Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

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

 

**For thequarterly period ended September 25, 2010**

 

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thetransition period from           to          **

 

**CommissionFile Number: 1-8183**

 

**SUPREME INDUSTRIES, INC.**

(Exact name of registrant 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 of principal executive offices)       (Zip Code)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-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 |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Common Stock ($.10 Par Value)** | ** ** | **Outstanding at October 25, 2010** |
|-------------------------------------------------------|------------|---------------------------------------------------------|
| **Class A**                                      | ** ** | **12,455,991**                                          |
| **Class B**                                      | ** ** | **1,917,882**                                           |

 

 

 

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SUPREME INDUSTRIES, INC.

 

CONTENTS

 
| ** **        | ** **                                                                                   | ** ** | **Page No.** |
|-------------------|----------------------------------------------------------------------------------------------|------------|-------------------|
|              |                                                                                         |       |              |   |
| PART I.      | FINANCIAL INFORMATION                                                                        |       |              |
|              |                                                                                         |       |              |   |
| ITEM 1.           | Financial Statements.                                                                        |       | 1                 |
|              |                                                                                         |       |              |
|              | 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. |       | 9                 |
|              |                                                                                         |       |              |
| ITEM 3.           | Quantitative  and Qualitative Disclosures About Market Risk.                                 |       | 16                |
|              |                                                                                         |       |              |
| ITEM  4.          | Controls and  Procedures.                                                                    |       | 16                |
|              |                                                                                         |       |              |   |
| PART II.     | OTHER INFORMATION                                                                            |       |              |
|              |                                                                                         |       |              |   |
| ITEM 1.           | Legal Proceedings.                                                                           |       | 17                |
|              |                                                                                         |       |              |
| ITEM 1A.          | Risk Factors.                                                                                |       | 17                |
|              |                                                                                         |       |              |
| ITEM 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds.                                |       | 18                |
|              |                                                                                         |       |              |
| ITEM 3.           | Defaults  Upon Senior Securities.                                                            |       | 18                |
|              |                                                                                         |       |              |
| ITEM 4.           | Reserved.                                                                                    |       | 18                |
|              |                                                                                         |       |              |
| ITEM 5.           | Other Information.                                                                           |       | 18                |
|              |                                                                                         |       |              |
| ITEM 6.           | Exhibits.                                                                                    |       | 19                |
|              |                                                                                         |       |              |
| 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 25,** | ** **  | **December 26,** | ** ** |
|--------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                       | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                                       | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **ASSETS**                                       |       |                   |        |                  |       |
|                                             |       |                   |        |                  |       |
| **Current assets:**                              |       |                   |        |                  |       |
| Cash  and cash equivalents                       |       | $                      | 57,226      |                  | $          | 1,222,411 |   |
| Investments                                      |       | 1,235,994              |        | 1,645,407             |       |
| Accounts  receivable, net                        |       | 21,894,479             |        | 22,710,669            |       |
| Inventories                                      |       | 37,606,874             |        | 31,553,351            |       |
| Other  current assets                            |       | 5,374,659              |        | 8,870,300             |       |
|                                             |       |                   |        |                  |       |
| **Total current assets**                         |       | 66,169,232             |        | 66,002,138            |       |
|                                             |       |                   |        |                  |       |
| **Property, plant and equipment, at cost**       |       | 88,591,996             |        | 89,501,666            |       |
| Less,  Accumulated depreciation and amortization |       | 48,755,232             |        | 47,264,582            |       |
|                                             |       |                   |        |                  |       |
| **Property, plant and equipment, net**           |       | 39,836,764             |        | 42,237,084            |       |
|                                             |       |                   |        |                  |       |
| **Other assets**                                 |       | 1,380,773              |        | 1,181,357             |       |
|                                             |       |                   |        |                  |       |
| **Total assets**                                 |       | $                      | 107,386,769 |                  | $          | 109,420,579 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

ConsolidatedBalance Sheets, Concluded

 
| ** **                                          | ** ** | **September 25,** | ** **  | **December 26,** | ** ** |
|-----------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ** **                                          | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |       |                   |        |                  |       |
|                                                |       |                   |        |                  |       |
| **Current liabilities:**                            |       |                   |        |                  |       |
| Current  maturities of long-term debt               |       | $                      | 22,532,330  |                  | $          | 26,226,289 |   |
| Trade  accounts payable                             |       | 11,779,484             |        | 9,906,429             |       |
| Accrued  income taxes                               |       | 1,002,085              |        | 989,300               |       |
| Other  accrued liabilities                          |       | 9,092,421              |        | 7,386,251             |       |
|                                                |       |                   |        |                  |       |
| **Total current liabilities**                       |       | 44,406,320             |        | 44,508,269            |       |
|                                                |       |                   |        |                  |       |
| **Long-term debt**                                  |       | 979,128                |        | 1,115,410             |       |
|                                                |       |                   |        |                  |       |
| **Deferred income taxes**                           |       | 1,438,463              |        | 1,211,262             |       |
|                                                |       |                   |        |                  |       |
| **Total liabilities**                               |       | 46,823,911             |        | 46,834,941            |       |
|                                                |       |                   |        |                  |       |
| **Stockholders’ equity**                       |       | 60,562,858             |        | 62,585,638            |       |
|                                                |       |                   |        |                  |       |
| **Total liabilities and stockholders’ equity** |       | $                      | 107,386,769 |                  | $          | 109,420,579 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

Consolidated Statements of Operations (Unaudited)

