolving line ofcredit are unsecured.

**ContractualObligations**

Our fixed,noncancelable obligations as of September 30, 2006 were as follows:
| ** **           | ** ** | **Payments due by period** | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Debt (a)             |       | $                                         | 35,519,546 |   | $ | 1,980,596 |   | $ | 30,379,470 |   | $ | 2,179,521 |   | $ | 979,959 |   |
| Operating Leases (b) |       | 3,102,042                                 |       | 789,967 |   | 1,569,010 |   | 743,065 |   | — |   |
|                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                |       | $                                         | 38,621,588 |   | $ | 2,770,563 |   | $ | 31,948,480 |   | $ | 2,922,586 |   | $ | 979,959 |   |

 

16

----

----

(a)  Amounts are included on the ConsolidatedBalance Sheets.  For additionalinformation regarding debt and related matters, see Note 5 of the Notes toConsolidated Financial Statements included in the Annual Report on Form 10-Kfor the year ended December 31, 2005.

(b)  For additional information regardingoperating leases, see Note 9 of the Notes to Consolidated Financial Statementsincluded in the Annual Report on Form 10-K for the year ended December 31,2005.

**Off-BalanceSheet Arrangements**

As of September30, 2006, the Company had no off-balance sheet arrangements, as defined in Item303(a) (4) (ii) of SEC Regulation S-K.

**CriticalAccounting Policies and Estimates**

Management’sdiscussion and analysis of its financial position and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires Management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses and related disclosure of contingent assets and liabilities.  The Company’s significant accounting policiesare discussed in Note 1 of the Notes to Consolidated Financial Statementsincluded in the Annual Report on Form 10-K for the year ended December 31,2005.  In Management’s opinion, theCompany’s critical accounting policies include allowance for doubtful accounts,excess and obsolete inventories, inventory relief, accrued insurance andaccrued warranty.

***Allowance for Doubtful Accounts*** – TheCompany maintains an allowance for doubtful accounts for estimated lossesresulting from the inability of customers to make required payments.  If the financial condition of customers wereto deteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required that would affect future operating results.

***Excess and Obsolete Inventories*** – TheCompany must make estimates regarding the future use of products and provide aprovision for obsolete or slow-moving inventories.  If actual product life-cycles, product demandor market conditions are less favorable than those projected by Management, additionalinventory write-downs may be required that would affect future operatingresults.

***Inventory Relief*** –For monthly andquarterly financial reporting, cost of sales is recorded and inventories arerelieved by the use of gross profit percentage method, standard bills ofmaterial, adjusted for scrap and other estimated factors affecting inventoryrelief.  Because of the customized natureof the Company’s products, it is difficult to place full reliance on the billsof material for accurate relief of inventories. Although the Company continues to refine the process of creatingaccurate bills of materials, manual adjustments, which are based on estimates,are necessary in an effort to assure correct relief of inventories for productssold.  The estimate calculations considerthe customized nature of products, historical inventory relief percentages,scrap variances and other factors which could impact inventory relief.  The accuracy of the inventory relief is notknown until interim and or annual physical inventories are conducted at each ofthe Company’s plant locations.  In prioryears, management had concluded that it was not practical to consider morefrequent physical inventories because of the size of our sales order

17

----

backlog and thecosts associated with ceasing production for the purpose of conducting physicalinventories.

**CriticalAccounting Policies and Estimates, Concluded**

During 2005, theCompany’s annual physical inventories resulted in a net unfavorable adjustmentof $1.1 million which was recorded in the third quarter of 2005.  Subsequent to the 2005 third quarter adverseinventory adjustments, Management dedicated significant in-house resourcesrefining bills of materials, improving cost accounting functions andinstituting new inventory policies and procedures.  In addition, Management implemented morefrequent physical inventories at certain locations.

The third quarterof 2006 was favorably impacted by $1.9 million of inventory adjustmentsresulting from physical inventories conducted during June, July and August atall the Company’s plant locations, with most of the adjustment attributable toinventory quantity adjustments.  Becausethe Company does not have perpetual inventory systems to track inventoryquantities for raw materials and work-in-progress and it is not alwayspractical or cost beneficial to cease production to conduct physicalinventories, the Company has continued to be dependent on physical inventoryprocedures and such favorable or unfavorable adjustments are historically materialto the quarterly period in which such adjustments are recorded.  Further, it is not possible to determine theimpact of physical inventory adjustments on prior interim periods, since dataon interim inventory quantities is not available.  See Part I, Item 4, Controls and Proceduresfor further discussion of this matter.

