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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                     | ** ** | ** **                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                         | ** ** | ** **                                                                                              |
| x                                                                                                                                                                  |       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                               |       |                                                                                                    |
| **For the  quarterly period ended September 26, 2009**                                                                                                        |
|                                                                                                                                                               |       |                                                                                                    |
| **or**                                                                                                                                                             |
|                                                                                                                                                               |       |                                                                                                    |
| **o**                                                                                                                                                              | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                               |       |                                                                                                    |
| **For the  transition period from             to            ** |

 

**CommissionFile Number: 1-8183**

 

**SUPREME INDUSTRIES, INC.**

(Exact name ofregistrant as specified in its charter)

** **

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

 

**2581 E.Kercher Rd., P.O. Box 237, Goshen, Indiana 46528**

(Address ofprincipal executive offices)  (Zip Code)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).                Yes o   No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company x |

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Common Stock ($.10 Par  Value)** | ** ** | **Outstanding at  October 30, 2009** |
|------------------------------------|------------|-------------------------------------------|
| **Class A**                   | ** ** | **12,158,823**                            |
| **Class B**                   | ** ** | **2,188,490**                             |

 

 

 

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SUPREME INDUSTRIES, INC.

 

CONTENTS

 
| ** **         | ** **                                                                                  | **Page No.** |
|--------------------|---------------------------------------------------------------------------------------------|-------------------|
|               |                                                                                        |              |
| PART I.       | FINANCIAL INFORMATION                                                                       |              |
|               |                                                                                        |              |
| ITEM  1.           | Financial Statements                                                                        |              |
|               |                                                                                        |              |
|               | Consolidated  Balance Sheets                                                                | 1                 |
|               |                                                                                        |              |
|               | Consolidated Statements of Operations                                                       | 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 | 10                |
|               |                                                                                        |              |
| ITEM 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                 | 18                |
|               |                                                                                        |              |
| ITEM 4.            | Controls and  Procedures                                                                    | 18                |
|               |                                                                                        |              |
| PART II.      | OTHER INFORMATION                                                                           |              |
|               |                                                                                        |              |
| ITEM 1.            | Legal Proceedings                                                                           | 20                |
|               |                                                                                        |              |
| ITEM  1A.          | Risk Factors                                                                                | 20                |
|               |                                                                                        |              |
| ITEM 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 21                |
|               |                                                                                        |              |
| ITEM 3.            | Defaults Upon  Senior Securities                                                            | 21                |
|               |                                                                                        |              |
| ITEM 4.            | Submission of Matters  to a Vote of Security Holders                                        | 21                |
|               |                                                                                        |              |
| ITEM 5.            | Other Information                                                                           | 21                |
|               |                                                                                        |              |
| ITEM  6.           | Exhibits                                                                                    | 22                |
|               |                                                                                        |              |
| SIGNATURES         |                                                                                        |
|               |                                                                                        |
| INDEX TO  EXHIBITS |                                                                                        |
|               |                                                                                        |
| EXHIBITS           |                                                                                        |
|                    |                                                                                             |                   |  |  |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****              FINANCIALSTATEMENTS.**

 

**Supreme Industries, Inc. and Subsidiaries**

Consolidated Balance Sheets

 
| ** **                                      | ** ** | **September 26,** | ** **  | **December 27,** | ** ** |
|-------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                      | ** ** | **2009**               | ** **  | **2008**              | ** ** |
| ** **                                      | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **ASSETS**                                      |       |                   |        |                  |       |
|                                            |       |                   |        |                  |       |
| **Current assets:**                             |       |                   |        |                  |       |
| Cash and cash equivalents                       |       | $                      | 66,890      |                  | $          | 932,608 |   |
| Investments                                     |       | 1,640,288              |        | 2,509,848             |       |
| Accounts receivable, net                        |       | 19,791,045             |        | 25,423,842            |       |
| Inventories                                     |       | 34,909,064             |        | 44,248,516            |       |
| Other current assets                            |       | 8,502,347              |        | 6,335,740             |       |
|                                            |       |                   |        |                  |       |
| **Total current assets**                        |       | 64,909,634             |        | 79,450,554            |       |
|                                            |       |                   |        |                  |       |
| **Property, plant and equipment, at  cost**     |       | 89,967,644             |        | 94,128,405            |       |
| Less, Accumulated depreciation and amortization |       | 46,812,757             |        | 48,349,497            |       |
|                                            |       |                   |        |                  |       |
| **Property, plant and equipment,  net**         |       | 43,154,887             |        | 45,778,908            |       |
|                                            |       |                   |        |                  |       |
| **Other assets**                                |       | 1,183,544              |        | 295,109               |       |
|                                            |       |                   |        |                  |       |
| **Total assets**                                |       | $                      | 109,248,065 |                  | $          | 125,524,571 |   |

 

See accompanying notes to consolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

Consolidated Balance Sheets, Concluded

 
| ** **                                           | ** ** | **September 26,** | ** **  | **December 27,** | ** ** |
|------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                           | ** ** | **2009**               | ** **  | **2008**              | ** ** |
| ** **                                           | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**       |       |                   |        |                  |       |
|                                                 |       |                   |        |                  |       |
| **Current liabilities:**                             |       |                   |        |                  |       |
| Current maturities of long-term debt                 |       | $                      | 613,489     |                  | $          | 823,297 |   |
| Revolving line of credit                             |       | 20,314,490             |        | —                |       |
| Trade accounts payable                               |       | 8,352,821              |        | 8,266,945             |       |
| Accrued income taxes                                 |       | 662,380                |        | 675,200               |       |
| Other accrued liabilities                            |       | 7,933,137              |        | 9,349,112             |       |
|                                                 |       |                   |        |                  |       |
| **Total current liabilities**                        |       | 37,876,317             |        | 19,114,554            |       |
|                                                 |       |                   |        |                  |       |
| **Long-term debt**                                   |       | 1,335,675              |        | 32,805,350            |       |
|                                                 |       |                   |        |                  |       |
| **Deferred income taxes**                            |       | 2,403,698              |        | 2,403,698             |       |
|                                                 |       |                   |        |                  |       |
| **Other long-term liabilities**                      |       | 585,158                |        | 818,053               |       |
|                                                 |       |                   |        |                  |       |
| **Total liabilities**                                |       | 42,200,848             |        | 55,141,655            |       |
|                                                 |       |                   |        |                  |       |
| **Stockholders’ equity**                        |       | 67,047,217             |        | 70,382,916            |       |
|                                                 |       |                   |        |                  |       |
| **Total liabilities and  stockholders’ equity** |       | $                      | 109,248,065 |                  | $          | 125,524,571 |   |

 

See accompanying notes to consolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

Consolidated Statements ofOperations (Unaudited)