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **September 25,**           | ** ** | **September 26,**          | ** ** | **September 25,** | ** ** | **September 26,** | ** ** |
| ** **                                              | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Net  sales                                              |       | $                                | 62,838,770 |                            | $          | 49,805,255 |   | $ | 171,879,771 |   | $ | 146,009,984 |   |
| Cost  of sales                                          |       | 57,150,319                       |       | 45,722,285                      |       | 156,804,407 |   | 135,181,021 |   |
| **Gross profit**                                        |       | 5,688,451                        |       | 4,082,970                       |       | 15,075,364 |   | 10,828,963 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Selling,  general and administrative expenses           |       | 5,706,733                        |       | 5,223,451                       |       | 17,043,608 |   | 16,066,318 |   |
| Other  income                                           |       | (192,593                         | )          | (102,669                        | )          | (589,598 | ) | (776,956 | ) |
| **Operating income (loss)**                             |       | 174,311                          |       | (1,037,812                      | )          | (1,378,646 | ) | (4,460,399 | ) |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Interest  expense                                       |       | 296,438                          |       | 549,423                         |       | 1,175,188 |   | 1,526,301 |   |
| **Loss from continuing operations before income taxes** |       | (122,127                         | )          | (1,587,235                      | )          | (2,553,834 | ) | (5,986,700 | ) |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Income  tax benefit                                     |       | —                           |       | (337,008                        | )          | — |   | (2,625,630 | ) |
| **Loss from continuing operations**                     |       | (122,127                         | )          | (1,250,227                      | )          | (2,553,834 | ) | (3,361,070 | ) |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Discontinued  operations                                |       |                             |       |                            |       |   |   |   |   |
| Operating  loss of discontinued motorhome operations    |       | (51,743                          | )          | (278,347                        | )          | (190,509 | ) | (672,527 | ) |
| **Net loss**                                            |       | $                                | (173,870   | )                               | $          | (1,528,574 | ) | $ | (2,744,343 | ) | $ | (4,033,597 | ) |
| **Loss Per Share:**                                     |       |                             |       |                            |       |   |   |   |   |
| Loss  from continuing operations                        |       | $                                | (0.01      | )                               | $          | (0.09 | ) | $ | (0.18 | ) | $ | (0.23 | ) |
| Loss  from discontinued operations                      |       | (0.00                            | )          | (0.02                           | )          | (0.01 | ) | (0.05 | ) |
| **Net loss**                                            |       | $                                | (0.01      | )                               | $          | (0.11 | ) | $ | (0.19 | ) | $ | (0.28 | ) |
| **Shares used in the computation of loss per share:**   |       |                             |       |                            |       |   |   |   |   |
| Basic                                                   |       | 14,325,693                       |       | 14,198,782                      |       | 14,291,729 |   | 14,180,168 |   |
| Diluted                                                 |       | 14,325,693                       |       | 14,198,782                      |       | 14,291,729 |   | 14,180,168 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

Consolidated Statements ofCash Flows (Unaudited)

 
| ** **                                                                       | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **September 25,**          | ** ** | **September 26,** | ** ** |
| ** **                                                                       | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                        |       |                            |       |   |   |
| Net  loss                                                                        |       | $                               | (2,744,343 | ) | $ | (4,033,597 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation  and amortization                                                   |       | 2,865,033                       |       | 3,117,219 |   |
| Provision  for losses on doubtful receivables                                    |       | 51,462                          |       | 78,736 |   |
| Stock-based  compensation expense                                                |       | 434,515                         |       | 469,810 |   |
| Losses  (gains) on sale of property, plant and equipment, net                    |       | 402                             |       | (239,708 | ) |
| Changes  in operating assets and liabilities                                     |       | 2,015,444                       |       | 11,281,311 |   |
|                                                                             |       |                            |       |   |   |
| **Net cash provided by operating activities**                                    |       | 2,622,513                       |       | 10,673,771 |   |
|                                                                             |       |                            |       |   |   |
| **Cash flows from investing activities:**                                        |       |                            |       |   |   |
| Additions  to property, plant and equipment                                      |       | (1,046,839                      | )          | (1,655,555 | ) |
| Proceeds  from sale of property, plant and equipment                             |       | 623,749                         |       | 507,071 |   |
| Purchases  of investments                                                        |       | (1,018,499                      | )          | (85,625 | ) |
| Proceeds  from sales of investments                                              |       | 1,475,073                       |       | 1,053,054 |   |
| Decrease  in other assets                                                        |       | 6,559                           |       | 6,559 |   |
|                                                                             |       |                            |       |   |   |
| **Net cash provided by (used in) investing activities**                          |       | 40,043                          |       | (174,496 | ) |
|                                                                             |       |                            |       |   |   |
| **Cash flows from financing activities:**                                        |       |                            |       |   |   |
| Proceeds  from revolving line of credit and long-term debt                       |       | 50,794,006                      |       | 55,813,354 |   |
| Repayments  of revolving line of credit and long-term debt                       |       | (54,624,247                     | )          | (67,178,347 | ) |
| Proceeds  from exercise of stock options                                         |       | 2,500                           |       | — |   |
|                                                                             |       |                            |       |   |   |
| **Net cash used in financing activities**                                        |       | (3,827,741                      | )          | (11,364,993 | ) |
|                                                                             |       |                            |       |   |   |
| **Change in cash and cash equivalents**                                          |       | (1,165,185                      | )          | (865,718 | ) |
|                                                                             |       |                            |       |   |   |
| **Cash and cash equivalents, beginning of period**                               |       | 1,222,411                       |       | 932,608 |   |
|                                                                             |       |                            |       |   |   |
| **Cash and cash equivalents, end of period**                                     |       | $                               | 57,226     |   | $ | 66,890 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**SUPREME INDUSTRIES, INC. AND SUBSIDIARIES**