***Accrued Insurance*** - The Company has aself-insured retention against product liability claims with insurance coverageover and above the retention.  TheCompany is also self-insured for a portion of its employee medical benefits andworkers’ compensation.  Product liabilityclaims are routinely reviewed by the Company’s insurance carrier and Managementroutinely reviews other self-insurance risks for purposes of establishingultimate loss estimates.  In addition,Management must determine estimated liability for claims incurred but notreported.  Such estimates and anysubsequent changes in estimates may result in adjustments to the Company’soperating results in the future.

Effective January1, 2005, the Company began utilizing its newly formed and wholly-owned smallcaptive insurance company to insure certain of its business risks.  Certain risks, previously self-insured by theCompany and its subsidiaries, are now insured by the captive insurancesubsidiary.  In addition, certainbusiness risks not previously insured are now insured by the captive insurancesubsidiary.  Since the captive insurancecompany has not reinsured any of its coverages, the Company’s overallself-insurance risk has not changed.  Thecaptive insurance subsidiary is expected to help the Company manage its riskexposures.  Under the Internal RevenueCode, the net underwriting income of a small captive, as defined, is nottaxable.

***Accrued Warranty*****– The Company provides limited warrantiesfor periods of up to five years from the date of retail sales.  Estimated warranty costs are provided for atthe time of sale and are based upon historical experience.  Differences between future actual warrantycosts and the estimated warranty accrual will result in adjustments to theCompany’s future operating results; however, historically such differences havenot been material.

18

----

**Forward-LookingStatements**

This reportcontains forward-looking statements (as defined in the Private SecuritiesLitigation Reform Act of 1995), other than historical facts, which reflect theview of the Company’s Management with respect to future events.  When used in this report, words such as “believe,”“expect,” “anticipate,” “estimate,” “intend,” and similar expressions, as theyrelate to the Company or its plans or operations, identify forward-lookingstatements.  Such forward-lookingstatements are based on assumptions made by, and information currentlyavailable to, the Company’s Management. Although Management believes that the expectations reflected in suchforward-looking statements are reasonable, it can give no assurance that suchexpectations are reasonable, and it can give no assurance that suchexpectations will prove to have been correct. Important factors that could cause actual results to differ materiallyfrom such expectations include, without limitation, limitations on theavailability of chassis on which the Company’s product is dependent,availability of raw materials, raw material cost increases, and severe interestrate increases.  Additional risks are setforth on Form 10-K for the year ended December 31, 2005.  Furthermore, the Company can provide noassurance that such raw material cost increases can be passed on to itscustomers through implementation of price increases for the Company’sproducts.  The forward-looking statementscontained herein reflect the current views of the Company’s Management withrespect to future events and are subject to those factors and other risks, uncertaintiesand assumptions relating to the operations, results of operations, cash flowsand financial position of the Company. The Company assumes no obligation to update the forward-lookingstatements or to update the reasons actual results could differ from thosecontemplated by such forward-looking statements.

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

There has been nomaterial change from the information provided in the Company’s Annual Report onForm 10-K, “Item 7A: Quantitativeand Qualitative Disclosures About Market Risk,” for the year endedDecember 31, 2005.

**ITEM 4.  CONTROLS AND PROCEDURES.**

***Evaluation of Disclosure Controls and Procedures -***The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s reports under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated tomanagement, including the Company’s Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”), as appropriate, to allow timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, as they are designed to do, andmanagement necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

Inconnection with the preparation of this Quarterly Report on Form 10-Q, as ofSeptember 30, 2006, an evaluation was performed under the supervision and withthe participation of the Company’s management, including the CEO and CFO, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the Exchange Act).In light of the significant physical inventory adjustments which were

19

----

recordedin the recent quarter ended September 30, 2006 and as disclosed in Item 2 andin the notes to consolidated financial statements of this Form 10-Q, theCompany’s CEO and CFO have concluded that, as of the end of the period coveredby this report, the disclosure controls and procedures were not effective at areasonable assurance level as of September 30, 2006, and in the opinion of theCEO and CFO, immediate corrective actions are required. A detailed discussionof the issue and the intended corrective actions follow.

Managementhas developed over a number of years a costed bill of material system toestimate its cost of sales on a monthly basis. An integral part of this system is the taking of “wall to wall” annualphysical inventories at all plant locations to true-up the costs of salesestimates recorded during the fiscal year. Such annual physical inventories are historically taken during June,July and August of each year.  Inaddition, interim physical inventories at certain plant locations may be takenduring the year when management believes there may be costing issues orpotential problems at those plants. Management views these annual and interim physical inventories as anintegral part of its cost system and views the physical inventory results to bea change in estimate and, accordingly, records adjustments resulting fromphysical inventories in the period in which the results of the physicalinventories are finalized.