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 26,** | ** ** | **September 27,** | ** ** | **September 26,** | ** ** | **September 27,** | ** ** |
| ** **                                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| Net sales                                                |       | $                      | 50,101,178 |                   | $          | 61,086,346 |   | $ | 148,978,349 |   | $ | 212,317,770 |   |
| Cost of sales                                            |       | 46,215,513             |       | 55,666,495             |       | 138,652,416 |   | 191,907,710 |   |
| **Gross profit**                                         |       | 3,885,665              |       | 5,419,851              |       | 10,325,933 |   | 20,410,060 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| Selling, general and administrative expenses             |       | 5,328,645              |       | 6,797,403              |       | 16,511,198 |   | 20,787,125 |   |
| Other income                                             |       | (102,972               | )          | (160,959               | )          | (780,998 | ) | (670,470 | ) |
| **Operating income (loss)**                              |       | (1,340,008             | )          | (1,216,593             | )          | (5,404,267 | ) | 293,405 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| Interest expense                                         |       | 623,566                |       | 508,368                |       | 1,780,330 |   | 1,625,273 |   |
| **Loss before income taxes**                             |       | (1,963,574             | )          | (1,724,961             | )          | (7,184,597 | ) | (1,331,868 | ) |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| Income tax benefit                                       |       | (435,000               | )          | (1,094,910             | )          | (3,151,000 | ) | (1,144,910 | ) |
| **Net loss**                                             |       | $                      | (1,528,574 | )                      | $          | (630,051 | ) | $ | (4,033,597 | ) | $ | (186,958 | ) |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **Loss Per Share:**                                      |       |                   |       |                   |       |   |   |   |   |
| Basic                                                    |       | $                      | (0.11      | )                      | $          | (0.04 | ) | $ | (0.28 | ) | $ | (0.01 | ) |
| Diluted                                                  |       | (0.11                  | )          | (0.04                  | )          | (0.28 | ) | (0.01 | ) |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **Shares used in the computation of****loss per share:** |       |                   |       |                   |       |   |   |   |   |
| Basic                                                    |       | 14,198,782             |       | 14,186,973             |       | 14,180,168 |   | 14,073,863 |   |
| Diluted                                                  |       | 14,198,782             |       | 14,186,973             |       | 14,180,168 |   | 14,073,863 |   |
|                                                     |       |                   |       |                   |       |   |   |   |   |
| **Cash dividends per common share**                      |       | $                      | —     |                   | $          | — |   | $ | — |   | $ | 0.19 |   |

 

See accompanying notes to consolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

Consolidated Statements ofCash Flows (Unaudited)

 
| ** **                                                                       | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **September 26,** | ** ** | **September 27,** | ** ** |
| ** **                                                                       | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Cash flows from operating  activities:**                                       |       |                   |       |   |   |
| Net loss                                                                         |       | $                      | (4,033,597 | ) | $ | (186,958 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                    |       | 3,117,219              |       | 3,194,638 |   |
| Amortization of intangibles                                                      |       | —                 |       | 36,278 |   |
| Provision for losses on doubtful receivables                                     |       | 78,736                 |       | 170,918 |   |
| Stock-based compensation expense                                                 |       | 469,810                |       | 465,616 |   |
| Losses (gains) on sale of property, plant and  equipment, net                    |       | (239,708               | )          | 28,868 |   |
| Changes in operating assets and liabilities                                      |       | 11,281,311             |       | 544,351 |   |
|                                                                             |       |                   |       |   |   |
| **Net cash provided by operating  activities**                                   |       | 10,673,771             |       | 4,253,711 |   |
|                                                                             |       |                   |       |   |   |
| **Cash flows from investing activities:**                                        |       |                   |       |   |   |
| Additions to property, plant and equipment                                       |       | (1,655,555             | )          | (2,823,868 | ) |
| Proceeds from sale of property, plant and  equipment                             |       | 507,071                |       | 60,401 |   |
| Purchases of investments                                                         |       | (85,625                | )          | (1,142,316 | ) |
| Proceeds from sale of investments                                                |       | 1,053,054              |       | 832,670 |   |
| Decrease in other assets                                                         |       | 6,559                  |       | 6,559 |   |
|                                                                             |       |                   |       |   |   |
| **Net cash used in investing  activities**                                       |       | (174,496               | )          | (3,066,554 | ) |
|                                                                             |       |                   |       |   |   |
| **Cash flows from financing  activities:**                                       |       |                   |       |   |   |
| Proceeds from revolving line of credit and  long-term debt                       |       | 55,813,354             |       | 89,915,986 |   |
| Repayments of revolving line of credit and  long-term debt                       |       | (67,178,347            | )          | (90,044,061 | ) |
| Payment of cash dividends                                                        |       | —                 |       | (2,491,484 | ) |
| Proceeds from exercise of stock options                                          |       | —                 |       | 247,500 |   |
|                                                                             |       |                   |       |   |   |
| **Net cash used in financing  activities**                                       |       | (11,364,993            | )          | (2,372,059 | ) |
|                                                                             |       |                   |       |   |   |
| **Change in cash and cash  equivalents**                                         |       | (865,718               | )          | (1,184,902 | ) |
|                                                                             |       |                   |       |   |   |
| **Cash and cash equivalents,  beginning of period**                              |       | 932,608                |       | 1,266,133 |   |
|                                                                             |       |                   |       |   |   |
| **Cash and cash equivalents, end of  period**                                    |       | $                      | 66,890     |   | $ | 81,231 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

NotesTo Consolidated Financial Statements

 

NOTE 1 - BASIS OFPRESENTATION AND OPINION OF MANAGEMENT

 

The accompanying unaudited consolidatedcondensed financial statements have been prepared in accordance with theinstructions 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, andcash flows in conformity with accounting principles generally accepted in theUnited States of America.  In the opinionof management, the information furnished herein includes all adjustmentsnecessary to reflect a fair statement of the interim periods reported.  All adjustments are of a normal and recurringnature.  The December 27, 2008consolidated balance sheet data was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America.  References to “we,” “us,” “our,” “its,” “Supreme,”or the “Company” refer to Supreme Industries, Inc. and its subsidiaries.

 

The Company has adopted a 52- or 53-weekfiscal year ending the last Saturday in December.  The results of operations for the three andnine months ended September 26, 2009 and September 27, 2008 are for13- and 39-week periods, respectively.

 

The Company evaluated its September 26,2009 consolidated financial statements for subsequent events through November 10,2009, the date the consolidated financial statements were issued.

 

NOTE 2 — RECENT ACCOUNTINGPRONOUNCEMENTS

 

In June 2009, the FASB issued AccountingStandards Codification (“ASC”) 105 which modifies the hierarchy of GenerallyAccepted Accounting Principles in the United States (“GAAP”) to include onlytwo levels of GAAP: authoritative and nonauthoritative.  All of thecontent included in the ASC will be considered authoritative.  ASC is notintended to amend GAAP but codifies previous accounting literature.  ASCis effective for interim and annual periods ending after September 15,2009.  We adopted the ASC when referring to GAAP in this quarterly reporton Form 10-Q for the fiscal period ending September 26, 2009. The adoption of the ASC changed the referencing of authoritative accountingliterature to conform to the ASC but did not have an impact on our consolidatedresults.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

Notes To Consolidated Financial Statements,Continued

 

NOTE 3 — OTHER COMPREHENSIVEINCOME (LOSS)

 

Other comprehensive income (loss) includesunrealized gains (losses) on hedge-activity, net of tax, and unrealized gains(losses) on available-for-sale securities, net of tax.  Total comprehensive loss combines net lossand other comprehensive income (loss).