Notes To ConsolidatedFinancial Statements

 

NOTE1 - BASIS OF PRESENTATION AND OPINION OF MANAGEMENT

 

Theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with the instructions to Form 10-Q and therefore donot include all of the information and financial statement disclosuresnecessary for a fair presentation of consolidated financial position, resultsof operations, and cash flows in conformity with accounting principlesgenerally accepted in the United States of America.  In the opinion of management, the informationfurnished herein includes all adjustments necessary to reflect a fair statementof the interim periods reported.  Alladjustments are of a normal and recurring nature.  The December 26, 2009 consolidatedbalance sheet data was derived from audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States of America.  Referencesto “we,” “us,” “our,” “its,” “Supreme,” or the “Company” refer to SupremeIndustries, Inc. and its subsidiaries.

 

TheCompany has adopted a 52- or 53-week fiscal year ending the last Saturday inDecember.  The results of operations forthe three and nine months ended September 25, 2010 and September 26,2009 are for 13- and 39-week periods, respectively.

 

NOTE2 — DISCONTINUED OPERATIONS

 

Inthe fourth quarter of 2009, the Company closed its Silver Crown luxurymotorhome operations. This decision was triggered by a significant reduction ofnew motorhome sales orders and the cancellation of sales orders due to theextremely tight credit markets caused by the economic recession. The Companydecided to exit the motorhome product line as part of a plan to focus on coretruck and bus products and to reduce overall fixed costs.

 

TheCompany is in the process of selling or leasing the real estate of the SilverCrown division; therefore, the real estate totaling $1.3 million is accordinglyclassified as held for sale at September 25, 2010. The Company plans tosell the finished units on hand as of September 25, 2010, relating to thisproduct line in the near term.

 

The 2010 operating resultsfor the Silver Crown division are classified as discontinued operations, andprior years’ operating results have been reclassified to discontinuedoperations as follows:

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Sep 25, 2010**       | ** ** | **Sep 26, 2009**      | ** ** | **Sep 25, 2010** | ** ** | **Sep 26, 2009** | ** ** |
|                        |       |                             |       |                            |       |   |   |   |   |
| Net sales                   |       | $                                | 260,174    |                            | $          | 295,922 |   | $ | 1,828,151 |   | $ | 2,968,365 |   |
|                        |       |                             |       |                            |       |   |   |   |   |
| Pretax loss from operations |       | $                                | (51,743    | )                               | $          | (376,339 | ) | $ | (190,509 | ) | $ | (1,197,897 | ) |
|                        |       |                             |       |                            |       |   |   |   |   |
| Net loss                    |       | $                                | (51,743    | )                               | $          | (278,347 | ) | $ | (190,509 | ) | $ | (672,527 | ) |

 

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**SUPREME INDUSTRIES, INC. AND SUBSIDIARIES**

Notes To Consolidated Financial Statements-Continued

 

NOTE 3 — OTHER COMPREHENSIVEINCOME

 

Othercomprehensive income includes unrealized gains (losses) on hedge-activity, netof tax, and unrealized gains (losses) on available-for-sale securities, net oftax.  Total comprehensive loss combinesnet loss and other comprehensive income.

 

Forthe three- and nine-month periods ended September 25, 2010 and September 26,2009, total comprehensive loss and other comprehensive income are as follows:

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Sep 25,**                 | ** ** | **Sep 26,**                | ** ** | **Sep 25,** | ** ** | **Sep 26,** | ** ** |
| ** **                  | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  loss                   |       | $                                | (173,870   | )                               | $          | (1,528,574 | ) | $ | (2,744,343 | ) | $ | (4,033,597 | ) |
| Other  comprehensive income |       | 42,962                           |       | 97,530                          |       | 284,548 |   | 228,088 |   |
| Total  comprehensive loss   |       | $                                | (130,908   | )                               | $          | (1,431,044 | ) | $ | (2,459,795 | ) | $ | (3,805,509 | ) |

 

NOTE4 — INVENTORIES

 

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

 
| ** **       | ** ** | **September 25,** | ** ** | **December 26,** | ** ** |
|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Raw materials    |       | $                      | 19,717,295 |                  | $          | 17,512,758 |   |
| Work-in-progress |       | 7,478,945              |       | 6,528,059             |       |
| Finished goods   |       | 10,410,634             |       | 7,512,534             |       |
|             |       | $                      | 37,606,874 |                  | $          | 31,553,351 |   |

 

NOTE5 — FAIR VALUE MEASUREMENT

 

Generallyaccepted accounting principles (“GAAP”) define fair value as the exchange pricethat would be received for an asset or paid to transfer a liability (an exitprice) in the principal or most advantageous market for the asset or liabilityin an orderly transaction between market participants on the measurementdate.  GAAP also establishes a fair value hierarchy which requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value.  The standard describesthree levels of inputs that may be used to measure fair value:

 

Level1: Quoted prices (unadjusted) for identical assets or liabilities in activemarkets that the entity has the ability to access as of the measurement date.

 

Level2: Significant other observable inputs other than Level 1 prices such as quotedprices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated by observablemarket data.

 

Level3: Significant unobservable inputs that reflect a company’s own assumptionsabout the assumptions that market participants would use in pricing an asset orliability.