Historically,the adjustments resulting from physical inventories have not been and continuenot to be material to inventory balances or annualized cost of sales, althoughsuch adjustments may be significant to the reported pretax income and netincome in the quarter in which the adjustment is recorded.  Such was the case in 2005 when the annualphysical inventories resulted in a $(1.1) million unfavorable adjustment and in2006 when an inventory gain of $1.9 million occurred. The $1.9 million physicalinventory adjustment was 3.6% of inventories at September 30, 2006 and 0.6% ofannualized cost of sales. These amounts were reflected in the third quarter ofeach of the reporting periods as changes in estimates and these amounts areprominently discussed and disclosed to allow the reader to determine theirimpact on the reported results as of the third quarters and for the year.

Subsequent to the $(1.1) million unfavorable annualphysical inventory adjustment recorded in the third quarter of fiscal yearended December 31, 2005, the Company expended significant internal resources toimprove its accounting controls and procedures related to valuation ofinventories and recognition of cost of sales for interim/quarterly financialreporting, including: refining bills of materials, improving its costaccounting functions, conducting interim physical inventories at certain plantlocations and instituting new inventory policies.  Subsequently, certain interim physical inventories,which resulted in book to physical adjustments that were not material to theinterim financial statements, caused management to believe that such matter hadbeen adequately addressed.  However, the$1.9 million favorable inventory adjustments for physical inventories conductedat all plant locations during June, July and August 2006, indicated thatinventory costing procedures for interim financial reporting were continuing toresult in potentially inaccurate interim/quarterly financial reporting.  Because the inventory adjustment for annualphysical inventories changed from a net unfavorable $(1.1) million adjustmentrecorded in last year’s third quarter to the $1.9 million favorable adjustmentrecorded in the current third quarter, it is apparent that management addressedthe issues that caused the unfavorable adjustment and recorded inventory reliefestimates which proved to be too conservative. In addition, the time requiredto complete the pricing and summarization of the June 2006 physical inventoriesprevented the Company from including the results in the Form 10-Q for thequarter ended July 1, 2006 and resulted in the recognition of the physicalinventory adjustments, attributable to the June 2006 physicals, in the Form10-Q for the quarter ended September 30, 2006.

20

----

In light of the foregoing, management hasimplemented procedures that it believes will positively impact theeffectiveness of internal control over interim financial reporting, includingthe following:

1.                                  Quarterly physical inventories will be conducted at those plantlocations that have had significant book to physical inventory adjustments inrecent periods until such time as management is able to determine that itsbills of materials and other inventory relief procedures will result in correctinventory valuation at the end of accounting periods and proper recognition ofcost of sales for interim financial reporting.

2.                                  At those plant locations where a quarterly physical inventory is notperformed, a more thorough review of inventory costing procedures will be madeat the end of interim periods to provide additional assurance that theprocedures for valuation of inventories and recognition of cost of sales isreasonable.

3.                                  Procedures will beimplemented to assure that interim quarterly physical inventories are pricedand summarized on a timely basis in order that any book to physical inventoryadjustments will be recorded in the period of the physical inventory ratherthan the subsequent accounting period.

Additionally, corrective actions also includeadditional procedures at corporate to strengthen ongoing reviews of plantaccounting activities through the utilization of our corporate accountingstaff.

The Company believes that it will be able toimprove its internal control procedures through these corrective actions bymore quickly identifying inaccuracies in its cost estimates and reporting theseon a more contemporaneous basis. Notwithstanding the Company’s corrective efforts,because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

***Changes inInternal Control over Financial Reporting -***Except as disclosed above, there have been no changes in the Company’sinternal control over financial reporting for the three months ended September30, 2006 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

The Companycontinues to take action to assure compliance with the internal controls,disclosure controls, and other requirements of the Sarbanes-Oxley Act of2002.  Our management, including ourChief Executive Officer and Chief Financial Officer, cannot guarantee that ourinternal controls and disclosure controls will prevent all possible errors orall fraud.  A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. In addition, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefit of controls must be relative to their costs.  Because of the inherent limitations in allcontrol systems, no system of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake.  Further, controls can be circumvented byindividual acts of some persons, by collusion of two or more persons, or bymanagement override of the controls.