 

For the three- and nine-month periods ended September 26,2009 and September 27, 2008, total and other comprehensive income (loss)are as follows:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **September 26,** | ** ** | **September 27,** | ** ** | **September 26,** | ** ** | **September 27,** | ** ** |
| ** **                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                          |       | $                      | (1,528,574 | )                      | $          | (630,051 | ) | $ | (4,033,597 | ) | $ | (186,958 | ) |
| Other comprehensive income (loss) |       | 97,530                 |       | (71,374                | )          | 228,088 |   | (188,574 | ) |
| Total comprehensive loss          |       | $                      | (1,431,044 | )                      | $          | (701,425 | ) | $ | (3,805,509 | ) | $ | (375,532 | ) |

 

NOTE 4 - INVENTORIES

 

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

 
| ** **       | ** ** | **September 26,** | ** ** | **December 27,** | ** ** |
|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Raw materials    |       | $                      | 19,146,836 |                  | $          | 24,596,110 |   |
| Work-in-progress |       | 6,994,731              |       | 8,204,857             |       |
| Finished goods   |       | 8,767,497              |       | 11,447,549            |       |
|             |       | $                      | 34,909,064 |                  | $          | 44,248,516 |   |

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

Notes To Consolidated Financial Statements,Continued

 

NOTE 5 — FAIR VALUEMEASUREMENT

 

Generally accepted accounting principlesdefine fair value as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date.  GAAP alsoestablishes a fair value hierarchy which requires an entity to maximize the useof observable inputs and minimize the use of unobservable inputs when measuringfair value.  The standard describes three levels of inputs that may beused to measure fair value:

 

Level 1: Quoted prices(unadjusted) for identical assets or liabilities in active markets that theentity has the ability to access as of the measurement date.

 

Level 2: Significant otherobservable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data.

 

Level 3: Significantunobservable inputs that reflect a company’s own assumptions about theassumptions that market participants would use in pricing an asset orliability.

 

The Company used the following methods andsignificant assumptions to estimate the fair value of items:

 

Investments: The fair valuesof investments available for sale are determined by obtaining quoted prices onnationally recognized securities exchanges (Level 1 inputs).

 

Derivatives: Our derivativeinstruments consist of interest rate swaps, currently reflected as otherlong-term liabilities on the Consolidated Balance Sheets.  The Company obtains fair values fromfinancial institutions who utilize internal models with observable market datainputs to estimate the fair value of these instruments (Level 2 inputs). Anincrease in interest rates since December 27, 2008 has resulted in areduction in the liability of $232,895 and comprehensive income of $163,495,net of tax.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

Notes To Consolidated Financial Statements,Continued

 

NOTE 6 — REVOLVING LINE OFCREDIT

 

Supreme Corporation, the Company’s wholly-owned subsidiary, amended itsexisting credit facility effective September 9, 2009.  This amendment reduced the line of creditavailable to Supreme Corporation to $25 million from $33 million and modifiedthe two financial covenants regarding minimum tangible net worth and adjustedEBITDA measurements. The remaining terms of the credit facility aresubstantially the same as the previous credit facility disclosed in the AnnualReport on Form 10-K for the year ended December 27, 2008.

 

During the quarter ended September 26, 2009, Supreme Corporationwas not in compliance with an earnings-related covenant regarding adjustedEBITDA in its existing credit facility with JPMorgan Chase Bank, N. A. On November 6,2009, the Company obtained consent from its lender to waive theearnings-related covenant through September 26, 2009. Additionally thelender modified the financial covenant regarding minimum tangible net worth andextended the credit facility maturity date three months from July 31, 2010 to October 31,2010.

 

Although the maturity date is greater thanone year, generally accepted accounting principles (specifically, ASC 470-10)require that a long-term debt be reclassified as current if management is ofthe opinion that the Company may not be able to cure the default at measurementdates that are within the next twelve months. As a result of previous covenant violations and the current economicenvironment, management has changed the classification of the Company’s debtfrom long-term to current. This reclassification will have no effect onpreviously reported Consolidated Statement of Operations or ConsolidatedStatement of Cash Flows for the 2009 year. Regardless of the non-compliancewith earnings-related covenants, the Company has made every scheduled paymentof principal and interest.

 

NOTE 7 - LOSS PER SHARE

 

As of September 26, 2009, the assumed exercise or issuance of253,013 shares and 186,797 shares for the three- and nine-month periods,respectively, relating to stock plans were not included in the computation ofdiluted loss per share. As of September 27, 2008, the assumed exercise orissuance of 200,669 shares and 171,755 shares for the three- and nine-monthperiods, respectively, relating to stock plans were not included in the dilutedloss per share.  Inclusion of theseshares in the respective periods would have been antidilutive.

 

NOTE 8 - STOCK-BASEDCOMPENSATION

 

The following tablesummarizes the activity for the unvested restricted stock units and restrictedstock for the nine months ended September 26, 2009:

 

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| ** **                        | ** ** | ** **    | ** ** | **Weighted -** | ** ** |
|-----------------------------------|------------|---------------|------------|----------------|------------|
| ** **                        | ** ** | ** **    | ** ** | **Average**    | ** ** |
| ** **                        | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **Shares**    | ** ** | **Fair Value** | ** ** |
| Unvested, December 27, 2008  |       | 202,069       |       | $              | 4.81       |   |
| Granted                           |       | —        |       | n/a            |       |
| Vested                            |       | (67,750       | )          | 5.04           |       |
| Unvested, September 26, 2009 |       | 134,319       |       | $              | 4.69       |   |

 

The total fair value of theshares vested during the nine months ended September 26, 2009 was$341,249.

 

A summary of the status of the Company’soutstanding stock options as of September 26, 2009, and changes during thenine months ended September 26, 2009, are as follows:

 
| ** **                           | ** ** | ** **    | ** ** | **Weighted -** | ** ** |
|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                           | ** ** | ** **    | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | **Number of** | ** ** | **Exercise**   | ** ** |
| ** **                           | ** ** | **Shares**    | ** ** | **Price**      | ** ** |
| Outstanding, December 27, 2008  |       | 1,061,975     |       | $              | 5.65       |   |
| Granted                              |       | 196,000       |       | 1.56           |       |
| Exercised                            |       | —        |       | n/a            |       |
| Forfeited                            |       | (11,893       | )          | 6.32           |       |
| Outstanding, September 26, 2009 |       | 1,246,082     |       | $              | 5.00       |   |

 

As of September 26, 2009, outstandingoptions had an intrinsic value of $16,350 and a weighted-average remainingcontractual life of 3.71 years.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

 

**ITEM 2****.****            ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.**

 

Established in 1974 as atruck body manufacturer, Supreme Industries, Inc., through itswholly-owned subsidiary Supreme Corporation, is one of the nation’s leadingmanufacturers of specialized commercial vehicles. Utilizing a nationwide directsales and distribution network, as well as manufacturing and service facilitiesin 10 states across the continental United States, Supreme is able to meet theneeds of customers across all of North America.