 

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**SUPREME INDUSTRIES, INC. AND SUBSIDIARIES**

Notes To Consolidated Financial Statements-Continued

 

NOTE5 — FAIR VALUE MEASUREMENT- continued

 

TheCompany used the following methods and significant assumptions to estimate thefair value of items:

 

Investments:The fair values of investments available-for-sale are determined by obtainingquoted prices on nationally recognized securities exchanges (Level 1 inputs).

 

The carrying amounts of cashand cash equivalents, accounts receivable, and trade accounts payableapproximated fair value as of September 25, 2010, and December 26,2009, because of the relatively short maturities of these financialinstruments.  The carrying amount oflong-term debt, including current maturities, approximated fair value as of September 25,2010, and December 26, 2009, based upon terms and conditions available tothe Company at those dates in comparison to the terms and conditions of itsoutstanding long-term debt.

 

NOTE6 — REVOLVING LINE OF CREDIT

 

OnOctober 18, 2010, Supreme Industries, Inc. entered into an Amendedand Restated Credit Agreement (the “Credit Agreement”) with JPMorgan ChaseBank, N.A. (the “Lender”) which agreement was effective on September 30,2010.  Under the terms of the CreditAgreement, the Lender agreed to provide the Company with a revolving line ofcredit of up to $30,000,000 (previously $25,000,000) through December 31,2011.  The line of credit is limited to$25,000,000 until the Company meets certain post-closing conditions, outlinedin the Credit Agreement, at which time the full revolving credit amount of$30,000,000 will become available.  Inorder to qualify for the full revolving credit amount, the Company must meetcertain borrowing base requirements related to accounts receivable andinventories.  As additional collateralfor the revolving credit facility, Supreme and certain of its affiliates havesigned and delivered to the Lender Pledge and Security Agreements granting tothe Lender security interests in their personal property.  During the term of this revolving credit, theCompany is required to comply with two financial covenants, consisting of aminimum required EBITDA (Earnings Before Interest Taxes Depreciation andAmortization) and a minimum tangible net worth.

 

Asof September 25, 2010, the Company had unused credit capacity ofapproximately $5.5 million under its then existing $25,000,000 creditagreement.  Interest on outstandingborrowings under the revolving line of credit is based on the bank’s primerate, or certain basis points above LIBOR, depending on the pricing optionselected and the Company’s leverage ratio.  The Company’s cash managementsystem and revolving line of credit are designed to maintain zero cash balancesand, accordingly, checks outstanding in excess of bank balances are classifiedas additional borrowings under the revolving line of credit.

 

NOTE7 - LOSS PER SHARE

 

As of September 25,2010, the assumed exercise or issuance of 160,129 shares and 212,753 shares forthe three- and nine-month periods, respectively, relating to stock plans werenot included in the computation of diluted loss per share. As of September 26,2009, the assumed exercise or issuance of 253,013 shares and 186,797 shares forthe three-and nine month period, respectively, relating to stock plans were notincluded in the computation of diluted loss per share.  Inclusion of these shares in the respectiveperiods would have been antidilutive.

 

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**SUPREME INDUSTRIES, INC. AND SUBSIDIARIES**

Notes To Consolidated Financial Statements — Concluded

 

NOTE8 - STOCK-BASED COMPENSATION

 

Thefollowing table summarizes the activity for the unvested restricted stock unitsand restricted stock for the nine months ended September 25, 2010:

 
| ** **                         | ** ** | **Number of  Shares** | ** ** | **Weighted -  Average  Grant Date  Fair Value** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------------------------------------------|------------|
| Unvested,  December 26, 2009  |       | 111,736                    |       | $                                                              | 4.62       |   |
| Granted                            |       | —                     |       | n/a                                                            |       |
| Vested                             |       | (67,749                    | )          | 5.04                                                           |       |
| Unvested,  September 25, 2010 |       | 43,987                     |       | $                                                              | 3.99       |   |

 

Thetotal fair value of the shares vested during the nine months ended September 25,2010 was $341,247.

 

Asummary of the status of the Company’s outstanding stock options as of September 25,2010, and changes during the nine months ended September 25, 2010, are asfollows:

 
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted -  Average  Exercise  Price** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| Outstanding, December 26, 2009  |       | 1,246,082                  |       | $                                             | 5.00       |   |
| Granted                              |       | —                     |       | n/a                                           |       |
| Exercised                            |       | (1,766                     | )          | 1.42                                          |       |
| Expired                              |       | (363,720                   | )          | 6.16                                          |       |
| Forfeited                            |       | —                     |       | n/a                                           |       |
| Outstanding, September 25, 2010 |       | 880,596                    |       | $                                             | 4.53       |   |

 

Asof September 25, 2010, outstanding options had an intrinsic value of$87,081 and a weighted-average remaining contractual life of 3.92 years.

 

Totalunrecognized compensation expense related to all share-based awards outstandingat September 25, 2010, was approximately $303,000 and is to be recordedover a weighted average contractual life of 0.80 years.

 

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

 

Establishedin 1974 as a truck body manufacturer, Supreme Industries, Inc., throughits wholly-owned subsidiary, Supreme Indiana Operations, Inc., is one ofthe nation’s leading manufacturers of specialized commercial vehicles.Utilizing a nationwide direct sales and distribution network, as well asmanufacturing and service facilities in nine states across the continentalUnited States, Supreme is able to meet the needs of customers across all ofNorth America.

 

TheCompany engages principally in the production and sale of customized truckbodies, buses, and other specialty vehicles. Building on its expertise inproviding both cargo and passenger transportation solutions, the Company’sspecialty vehicle offerings include products such as customized armoredvehicles, homeland response vehicles, and portable storage units.