The design of anysystem of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential futureconditions.  Over time, a control may beinadequate because of changes in conditions or the degree of compliance with thepolicies or

21

----

procedures maydeteriorate.  Because of inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

**PARTII.     OTHER INFORMATION**

**ITEM1.****                                         LEGALPROCEEDINGS.**

Not applicable

**ITEM1A.****                                RISKFACTORS.**

Any investment inour Common Stock involves a high degree of risk.  You should carefully consider the risks anduncertainties described below and the other information included in thisquarterly report on Form 10-Q before purchasing our Common Stock.  Although the risks described below are therisks that we believe are material, they are not the only risks relating to ourbusiness and our Common Stock.  Additionalrisks and uncertainties, including those that are not yet identified or that wecurrently believe are immaterial, may also adversely affect our business,financial condition, or results of operations. If any of the events described below occur, our business and financialresults could be materially and adversely affected.  The market price of our Common Stock coulddecline due to any of these risks, perhaps significantly, and you could loseall or part of your investment.  Inassessing these risks, you should also refer to the other information containedor incorporated by reference in our Annual Report on Form 10-K for the yearended December 31, 2005 filed with the Securities and Exchange Commission,including our consolidated financial statements and related notes.

**Rawmaterials**

The Company doesnot have long-term raw material contracts and is dependent upon suppliers ofsteel, aluminum, wood and fiberglass materials, for its manufacturingoperations. Consequently, our ability to produce and deliver our products couldbe affected by disruptions encountered by our raw material suppliers or freightcarriers.  Additionally, competitivemarket conditions may prevent the Company from implementing price increases tooffset raw material cost increases.

22

----

**Chassisavailability**

The Companygenerally does not purchase vehicle chassis for its inventory.  The Company accepts shipments of vehiclechassis owned by dealers or end-users, for the purpose of installing and/ormanufacturing its specialized truck bodies and buses on such chassis.  In the event of a labor disruption or otheruncontrollable event adversely affecting the limited number of companies whichmanufacture and/or deliver such chassis, the Company’s level of manufacturingcould be substantially reduced.  TheCompany has established relationships with all major chassis manufacturers, andin the event of a disruption in supply from one manufacturer, the Company wouldattempt to divert its demand to the other manufacturers.  Approximately 30% of the chassis involved inthe Company’s manufacturing have been secured through converter pool agreementswith three major chassis manufacturers that provide for truck chassis pools ateach of the Company’s manufacturing facilities.

The Company alsofaces risk relative to finance charges for maintaining excess chassisinventory.  Under these consignedinventory agreements, if the chassis is not delivered to a customer within aspecified time frame, the Company is required to pay a finance charge on thechassis.

**Competition**

The competitivenature of the specialized vehicle industry creates a number of challenges forthe Company.  Important factors includeproduct pricing, quality of product, lead times, geographic proximity tocustomers and the ability to manufacture a product customized to customerspecifications.  Management believes thatthe Company has a competitive advantage in each of these areas due to its yearsof experience in the industry, established dealer/distributor relationships,strong relationships with chassis manufacturers and its nationwide presence.  However, specialized vehicles are produced bya number of smaller, regional companies, which create product pricing pressuresthat could adversely impact the Company’s profits.  Chassis manufacturers have not generallyshown an interest in manufacturing specialized vehicles, including truck bodiesand shuttle buses, because such manufacturers’ highly-automated assembly lineoperations do not lend themselves to the efficient production of a wide varietyof highly specialized vehicles with various options and equipment.

**Environmentaland health and safety liabilities**

Our operations aresubject to a variety of federal, state and local environmental and health andsafety statutes and regulations, including those relating to emissions in theair, discharges to water, treatment, storage and disposal of waste andremediation of contaminated sites.  Incertain cases, these requirements may limit the productive capacity of ouroperations.  However, other companies aresubject to similar regulations. As a result, these regulations are not believedto have an adverse effect on the Company’s competitive position.

Certain laws,including the Federal Comprehensive Environmental Response, Compensation, andLiability Act of 1980, as amended, have imposed strict and, under certaincircumstances, joint and several liability for costs to remediate contaminatedsites upon designated responsible parties including site owners or operatorsand persons who dispose of wastes at, or transport wastes to, such sites.

23

----

From time to time,we have received notices of noncompliance with respect to our operations. Thesehave typically been resolved by investigating the alleged noncompliance andcorrecting any non compliant conditions. New environmental requirements, more aggressive enforcement of existingones, or discovery of presently unknown conditions could require materialexpenditures or result in liabilities which could limit expansion or otherwisehave a material adverse effect on our business, financial condition andoperating cash flows.

**Possibilityof material losses from product liability and warranty claims**

We face aninherent risk of exposure to product liability claims if the use of our currentand formally manufactured products result, or are alleged to result, inpersonal injury and/or property damage. If we manufacture a defective product, we may experience materialproduct liability losses in the future. In addition, we may incur significant costs to defend product liabilityclaims.  We could also incur damages andsignificant costs in correcting any defects, lost sales, and suffer damage toour reputation.  Our product liabilityinsurance coverage may not be adequate for liabilities we could incur and maynot continue to be available on terms acceptable to us.