 

The Company engagesprincipally in the production and sale of customized truck bodies, shuttlebuses, and other specialty vehicles. Building on its expertise in providingboth cargo and passenger transportation solutions, the Company’s specialtyofferings include products such as customized armored vehicles, homelandresponse vehicles, portable storage units, and luxury motor coaches. Throughvertical integration and proprietary processes, the Company also is a producerof high quality fiberglass and fiberglass-reinforced components.

 

The Company and its productofferings are sensitive to various factors which include, but are not limitedto, economic conditions, interest rate fluctuations, volatility in the supplychain of vehicle chassis and the availability of credit and financing to theCompany, our vendors, dealers, or end users.  The Company’s business isalso affected by the availability and costs of certain raw materials that serveas significant components of its product offerings.  The Company’s riskfactors are disclosed in Item 1A “Risk Factors” in the Company’s Annual Reporton Form 10-K for the year ended December 27, 2008 and herein in Item1A.

 

The following discussionshould be read in conjunction with the unaudited consolidated financialstatements and related notes thereto elsewhere in this document.

 

**Results of Operations**

 

***Overview***

 

During the third quarter of2009, Supreme continued to experience the impact of the severe economicrecession, particularly in its core truck business and motorhome operations ashas been the case since early 2008.  In our efforts to emerge from thecurrent economic environment as an even more formidable competitor in ourindustry, we continue to carry out our strategy which includes costcontainment, production efficiencies, market expansion and productdiversification. Although we have reduced our annualized operating costs bymore than $15 million over the past year, we still incurred a loss for thethird quarter.  Management remainsfocused on further reducing our costs of operations in light of the product mixand revenue levels we are currently experiencing. The current industryconsensus is that overall demand for our products is not expected to improveuntil mid-2010, though we can not provide any assurance that this will occur.

 

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Additionally, during 2009,we have incurred production start-up costs in both our Pennsylvania and Oregonbus operations as we expanded capacity in those locations to meet the recentincrease in bus demand. In our efforts to increase revenues, we have investedand focused more on marketing and selling into the specialty vehicle market andthe larger fleet market. Further, we continually work to improve ouroperational processes, researching new materials to increase value to ourcustomers with an emphasis on “green” materials and technologies, while alsoupgrading existing and developing new product offerings.

 

During 2009, we haveincurred an operating loss primarily due to the approximate 40% decline in thecommercial truck market over the past 12 months according to the latest Polkreport, an industry commentary on the U.S. commercial vehicle market. With coredry freight trucks and related products having historically represented approximately65% of our revenues on average over prior periods, our revenues have beendramatically affected by these conditions. The outlook for the commercialvehicle industry continues to be weak for the remainder of 2009. We believethat the current market condition may result in pent-up demand since theaverage age of vehicles in use is estimated to be over nine years compared tothe historic average of six years. With recent improvements to our newSignature body and improved processes, we believe that our truck division iswell positioned to capitalize on a modest recovery.

 

Additionally, the Company’sintense focus on asset management continues as evidenced by our totaldebt-to-equity ratio, which improved significantly since the beginning of 2009,along with a total debt level decrease of $11.4 million, or 34%.

 

***Net Sales***

 

Net sales for the threemonths ended September 26, 2009 decreased $11.0 million to $50.1 millioncompared to $61.1 million for the three months ended September 27,2008.  Net sales for the nine months ended September 26, 2009decreased $63.3 million to $149.0 million compared to $212.3 million for thenine months ended September 27, 2008. The following table presents thecomponents of net sales and the changes from period-to-period:

 
| ** **                | ** ** | **Three Months Ended** | ** **   | **Nine Months Ended** | ** ** |
|---------------------------|------------|------------------------|--------------|-----------------------|------------|
| **($000’s omitted)** | ** ** | **Sep 26,  2009**      | ** **   | **Sep 27,  2008**     | ** ** | **Change** | ** ** | **Sep 26,  2009** | ** ** | **Sep 27,  2008** | ** ** | **Change** | ** ** |
| Specialized vehicles:     |       |                   |         |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Trucks                    |       | $                      | 26,668       |                  | $          | 34,305 |   | $ | (7,636 | ) | -22.3 | % | $ | 78,207 |   | $ | 130,705 |   | $ | (52,498 | ) | -40.2 | % |
| Buses                     |       | 19,515                 |         | 20,992                |       | (1,477 | ) | -7.0 | % | 50,190 |   | 59,115 |   | (8,925 | ) | -15.1 | % |
| Armored vehicles          |       | 2,735                  |         | 932                   |       | 1,803 |   | 193.5 | % | 13,226 |   | 4,197 |   | 9,029 |   | 215.1 | % |
| Motorhomes                |       | 781                    |         | 2,827                 |       | (2,046 | ) | -72.4 | % | 3,567 |   | 10,413 |   | (6,846 | ) | -65.7 | % |
|                      |       | 49,699                 |         | 59,055                |       | (9,356 | ) | -15.8 | % | 145,190 |   | 204,430 |   | (59,240 | ) | -29.0 | % |
| Composites                |       | 402                    |         | 2,031                 |       | (1,629 | ) | -80.2 | % | 3,788 |   | 7,888 |   | (4,100 | ) | -52.0 | % |
|                      |       | $                      |  50,101 |                  | $          | 61,086 |   | $ | (10,985 | ) | -18.0 | % | $ | 148,978 |   | $ | 212,318 |   | $ | (63,340 | ) | -29.8 | % |

 

We attribute the decrease inour truck product sales primarily to the U.S. economic recession which resultedin an industry-wide decline in the retail truck market of approximately 40%over the past 12 months.  As a result of these market conditions, ourretail customers ordered fewer units, resulting in a revenue decrease of 22%versus the comparable quarter in 2008. This factor, combined with decreased orders from major fleet customersearlier in 2009, resulted in a revenue decrease of 40% for the nine months whencompared to the comparable 2008 period.

 

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OurStarTrans bus division continues to experience strong demand for its productsresulting from the availability of funds from the Federal economic stimuluspackage and increased use of more economical public transportation.  Withour recently expanded capacity and our strong backlog for this division, weanticipate favorable contributions for the remainder of 2009 and into 2010.

 

Thearmored division sales increase was primarily the result of our increasedcash-in-transit business and our armored Suburban product line.  Webelieve that the armored division is well positioned to increase its revenueyear-over-year for the remainder of 2009 due to the increased backlog and thepositive feedback we are receiving from other governmental agencies regardingour products and quality.

 

Themotorhome division continues to be impacted by the lack of financing availableto retail customers and the excess supply of motorhomes in the market.  To mitigate losses, we are consolidating thisoperation, streamlining the production****processes, andreviewing the product line to more effectively compete in this product group.

 

Thedecrease in composite sales of fiberglass reinforced plywood and otherfiberglass products is due to the overall decline in the commercial truck andrecreational vehicle markets.

 

Ourtotal sales backlog was $61.9 million at September 26, 2009 compared to$64.9 million at September 27, 2008.