 

TheCompany and its product offerings are sensitive to various factors whichinclude, but are not limited to, economic conditions, interest ratefluctuations, volatility in the supply chain of vehicle chassis, and theavailability of credit and financing to the Company, our vendors, dealers, andend users.  The Company’s business is also affected by the availabilityand costs of certain raw materials that serve as significant components of itsproduct offerings.  The Company’s risk factors are disclosed in Item 1A “RiskFactors” in the Company’s Annual Report on Form 10-K for the year endedDecember 26, 2009, and herein in Item 1A.

 

Thefollowing discussion should be read in conjunction with the consolidatedfinancial statements and related notes thereto elsewhere in this document andpertain to continuing operations unless otherwise noted.

 

**Results of Operations**

 

***Overview***

 

Duringthe third quarter of 2010, we continued to experience increasing revenues, andaccordingly, we were able to improve our results from a pre-tax operating lossof $1.6 million in the third quarter of 2009 to a pre-tax operating loss of$0.1 million in the third quarter of 2010. We also improved our gross profit in 2010 by 39% for both the thirdquarter and for the nine months as compared with the corresponding periods in2009.  Based upon industry analysts, ourown increasing backlog, and a large fleet order received for spring 2011, weare beginning to see improved market demand. However, we continue to maintain aconservative and cautious view of our markets as we move forward.

 

Wehave been experiencing improved demand for all product lines including truck,bus, and armored vehicles.  Our salesbacklog was $89.3 million at September 25, 2010, as compared with $61.9million at September 26, 2009.  With product enhancements to ourSignature body to improve customer satisfaction, pent-up truck demand (due tohistoric lows in purchases over the past two years), and our improved backlog,we are well-positioned to improve our performance going forward, subject to acontinued recovery of the truck market.

 

Wealso continue to look for opportunities to make our operations leaner and moreprofitable.  The substantial costreductions to date, which began in mid-2008, have been derived from, amongother factors, personnel and salary reductions, suspension of the Company’s401(k) contributions, process improvements, plant closures andconsolidations, outsourcing, and improved inventory management. In addition,during the fourth quarter of 2009, the Company closed its Silver Crown luxurymotorhome business. The unprecedented tight credit markets caused by the severeeconomic recession led to a significant reduction of new motorhome orders andthe cancellation of orders.

 

Inour efforts to rebound from the severe recession and maintain our position asone of the strongest companies in our industry, we continue to implement ourstrategies of cost containment, production efficiencies, revenue enhancement,market expansion, and product diversification.

 

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***Net Sales***

 

Netsales for the three months ended September 25, 2010, increased $13.0million to $62.8 million as compared with $49.8 million for the three monthsended September 26, 2009.  Net sales for the nine months ended September 25,2010, increased $25.9 million to $171.9 million compared with $146.0 millionfor the nine months ended September 26, 2009.  The following table presents the componentsof net sales and the changes from period to period:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **($000’s omitted)** | ** ** | **Sep 25,********2010**     | ** ** | **Sep 26,********2009**    | ** ** | **Change** | ** ** | ** ** | ** ** | **Sep 25,********2010** | ** ** | **Sep 26,********2009** | ** ** | **Change** | ** ** | ** ** | ** ** |
| Specialized  vehicles:         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Trucks                         |       | $                                | 35,968     |                            | $          | 27,153 |   | $ | 8,815 |   | 32.5 | % | $ | 92,956 |   | $ | 78,806 |   | $ | 14,150 |   | 18.0 | % |
| Buses                          |       | 20,368                           |       | 19,515                          |       | 853 |   | 4.4 | % | 58,443 |   | 50,190 |   | 8,253 |   | 16.4 | % |
| Armored  vehicles              |       | 5,718                            |       | 2,735                           |       | 2,983 |   | 109.1 | % | 17,341 |   | 13,226 |   | 4,115 |   | 31.1 | % |
|                           |       | 62,054                           |       | 49,403                          |       | 12,651 |   | 25.6 | % | 168,740 |   | 142,222 |   | 26,518 |   | 18.6 | % |
| Composites                     |       | 785                              |       | 402                             |       | 383 |   | 95.3 | % | 3,140 |   | 3,788 |   | (648 | ) | -17.1 | % |
|                           |       | $                                | 62,839     |                            | $          | 49,805 |   | $ | 13,034 |   | 26.2 | % | $ | 171,880 |   | $ | 146,010 |   | $ | 25,870 |   | 17.7 | % |

 

Thetruck division sales increase of $8.8 million, or 33% for the quarter, and$14.2 million, or 18% for the first nine months, was primarily attributable toan improved retail truck market and increased fleet shipments.  We have experienced improved backlog fortrucks and believe that we are well-positioned to benefit from favorableindustry indicators and the expectation that customers will begin replacingaging equipment.  Additionally, we areencouraged by a specific large fleet order received with shipments to commenceduring the first half of 2011.

 

OurStarTrans bus division continued to experience strong demand, increasing itssales by $0.9 million for the quarter and $8.3 million for the first ninemonths of 2010.  These increases were due in part to the availability offunds from the 2009 federal economic stimulus plan enabling state and localtransit authorities to purchase new units.  With our strong bus backlog,we anticipate continued favorable contributions from our bus division for theremainder of 2010 and into 2011.

 

Thearmored division continued to experience increased demand with revenueincreases of $3.0 million for the quarter and $4.1 million for the nine monthsof 2010.  These increases were primarily the result of our contract withthe U.S. Department of State to produce armored Suburbans for embassies abroadand improved demand for cash-in-transit vehicles.  We believe that thearmored division is well-positioned for the remainder of 2010 and into 2011 dueto the increased backlog and the positive response we are receiving from othergovernmental agencies regarding our armored product offerings and quality.