We are alsosubject to product warranty claims in the ordinary course of our business.  If we manufacture poor quality products orreceive defective materials, we may incur unforeseen costs in excess of what wehave reserved in our financial statements. These costs could have a material adverse effect on our business andoperating cash flows.

**We depend on the services of keymanagement personnel, the loss of whom could materially harm us**

Our ability tocompete successfully and implement our business strategy depends on the effortsof our senior management personnel.  Theloss of the services of any one or more of these individuals could have amaterial adverse effect on our business. We do not maintain key-man life insurance policies on any of ourexecutives.  If we were unable to attractqualified personnel to our management, our existing management resources couldbecome strained, which would harm our business and our ability to implement ourstrategies.

**Price volatility and low tradingvolumes**

Our Class A CommonStock has experienced, and may continue to experience, price volatility and lowtrading volumes.  It may be difficult foryou to sell your shares in the public market at any given time at prevailingprices, and the price of our Class A Common Stock may, therefore, bevolatile.  Overall market conditions andother risk factors described herein may cause the market price of our Class ACommon Stock to fall.  Our high and lowsales prices for the twelve-month period ended September 30, 2006, were $9.56 and$6.10, respectively.  Our Class A CommonStock is listed on the American Stock Exchange under the symbol “STS.”  However, daily trading volumes for our ClassA Common Stock are, and may continue to be, relatively small compared to manyother publicly-traded securities.  Forexample, during the twelve-month period ended September 30, 2006, our dailytrading volume has been as low as zero.

24

----

**Our officers and directors own alarge percentage of our common stock, and they may control our business andaffairs**

Our officers anddirectors as a group beneficially own approximately 33.2% of our Class A CommonStock and 90.9% of our Class B Common Stock. As a result, they will continue to be able to exercise significantinfluence, and in most cases, control, over matters requiring shareholderapproval, including the election of directors, changes to our charter documentsand significant corporate transactions. This concentration of ownership makes it unlikely that any other holderor group of holders of our Class A Common Stock will be able to affect the waywe are managed or the direction of our business.

**Split classes of stock make itdifficult for a third party to acquire the Company**

Our outstandingCommon Stock is split into two classes. The Class A Common Stock is listed on the American Stock Exchange, andthe holders thereof are entitled to elect three members of the Company’s Boardof Directors.  The majority (90.9%) ofthe Class B Common Stock is owned or controlled by the Company’s officers anddirectors and is entitled to elect the remaining six members of the Company’sBoard of Directors.  The continuingability of the holders of our Class B Common Stock to elect a majority of themembers of the Company’s Board of Directors will make it difficult for anothercompany to acquire us and for you to receive any related take-over premium foryour shares (unless the controlling group approves the acquisition).

(See other riskfactors listed under the following captions: Critical Accounting Policies and Estimates, Forward-Looking Statements,and Control Risks)

**ITEM2.****                                         UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

Not applicable

**ITEM3.****                                         DEFAULTSUPON SENIOR SECURITIES.**

Not applicable

**ITEM4.****                                         SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

Not applicable

**ITEM5.****                                         OTHERINFORMATION.**

Not applicable

25

----

 

**ITEM6.****                                         EXHIBITS.**

Exhibits:
| Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|--------------|-----------------------------------------------------------------------------------------------------|
|         |                                                                                                |
| Exhibit 31.2 | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|         |                                                                                                |
| Exhibit 32.1 | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|         |                                                                                                |
| Exhibit 32.2 | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

26

----

 

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                 | SUPREME INDUSTRIES, INC.                                                                  |
|---------------------------------|-------------------------------------------------------------------------------------------|
|                            |                                                                                      |
|                            |                                                                                      |
|                            |   BY: /s/  Jeffery D. Mowery                                                         |
|   DATE:  November 14, 2006 |                                                                                      |   Jeffery D.  Mowery |
|                            |                                                                                      |
|                            | Vice President of Finance and Chief  Financial Officer                                    |
|                            |                                                                                      |
|                            | (Signing on behalf of the Registrant  and as Principal Financial and  Accounting Officer) |
|                                 |                                                                                           |  |

 

----

 

INDEX TO EXHIBITS
| Exhibit    | ** ** | ** **                                                                                           |
|------------|------------|------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description of Document**                                                                          |
|       |       |                                                                                                 |
| 31.1       |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                 |
| 31.2       |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                 |
| 32.1       |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                 |
| 32.2       |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----