 

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

 

Grossprofit decreased by $1.5 million, or 27.8%, to $3.9 million for the threemonths ended September 26, 2009 compared to $5.4 million for the threemonths ended September 27, 2008.  For the nine months ended September 26,2009, gross profit decreased by $10.1 million, or 49.5%, to $10.3 millioncompared to $20.4 million for the nine months ended September 27,2008.  The following table presents the components of cost of sales as apercentage of net sales and the changes from period to period:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|------------------------|------------|-----------------------|------------|
| ** **    | ** ** | **Sep 26,  2009**      | ** ** | **Sep 27,  2008**     | ** ** | **Percent  Change** | ** ** | **Sep 26,  2009** | ** ** | **Sep 27,  2008** | ** ** | **Percent  Change** | ** ** |
| Material      |       | 59.7                   | %          | 59.0                  | %          | 0.7 | % | 59.3 | % | 57.9 | % | 1.4 | % |
| Direct Labor  |       | 13.7                   |       | 13.6                  |       | 0.1 |   | 13.8 |   | 13.9 |   | (0.1 | ) |
| Overhead      |       | 16.4                   |       | 15.7                  |       | 0.7 |   | 17.7 |   | 15.8 |   | 1.9 |   |
| Delivery      |       | 2.4                    |       | 2.8                   |       | (0.4 | ) | 2.3 |   | 2.8 |   | (0.5 | ) |
| Cost of sales |       | 92.2                   |       | 91.1                  |       | 1.1 |   | 93.1 |   | 90.4 |   | 2.7 |   |
| Gross profit  |       | 7.8                    | %          | 8.9                   | %          | (1.1 | )% | 6.9 | % | 9.6 | % | (2.7 | )% |

 

**Material** — Materialcost as a percentage of net sales increased for the three and nine months endedSeptember 26, 2009 when compared to the corresponding periods in 2008. Thechange in the material percentage is primarily related to changes in ourproduct mix as a result of increased sales in our bus division, which has ahigher material percentage, and accounted for 39.0% and 33.7% of our total netsales for the three and nine months in 2009 compared to 34.4% and 27.8% for thesame periods in 2008, respectively.  The material percentage for trucksremained relatively constant from period to period.

 

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Raw material costs haverecently stabilized and have even begun to decrease for certain commodities,particularly for aluminum and steel products.  The Company closelymonitors all major commodities and continually reviews the financial viabilityof its primary vendors.  We also strive to reduce manufacturing coststhrough the use of improved technologies, processes, and supply chainmanagement tactics and strategies.

 

**DirectLabor** — Direct labor as a percentage of net sales was relatively consistentfor the three and nine months ended September 26, 2009 when compared tothe corresponding periods in 2008.  During this economic downturn theCompany has worked toward improving the overall direct labor percentage andcontinues its effort in this regard.

 

**Overhead** — Overhead asa percentage of net sales increased for the three and nine months ended September 26,2009 when compared to the corresponding periods in 2008.  The majority ofthe increase in the overhead percentage was due to the fixed nature of certainexpenses that do not fluctuate when sales volume changes. Additionally, grouphealth insurance expense was higher than anticipated for both periods as aresult of a few high dollar claims.  In an effort to control future claimcosts, the Company continues to implement changes to its employee healthinsurance plan design with a focus on preventive care.  We continue tofocus on reducing expenses and managing our overhead cost structure based onsales volume levels.

 

**Delivery** — Delivery asa percentage of net sales decreased for the three and nine months ended September 26,2009 when compared to the corresponding periods in 2008.  The Companycontinues to research and utilize more cost-effective delivery methods toreduce the adverse impact of high fuel costs.

 

***Selling, general and administrativeexpenses***

 

Selling,general and administrative (“G&A”) expenses decreased by $1.5 million, or22.1%, to $5.3 million for the three months ended September 26, 2009compared to $6.8 million for the three months ended September 27,2008.  For the nine months ended September 26, 2009, selling andG&A expenses decreased by $4.3 million, or 20.7%, to $16.5 million comparedto $20.8 million for the nine months ended September 27, 2008.  Thefollowing table presents selling and G&A expenses as a percentage of netsales and the changes from period to period:

 
| ** **                | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|---------------------------|------------|-------------------------|------------|------------------------|------------|
| **($000’s omitted)** | ** ** | **Sep  26,  2009**      | ** ** | **Sep  27,  2008**     | ** ** | **Change** | ** ** | **Sep  26,  2009** | ** ** | **Sep  27,  2008** | ** ** | **Change** | ** ** |
| Selling  expenses         |       | $                       | 1,748      |                   | 3.5        | % | $ | 2,817 |   | 4.6 | % | $ | (1,069 | ) | (1.1 | )% | $ | 5,677 |   | 3.8 | % | $ | 8,006 |   | 3.8 | % | $ | (2,329 | ) | — | % |
| G&A  expenses         |       | 3,581                   |       | 7.1                    |       | 3,980 |   | 6.5 |   | (399 | ) | 0.6 |   | 10,834 |   | 7.3 |   | 12,781 |   | 6.0 |   | (1,947 | ) | 1.3 |   |
| Total                     |       | $                       | 5,329      |                   | 10.6       | % | $ | 6,797 |   | 11.1 | % | $ | (1,468 | ) | (0.5 | )% | $ | 16,511 |   | 11.1 | % | $ | 20,787 |   | 9.8 | % | $ | (4,276 | ) | 1.3 | % |

 

**Sellingexpenses** — Selling expenses declined for the three and ninemonths ended September 26, 2009 when compared to the corresponding periodsin 2008.  The decrease was a result of lower commission expense, sellingwages, and employee-related expenses due to lower sales volumes and severalproactive cost reduction efforts.  These declines were partially offset byfewer cooperative marketing credits the Company received from chassismanufacturers.  These credits, determined solely by programs establishedby the chassis manufacturers, are used to offset marketing and promotionalexpenses.

 

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**G&Aexpenses** — G&A expenses decreased for the three and ninemonths ended September 26, 2009 when compared to the corresponding periodsin 2008.  The decrease was primarily attributable to employee headcountand related cost reductions, which are a large part of our cost savingsinitiatives which began in late 2008.

 

***Other income***

 

Forthe three months ended September 26, 2009, other income was $0.1 million(0.2% of net sales) compared to $0.2 million (0.3% of net sales) for the threemonths ended September 27, 2008.  For the nine months ended September 26,2009, other income was $0.8 million (0.5% of net sales) compared to $0.7million (0.3% of net sales) for the nine months ended September 27, 2008.Other income consisted of rental income, gain on sale of assets, and othermiscellaneous income received by the Company through its various businessactivities.

 

***Interest expense***

 

Interestexpense was $0.6 million (1.2% of net sales) for the three months ended September 26,2009 compared to $0.5 million (0.8% of net sales) for the three months ended September 27,2008.  For the nine months ended September 26, 2009, interest expensewas $1.8 million (1.2% of net sales) compared to $1.6 million (0.8% of netsales) for the nine months ended September 27, 2008.   The bankinterest expense reflects lower prevailing LIBOR and prime interest ratescoupled with reduced debt levels due to lower working capitalrequirements.  This was offset by higher performance-based pricingprovisions under the Company’s credit facility as recent operating lossestriggered an increase in rate. Additionally, chassis interest expense increased due to the slowdown inthe light-duty truck market causing a build-up of consigned chassis inventory.