 

Thecomposite divisions represent sales of fiberglass reinforced plywood and otherfiberglass products.  The increase forthe quarter of $0.4 million was due to improved sales of our fiberglassreinforced plywood product.  The decreaseof $0.7 million for the first nine months of 2010 was due to lower fiberglasssales resulting from the overall economic downturn.

 

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

 

Grossprofit increased by $1.6 million, or 39.0%, to $5.7 million for the threemonths ended September 25, 2010, as compared with $4.1 million for thethree months ended September 25, 2009.  For the nine months ended September 25,2010, gross profit increased by $4.3 million, or 39.8%, to $15.1 millioncompared with $10.8 million for the nine months ended September 26,2009.  The following table presents thecomponents of cost of sales as a percentage of net sales and the changes fromperiod to period:

 

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| ** **     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **     | ** ** | **Sep 25,********2010**     | ** ** | **Sep 26,********2009**    | ** ** | **Percent********Change** | ** ** | **Sep 25,********2010** | ** ** | **Sep 26,********2009** | ** ** | **Percent********Change** | ** ** |
| Material       |       | 57.3                             | %          | 59.4                            | %          | (2.1 | )% | 57.8 | % | 58.8 | % | (1.0 | )% |
| Direct  Labor  |       | 15.4                             |       | 13.7                            |       | 1.7 |   | 14.7 |   | 13.8 |   | 0.9 |   |
| Overhead       |       | 15.6                             |       | 16.3                            |       | (0.7 | ) | 16.2 |   | 17.7 |   | (1.5 | ) |
| Delivery       |       | 2.6                              |       | 2.4                             |       | 0.2 |   | 2.5 |   | 2.3 |   | 0.2 |   |
| Cost  of sales |       | 90.9                             |       | 91.8                            |       | (0.9 | ) | 91.2 |   | 92.6 |   | (1.4 | ) |
| Gross  profit  |       | 9.1                              | %          | 8.2                             | %          | 0.9 | % | 8.8 | % | 7.4 | % | 1.4 | % |

 

**Material** — Material cost as apercentage of net sales decreased by 2.1% and 1.0% for the three and ninemonths ended September 25, 2010, respectively, as compared with thecorresponding periods in 2009. The decrease in the material percentage wasattributable to a higher proportion of specialty products sold through our busand armored divisions.  This was partially offset by an increase in thematerial percentage in the truck division due to a change in the product mixand a competitive pricing environment.

 

Asthe general economic environment begins to show signs of stability and someimprovement, the potential for future raw material cost increases remains aconcern for certain commodities (aluminum, steel, and wood).  We closelymonitor all major commodities and continually review the financial stability ofour primary vendors.  We also strive to reduce manufacturing costs throughthe use of improved technologies, processes, and supply-chain managementtactics and strategies.

 

**Direct Labor** — Direct labor as apercentage of net sales increased by 1.7% and 0.9% for the three and ninemonths ended September 25, 2010, respectively, as compared with thecorresponding periods in 2009.  Theincrease in the direct labor percentage was due to new employee training costsin order to support the higher production and sales levels in 2010.Historically, our labor percentage has increased during ramp-up periods due tothe new employee training costs.

 

**Overhead** — Manufacturing overhead asa percentage of net sales decreased by 0.7% and 1.5% for the three and ninemonths ended September 25, 2010, respectively, as compared with thecorresponding periods in 2009.  The overall overhead percentage declineddue to the fixed nature of certain overhead expenses that do not fluctuate withsales volume changes.  Additionally, thedecrease in the overhead percentage was the result of our cost reductionefforts which have included personnel reductions, process improvements, and plantconsolidations.  Partially offsetting the decrease in the percentage wasgroup health insurance costs which were higher than anticipated as a result ofseveral large claims.  In an effort to control future claim costs, theCompany continues to implement design changes to its group health insuranceplan.

 

**Delivery** — Delivery as a percentageof net sales increased by 0.2% for the three and nine months ended September 25,2010, as compared with the corresponding periods in 2009.  The Companycontinues to explore more cost-effective delivery methods to mitigate theadverse impact of ongoing high fuel costs.

 

***Selling, general and administrativeexpenses***

 

Selling,general and administrative (“G&A”) expenses increased by $0.5 million, or9.6%, to $5.7 million for the three months ended September 25, 2010, ascompared with $5.2 million for the three months ended September 26,2009.  For the nine months ended September 25, 2010, selling andG&A expenses increased by $0.9 million, or 5.6%, to $17.0 million comparedwith $16.1 million for the nine months ended September 26, 2009.  The following table presents selling andG&A expenses as a percentage of net sales and the changes from period toperiod:

 

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| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **($000’s omitted)** | ** ** | **Sep 25,  2010**           | ** ** | **Sep 26,  2009**          | ** ** | **Change** | ** ** | **Sep 25,  2010** | ** ** | **Sep 26,  2009** | ** ** | **Change** | ** ** |
| Selling  expenses              |       | $                                | 1,910      |                            | 3.1        | % | $ | 1,677 |   | 3.4 | % | $ | 233 |   | -0.3 | % | $ | 5,852 |   | 3.4 | % | $ | 5,385 |   | 3.7 | % | $ | 467 |   | -0.3 | % |
| G&A  expenses              |       | 3,797                            |       | 6.0                             |       | 3,546 |   | 7.1 |   | 251 |   | -1.1 |   | 11,192 |   | 6.5 |   | 10,681 |   | 7.3 |   | 511 |   | -0.8 |   |
| Total                          |       | $                                | 5,707      |                            | 9.1        | % | $ | 5,223 |   | 10.5 | % | $ | 484 |   | -1.4 | % | $ | 17,044 |   | 9.9 | % | $ | 16,066 |   | 11.0 | % | $ | 978 |   | -1.1 | % |

 

**Selling expenses** — Selling expenses increasedfor the three and nine months ended September 25, 2010, as compared withthe corresponding periods in 2009.  The increase for both periods wasprimarily attributable to higher commission expense resulting from theimprovement in the sales volume. However, selling expenses as a percentage ofsales decreased 0.3% for the three and nine months, respectively, as comparedwith the corresponding periods in 2009.

 

**G&A expenses** — G&A expensesincreased for the three and nine months ended September 25, 2010, as comparedwith the corresponding period in 2009.  The increase was primarilyattributable to costs incurred to engage a consulting firm to assist theCompany with its profit improvement plan and higher legal fees resulting from alawsuit the Company is vigorously contesting.  These costs were offset byreduced employee headcount and the related payroll and benefit costsavings.  Reductions in our administrative workforce have been asignificant part of the cost savings initiatives that we began implementing inmid-2008. G&A expenses as a percentage of sales decreased 1.1% and 0.8% forthe three and nine months, respectively, as compared with the correspondingperiods in 2009.

 

***Other income***

 

Forthe three months ended September 25, 2010, other income was $0.2 millionas compared with $0.1 million for the three months ended September 26,2009.  For the nine months ended September 25,2010, other income was $0.6 million as compared with $0.8 million for the ninemonths ended September 26, 2009. Other income consisted of rental income, gain or loss on sale of assets,and other miscellaneous income received by the Company.

 

***Interest expense***

 

Interestexpense was $0.3 million for the three months ended September 25, 2010,compared with $0.5 million for the three months ended September 26,2009.  For the nine months ended September 25,2010, interest expense was $1.2 million compared with $1.5 million for the ninemonths ended September 26, 2009.  Areduction in chassis interest expense was partially attributable to measuresimplemented to improve bailment chassis inventory management.  The bank interest expense reflected lowerprevailing interest rates coupled with reduced debt levels due to lower workingcapital levels.  This was somewhat offsetby higher (performance-based) pricing provisions under our bank credit facilityas recent operating losses triggered an increase in interest rates.

 

***Loss from continuing operations beforeincome taxes***

 

Theloss from continuing operations before income taxes was $0.1 million (-0.2% ofnet sales) for the three months ended September 25, 2010, compared to anet loss of $1.6 million (-3.2% of net sales) for the three months ended September 26,2009.  For the nine months ended September 25,2010, the loss from continuing operations before income taxes was $2.6 million(-1.5% of net sales) compared with $6.0 million (-4.1% of net sales) for thenine months ended September 26, 2009.

 

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***Income taxes***

 

TheCompany fully utilized its net operating loss carryback benefits during its2009 tax year, for which refunds have been subsequently received. Accordingly,we recorded a deferred tax asset for the net operating losses generated duringthe three-and nine-month periods ended September 25, 2010. The ultimaterealization of these deferred tax assets is dependent upon future taxableincome. Because the Company has incurred tax losses in the prior two years,there is no certainty that the Company will utilize the full benefit of thesedeferred tax assets; therefore, it has recorded a valuation allowance for thenet operating losses generated during the three quarters of 2010, thus no taxbenefit has been recorded for the 2010 periods. The estimated effective incometax rate for the nine months ended September 26, 2009, was 44%. Theestimated effective income tax rate for the three quarters of 2009 wasfavorably impacted by tax benefits associated with the Company’s wholly-ownedcaptive insurance subsidiary, federal alternative fuel tax credits, andresearch and development tax credits. The combination of these tax benefits, inaddition to the incurred pretax losses, resulted in an overall tax benefitposition for the Company in 2009.

 

***Discontinued Operations***

 

Asnoted earlier, the Company closed its Silver Crown luxury motorhome businessand has, accordingly, reflected prior-period results as discontinuedoperations. The unprecedented tight credit markets caused by the severeeconomic recession led to a significant reduction in new motorhome orders andthe cancellation of orders.  For the three months ended September 25,2010, the after tax operating loss from this discontinued operation was $52,000compared with an after tax operating loss of $0.3 million for the three monthsended September 26, 2009.  For thenine months ended September 25, 2010, the after tax operating loss fromthe Silver Crown discontinued operation was $0.2 million compared with an aftertax operating loss of $0.7 million for the nine months ended September 26,2009.

 

***Basic and diluted loss per share***

 

Thefollowing table presents basic and diluted loss per share and the changes fromperiod to period:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Sep 25,   2010**          | ** ** | **Sep 26,  2009**          | ** ** | **Change** | ** ** | **Sep 25,  2010** | ** ** | **Sep 26,  2009** | ** ** | **Change** | ** ** |
| Basic and diluted net loss per share: | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations       |       | $                                | (0.01      | )                               | $          | (0.09 | ) | $ | 0.08 |   | $ | (0.18 | ) | $ | (0.23 | ) | $ | 0.05 |   |
| Loss from discontinued operations     |       | —                           |       | (0.02                           | )          | 0.02 |   | (0.01 | ) | (0.05 | ) | 0.04 |   |
| Net Loss                              |       | $                                | (0.01      | )                               | $          | (0.11 | ) | $ | 0.10 |   | $ | (0.19 | ) | $ | (0.28 | ) | $ | 0.09 |   |

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

TheCompany’s primary sources of liquidity have been cash flows from operatingactivities and borrowings under a credit facility entered into by SupremeIndiana Operations, Inc., the Company’s wholly-owned subsidiary, andcertain of its affiliates. Principal uses of cash have been to fund recentoperating losses, support working capital needs, meet debt servicerequirements, and fund capital expenditure needs.