 

***Income taxes***

 

TheCompany’s estimated effective income tax rate was favorably impacted by taxbenefits associated with the Company’s wholly-owned captive insurancesubsidiary, federal alternative fuel tax credits, and research and developmenttax credits.  The combination of these tax benefits along with theincurred pretax losses resulted in an overall tax benefit position for theCompany in each of the 2009 and 2008 periods presented.  The Companyestimates a 44% effective tax rate for the year ending December 26,2009.  The effective tax rate for the year ended December 27, 2008was 41.5%.  The increase in the effective tax rate is due to the fixednature of the noted tax benefits along with the estimated pretax loss for thefull year ending December 26, 2009.

 

***Net loss and loss per share***

 

Ournet loss increased by $0.9 million to $1.5 million (-3.0% of net sales) for thethree months ended September 26, 2009, from a net loss of $0.6 million(-1.0% of net sales) for the three months ended September 27, 2008. For the nine months ended September 26, 2009, our net loss was $4.0million (-2.7% of net sales) compared to a net loss of $0.2 million (-0.1% ofnet sales) for the nine months ended September 27, 2008.  Thefollowing table presents basic and diluted loss per share and the changes fromperiod to period:

 

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| ** **      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **Sep 26,  2009**      | ** ** | **Sep 27,  2008**     | ** ** | **Change** | ** ** | **Sep 26,  2009** | ** ** | **Sep 27,  2008** | ** ** | **Change** | ** ** |
| Loss per share: | ** ** | ** **             |       |                  | ** ** | ** ** | ** ** | ** ** |   |   | ** ** |   | ** ** |
| Basic           |       | $                      | (0.11      | )                     | $          | (0.04 | ) | $ | (0.07 | ) | $ | (0.28 | ) | $ | (0.01 | ) | $ | (0.27 | ) |
| Diluted         |       | $                      | (0.11      | )                     | $          | (0.04 | ) | $ | (0.07 | ) | $ | (0.28 | ) | $ | (0.01 | ) | $ | (0.27 | ) |

 

**Liquidity and Capital Resources**

 

TheCompany believes that it has adequate availability in its current bank creditfacility to finance future foreseeable working capital requirements.  TheCompany’s cash management system and revolving line of credit are designed tomaintain zero cash balances and, accordingly, checks outstanding in excess ofbank balances are classified as additional borrowings under the revolving lineof credit.

 

Intereston outstanding borrowings under the revolving line of credit is based on thebank’s prime rate, or certain basis points above LIBOR, depending on thepricing option selected and the Company’s leverage ratio.  Allborrowings under the Credit Agreement are secured by security interestscovering certain inventories, trade receivables, and selected other assets ofthe Company.  As of September 26, 2009, the Company had $20.3 millionutilized under its credit facility.

 

Supreme Corporation, the Company’swholly-owned subsidiary, amended its existing credit facility effective September 9,2009.  This amendment reduced the line ofcredit available to Supreme Corporation to $25 million from $33 million andmodified the two financial covenants regarding minimum tangible net worth andadjusted EBITDA measurements. The remaining terms of the credit facility aresubstantially the same as the previous credit facility disclosed in the AnnualReport on Form 10-K for the year ended December 27, 2008.

 

During the quarter ended September 26,2009, Supreme Corporation was not in compliance with an earnings-relatedcovenant regarding adjusted EBITDA in its existing credit facility with JPMorganChase Bank, N. A. On November 6, 2009 the Company obtained consent fromits lender to waive the earnings-related covenant through September 26,2009. Additionally the lender modified the financial covenant regarding minimumtangible net worth and extended the credit facility maturity date three monthsfrom July 31, 2010 to October 31, 2010.

 

Although the maturity dateis greater than one year, generally accepted accounting principles(specifically, ASC 470-10) require that a long-term debt be reclassified ascurrent if management is of the opinion that the Company may not be able tocure the default at measurement dates that are within the next twelvemonths.  As a result of previous covenantviolations and the current economic environment, management has changed theclassification of the Company’s debt from long-term to current. Thisreclassification will have no effect on previously reported ConsolidatedStatement of Operations or Consolidated Statement of Cash Flows for the 2009year. Regardless of the non-compliance with earnings-related covenants, theCompany has made every scheduled payment of principal and interest.

 

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***Operating activities***

 

Operatingactivities provided $10.7 million of cash for the nine months ended September 26,2009 compared to cash provided of $4.3 million for the nine months ended September 27,2008.  Through the third quarter of 2009, cash provided by operatingactivities was favorably impacted by a $5.6 million reduction in accountsreceivable resulting from the lower revenues in our core truck operations.Additionally, inventories decreased $9.3 million due improved inventorymanagement and depressed business conditions. This was offset by a $1.4 milliondecrease in other accrued liabilities and an increase in other current assetsof $2.2 million.  The net loss, adjusted for depreciation andamortization, resulted in unfavorable cash flows of $0.9 million and generatedfavorable cash flows of $3.0 million during the first nine months of 2009 and2008, respectively.

 

***Investing activities***

 

Cashused in investing activities was $0.2 million for the nine months ended September 26,2009 compared to $3.1 million for the nine months ended September 27,2008. Capital expenditures for the first nine months of 2009 were $1.7million and consisted primarily of purchases of machinery to improveefficiencies at our armored truck division. This was offset by the sale of investments in our wholly-owned captivesubsidiary totaling $1.0 million, and an additional $0.5 million in proceedsfrom the sale of property during the nine months ended September 27,2009.  For the remainder of 2009, theCompany expects to invest primarily in replacement equipment.

 

***Financing activities***

 

Financingactivities used $11.4 million of cash for the nine months ended September 26,2009 to principally pay down debt compared to cash used of $2.4 million for thenine months ended September 27, 2008.  The lower level of bankborrowing for the first nine months of the year occurred primarily as a resultof the decrease in accounts receivable and inventory levels due to lower salesand production levels.  Because of the present industry conditions andongoing economic recession, the Company’s Board of Directors suspended theCompany’s dividend program effective as of February 16, 2009. Futuredividends will necessarily be subject to business conditions, the Company’sfinancial position, and requirements for working capital, property, plant, andequipment expenditures, and other corporate purposes.

 

**Critical Accounting Policies andEstimates**

 

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 27,2008.  In management’s opinion, theCompany’s critical accounting policies include revenue recognition, allowancefor doubtful accounts, excess and obsolete inventories, inventory relief,accrued insurance, and accrued warranty.

 

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***Revenue Recognition*** — The Company generallyrecognizes revenue when products are shipped to the customer.  Revenue oncertain customer requested bill and hold transactions is recognized after thecustomer is notified that the products have been completed according tocustomer specifications, have passed all of the Company’s quality controlinspections, and are ready for delivery based on established delivery terms.

 

***Allowance for Doubtful Accounts*** — The Companymaintains an allowance for doubtful accounts for estimated losses resultingfrom the inability of our customers to make required payments.  If thefinancial conditions of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired which would adversely affect our future operating results.

 

***Excess and Obsolete Inventories*** — The Company mustmake estimates regarding the future use of raw materials and finished productsand provide for obsolete or slow-moving inventories.  If actual productlife cycles, product demand, and/or market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired, which would adversely affect future operating results.

 

***Inventory Relief*** — For monthlyand quarterly financial reporting, cost of sales is recorded and inventoriesare relieved by the use of standard bills of material adjusted for scrap andother estimated factors affecting inventory relief.  Because of our largeand diverse product line and the customized nature of each order, it isdifficult to place full reliance on the bills of material for accurate reliefof inventories.  Although the Company continues to refine the process ofcreating accurate bills of materials, manual adjustments (which are based onestimates) are necessary to assure correct relief of inventories for productssold.  The calculations to estimate costs not captured in the bill ofmaterials take into account the customized nature of products, historicalinventory relief percentages, scrap variances, and other factors which couldimpact inventory relief.

 

Theaccuracy of the inventory relief is not fully known until physical inventoriesare conducted at each of the Company’s locations. We conduct semi-annualphysical inventories at a majority of our locations and schedule them in amanner that provides coverage in each of our calendar quarters. We haveinvested significant resources in our continuing effort to improve the physicalinventory process and accuracy of our inventory accounting system.

 

***Accrued Insurance*** - The Companyhas a self-insured retention against product liability claims with insurancecoverage over and above the retention.  The Company is also self-insuredfor a portion of its employee medical benefits and workers’ compensation. Product liability claims are routinely reviewed by the Company’s insurancecarrier, and management routinely reviews other self-insurance risks forpurposes of establishing ultimate loss estimates.  In addition, managementmust determine estimated liability for claims incurred but not reported. Such estimates, and any subsequent changes in estimates, may result inadjustments to our operating results in the future.

 

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TheCompany utilizes a wholly-owned small captive insurance company to insurecertain of its business risks.  Certain risks, traditionally self-insuredby the Company and its subsidiaries, are insured by the captive insurancesubsidiary.  The captive insurance subsidiary helps the Company manage itsrisk exposures and, under the Internal Revenue Code, the net underwritingincome of such small captive is not taxable.

 

***Accrued Warranty*****— The Company provides limited warranties for periods of up to fiveyears from the date of retail sale.  Estimated warranty costs are accruedat the time of sale and are based upon historical experience.

 

**Forward-LookingStatements**

 

Thisreport contains forward-looking statements, other than historical facts, whichreflect the view of management with respect to future events.  When usedin this report, words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,”and similar expressions, as they relate to the Company or its plans oroperations, identify forward-looking statements.  Such forward-lookingstatements are based on assumptions made by, and information currentlyavailable to, management.  Although management believes that theexpectations reflected in such forward-looking statements are reasonable, itcan give no assurance that the expectations reflected in such forward-lookingstatements are reasonable, and it can give no assurance that such expectationswill prove to be correct.  Important factors that could cause actualresults to differ materially from such expectations include, without limitation,an economic slowdown in the specialized vehicle industry, limitations on theavailability of chassis on which the Company’s products are dependent,availability of raw materials, raw material cost increases, and severe interestrate increases.  Furthermore, the Company can provide no assurance thatsuch raw material cost increases can be passed on to its customers throughimplementation of price increases for the Company’s products.  Theforward-looking statements contained herein reflect the current view ofmanagement with respect to future events and are subject to those factors andother risks, uncertainties, and assumptions relating to the operations, resultsof operations, cash flows, and financial position of the Company.  TheCompany assumes no obligation to update the forward-looking statements or toupdate the reasons actual results could differ from those contemplated by suchforward-looking statements.

 

**ITEM 3.**              **QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Therehas been no material change from the information provided in the Company’sAnnual Report on Form 10-K, “Item 7A: Quantitative and QualitativeDisclosures About Market Risk,” for the year ended December 27, 2008.

 

**ITEM 4.****             ****CONTROLSAND PROCEDURES.**

 

a.             Evaluation of Disclosure Controls and Procedures.

 

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Inconnection with the preparation of this Form 10-Q, an evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective as of September 26, 2009.

 

b.             Changes in Internal Control over FinancialReporting.

 

Therehas been no change in the Company’s internal control over financial reportingduring our last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

TheCompany continues to take action to assure compliance with the internalcontrols, disclosure controls, and other requirements of the Sarbanes-Oxley Actof 2002.  Management, including the Company’s Chief Executive Officer andChief Financial Officer, cannot guarantee that the internal controls anddisclosure controls will prevent all possible errors or fraud.  A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of a control system have been met.In addition, the design of a control system must reflect the fact that thereare resource constraints, and the benefit of controls must be relative to theircosts.  Because of the inherent limitations in all control systems, nosystem of controls can provide absolute assurance that all control issues andinstances of fraud, if any, within the Company will be detected.  Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons,by collusion of two or more persons, or by management override of the controls.

 

Thedesign of any system of controls is also based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions.  Over time, a control may be inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate.  Because of inherent limitations in any cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

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**PART II.****           ****OTHERINFORMATION**

 

**ITEM 1.****             ****LEGAL PROCEEDINGS.**

 

The Company is subject to variousinvestigations, claims, and legal proceedings covering a wide range of mattersthat arise in the ordinary course of its business activities.  Each of these matters is subject to variousuncertainties, and it is possible that some ofthese matters may be resolved unfavorably to the Company.  The Company has established accruals formatters that are probable and reasonably estimable.  Management believes that any liability thatmay ultimately result from the resolution of these matters in excess ofaccruals and amounts provided by insurance coverage will not have a materialadverse effect on the consolidated financial position or results of operationsof the Company.

 

**ITEM 1A.****          ****RISK FACTORS.**

 

Fora discussion of those “Risk Factors” affecting the Company, you shouldcarefully consider the “Risk Factors” discussed in Part I, under “Item 1A:Risk Factors” contained in our Annual Report on Form 10-K for the yearended December 27, 2008, which is herein incorporated by reference. Wehave updated three of the risk factors previously disclosed in such AnnualReport to reflect the impact of the current recession on the Company and itsindustry, as follows:

 

**The current recession is having a significant negativeimpact on our industry.**

 

Therecession and the uncertainty over its breadth, depth, and duration have had anegative impact on the specialized commercial vehicle industry. Accordingly,our financial results have been negatively impacted by the economic downturnnotwithstanding cost-cutting measures taken by the Company in response to suchdownturn. Both our financial results and potential for growth could be furtherhindered if the recession continues for a significant period or becomes worse.The Company may be forced to take additional cost-cutting measures which mayadversely affect the Company’s ability to execute its business plan.

 

**A lack of credit and financing availability to theCompany, its vendors, dealers, or end users could adversely affect ourbusiness.**

 

Therecession may have a material adverse effect on the Company’s liquidity and financialcondition if, under its current bank credit agreement, the Company’s ability toborrow money from its existing lender to finance its operations is reduced oreliminated. Similar adverse effects may also result if the Company realizeslessened credit availability from trade creditors. Additionally, many of ourcustomers require the availability of financing to facilitate the purchase ofour products. As a result, a continuing period of reduced credit availabilityin the marketplace could have further adverse effects on the Company’sbusiness.

 

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**Volatility in the supply of vehicle chassis and othervehicle components resulting from the current recession could adversely affectour business.**

 

Withthe exception of some StarTrans bus products, the Company generally does notpurchase vehicle chassis for its inventory.  The Company accepts shipmentsof vehicle chassis owned by dealers or end-users for the purpose of installingand/or manufacturing its specialized truck bodies and buses on such chassis.Recently emerging from bankruptcy, General Motors Corp. (“GM”) has historicallybeen the Company’s primary supplier of truck chassis, while Ford Motor Company(“Ford”) has been the primary supplier of bus chassis.  In the event of adisruption in supply from one major supplier, the Company would attempt to useanother major supplier, but there can be no assurance that this attempt wouldbe successful. Nevertheless, in the event of chassis supply disruptions, therecould be unforeseen consequences that may have a significant adverse effect onthe Company’s business operations.

 

TheCompany also faces risk relative to finance and storage charges for maintainingexcess consigned chassis inventory from GM and Ford.  Under theseconsigned inventory agreements, if a chassis is not delivered to a customerwithin a specified time frame, the Company is required to pay finance or storagecharges on such chassis.

 

**ITEM 2.****             ****UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

Notapplicable.

 

**ITEM 3.****             ****DEFAULTS UPON SENIOR SECURITIES.**

 

Notapplicable.

 

**ITEM 4.****             ****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Nomatters were submitted by the Company to a vote of the Company’s securityholders, through the solicitation of proxies, or otherwise, during the quarterended September 26, 2009.

 

**ITEM 5.****             ****OTHER INFORMATION.**

 

During the quarter ended September 26,2009, Supreme Corporation was not in compliance with an earnings-relatedcovenant regarding adjusted EBITDA in its existing credit facility withJPMorgan Chase Bank, N.A.  On November 6,2009 the Company obtained consent from its lender to waive the earnings-relatedcovenant through September 26, 2009. Additionally the lender modified thefinancial covenant regarding minimum tangible net worth and extended the creditfacility maturity date three months from July 31, 2010 to October 31,2010.

 

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**ITEM 6.**** ****EXHIBITS.**

 

Exhibits:

 
| Exhibit 3.1   |   | Certificate  of Incorporation of the Company, filed as Exhibit 3(a) to the  Company’s Registration Statement on Form 8-A, filed with the Commission  on September 18, 1989, and incorporated herein by reference.                                                                              |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.2   |   | Certificate of Amendment  of Certificate of Incorporation of the Company filed with the Secretary of  State of Delaware on June 10, 1993 filed as Exhibit 3.2 to the  Company’s annual report on Form 10-K for the fiscal year ended  December 31, 1993, and incorporated herein by reference. |
| Exhibit 3.3   |   | Certificate  of Amendment of Certificate of Incorporation of the Company filed with the  Secretary of State of Delaware on May 29, 1996 filed as Exhibit 3.3  to the Company’s annual report on Form 10-K for the fiscal year ended  December 31, 1996, and incorporated herein by reference.  |
| Exhibit 3.4   |   | Amended  and Restated Bylaws of the Company dated May 7, 2008, filed as  Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and  Exchange Commission on May 7, 2008, and incorporated herein by  reference.                                                                       |
| Exhibit 10.1  |   | Amendment  to Credit Facility dated September 9, 2009, filed as Exhibit 10.1  to the Company’s Form 8-K filed on September 15, 2009, and  incorporated herein by reference.                                                                                                                    |
| Exhibit 10.2  |   | Note  Modification Agreement dated September 9, 2009, filed as  Exhibit 10.2 to the Company’s Form 8-K filed on September 15,  2009, and incorporated herein by reference.                                                                                                                     |
| Exhibit 10.3* |   | Amendment  No. Four to the Company’s Amended and Restated 2004 Stock Option Plan  dated August 25, 2009.                                                                                                                                                                                                 |
| Exhibit 10.4* |   | Amendment  to Credit Agreement dated November 6, 2009.                                                                                                                                                                                                                                                             |
| Exhibit 10.5* |   | Note  Modification Agreement dated November 6, 2009.                                                                                                                                                                                                                                                               |
| 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.                                                                                                                                                                                                              |

 

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*Filedherewith.

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                          |   | SUPREME  INDUSTRIES, INC.                              |
|-------------------------------|--------|--------------------------------------------------------|
|                          |   |                                                   |
|                          |   |                                                   |
|                          |   | BY:  /s/ Herbert M. Gardner                            |
| DATE:  November 10, 2009 |   |                                                   | Herbert  M. Gardner |
|                          |   |                                                   | Chairman  of the Board and Chief Executive Officer |
|                          |   |                                                   |   |
|                          |   |                                                   |   |
|                          |   |                                                   | BY:  /s/ Jeffery D. Mowery |
| DATE:  November 10, 2009 |   |                                                   | Jeffery  D. Mowery |
|                          |   | Vice  President of Finance and Chief Financial Officer |

 

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INDEX TO EXHIBITS

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                     |
| Exhibit 3.1    |       | Certificate  of Incorporation of the Company, filed as Exhibit 3(a) to the  Company’s Registration Statement on Form 8-A, filed with the Commission  on September 18, 1989, and incorporated herein by reference.                                                                               |
| Exhibit 3.2    |       | Certificate  of Amendment of Certificate of Incorporation of the Company filed with the  Secretary of State of Delaware on June 10, 1993 filed as  Exhibit 3.2 to the Company’s annual report on Form 10-K for the  fiscal year ended December 31, 1993, and incorporated herein by  reference. |
| Exhibit 3.3    |       | Certificate  of Amendment of Certificate of Incorporation of the Company filed with the  Secretary of State of Delaware on May 29, 1996 filed as Exhibit 3.3  to the Company’s annual report on Form 10-K for the fiscal year ended  December 31, 1996, and incorporated herein by reference.   |
| Exhibit 3.4    |       | Amended  and Restated Bylaws of the Company dated May 7, 2008, filed as  Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and  Exchange Commission on May 7, 2008, and incorporated herein by  reference.                                                                        |
| Exhibit 10.1   |       | Amendment  to Credit Facility dated September 9, 2009, filed as Exhibit 10.1  to the Company’s Form 8-K filed on September 15, 2009, and  incorporated herein by reference.                                                                                                                     |
| Exhibit 10.2   |       | Note  Modification Agreement dated September 9, 2009, filed as  Exhibit 10.2 to the Company’s Form 8-K filed on September 15,  2009, and incorporated herein by reference.                                                                                                                      |
| Exhibit 10.3*  |       | Amendment  No. Four to the Company’s Amended and Restated 2004 Stock Option Plan  dated August 25, 2009.                                                                                                                                                                                                  |
| Exhibit 10.4*  |       | Amendment  to Credit Agreement dated November 6, 2009.                                                                                                                                                                                                                                                              |
| Exhibit 10.5*  |       | Note  Modification Agreement dated November 6, 2009.                                                                                                                                                                                                                                                                |
| 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.                                                                                                                                                                                                               |

 

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*Filedherewith.

 

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