 

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***Operating activities***

 

Cashflows from operations represent the net loss sustained in the reported periodsadjusted for non-cash charges and changes in operating assets andliabilities.  Operating activities provided $2.6 million of cash for thenine months ended September 25, 2010, as compared with cash provided of$10.7 million for the nine months ended September 26, 2009.  Our netloss, adjusted for depreciation and amortization, favorably impacted cash flowsby $0.1 million for the nine months ended September 25, 2010. For thefirst nine months of 2010, cash provided by operating activities was favorablyimpacted by an increase in accounts payable of $1.9 million, a $1.7 millionincrease in accrued other liabilities, and a decrease in accounts receivablestotaling $0.8 million.  The Company alsoreceived a federal income tax refund generated by our 2009 net operating losscarryback totaling $4.2 million.  Thiswas offset by a $6.1 million increase in inventories due to higher productionlevels to support the increased backlog and the increased sales volume.  The Company continues to improve itsinventory management resulting in higher inventory turns, which improved byover 13% compared to the third quarter of 2009.

 

***Investingactivities***

 

Cashprovided by investing activities was $40,000 for the nine months ended September 25,2010, as compared with cash used of $175,000 for the nine months ended September 26,2009. During the first nine months of 2010, the Company made short-terminvestments totaling $1.0 million through its wholly-owned captive insurancesubsidiary and had capital expenditures totaling $1.0 million, which consistedprimarily of replacement equipment. These amounts were reduced by the proceedsfrom the sale of assets of $0.6 million and proceeds from the sales ofinvestments totaling $1.5 million.

 

***Financing activities***

 

Financingactivities used $3.8 million of cash for the nine months ended September 25,2010, principally due a reduction of debt under our revolving bank creditfacility as compared with cash used of $11.4 million for the nine months ended September 26,2009.  Because of the prevailing industry conditions and our focus onrestoring profitability and reducing debt, the Company’s Board of Directorssuspended paying cash dividends effective as of February 16, 2009. Futuredividends will be subject to business conditions, the Company’s financialposition, and requirements for working capital, property, plant, and equipmentexpenditures, and other corporate purposes.

 

**Capital Resources**

 

OnOctober 18, 2010, Supreme Industries, Inc. entered into an Amendedand Restated Credit Agreement (the “Credit Agreement”) with JPMorgan ChaseBank, N.A. (the “Lender”) which agreement was effective on September 30,2010.  Under the terms of the CreditAgreement, the Lender agreed to provide the Company with a revolving line ofcredit of up $30,000,000 (previously $25,000,000) through December 31,2011.  The line of credit is limited to$25,000,000 until the Company meets certain post-closing conditions, outlinedin the Credit Agreement, at which time the full revolving credit amount of$30,000,000 will become available.  Inorder to qualify for the full revolving credit amount, the Company must meetcertain borrowing base requirements related to accounts receivable andinventories.  As additional collateralfor the revolving credit facility, Supreme and certain of its affiliates havesigned and delivered to the Lender Pledge and Security Agreements granting tothe Lender security interests in their personal property.  During the term of this revolving credit, theCompany is required to comply with two financial covenants, being a minimumrequired EBITDA (Earnings Before Interest Taxes Depreciation and Amortization)and a minimum tangible net worth.

 

Asof September 25, 2010, the Company had unused credit capacity ofapproximately $5.5 million under its then existing $25,000,000 creditagreement.  Interest on outstandingborrowings under the revolving line of credit is based on the bank’s primerate, or certain basis points above LIBOR, depending on the pricing optionselected and the Company’s leverage ratio.  The Company’s cash managementsystem and revolving line of credit are designed to maintain zero cash balancesand, accordingly, checks outstanding in excess of bank balances are classifiedas additional borrowings under the revolving line of credit.

 

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**Summary of Liquidity and Capital Resources**

 

TheCompany’s primary capital requirements are to support working capital demands,meet its debt service obligations, and finance capital expenditurerequirements. The Company has a substantial asset collateral base that itbelieves is more than sufficient to support its current outstanding revolvingline of credit obligation. Further, additional liquidity is obtained throughselling products and collecting the resulting trade accounts receivable. Thefunds collected are used to pay creditors and employees and to fund workingcapital needs.

 

TheCompany believes that it has adequate availability under its new bank creditfacility and sufficient additional liquidity resources to finance its expectedworking capital needs.

 

**Critical Accounting Policies and Estimates**

 

Management’sdiscussion and analysis of its financial position and results of operations arebased upon the Company’s consolidated condensed financial statements which havebeen prepared in accordance with accounting principles generally accepted inthe United 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 26,2009.  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.

 

***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 Companymust make estimates regarding the future use of raw materials, chassis, andfinished products, and provide for obsolete or slow-moving inventories. If actual product life cycles, product demand, and/or market conditions areless favorable than those projected by management, additional inventorywrite-downs may be required which would adversely affect future operatingresults.

 

***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.

 

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***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.

 

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 insurance subsidiary 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**

 

This report containsforward-looking statements, other than historical facts, which reflect the viewof management with respect to future events.  When used in this report,words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” andsimilar expressions, as they relate to the Company or its plans or operations,identify forward-looking statements.  Such forward-looking statements arebased on assumptions made by, and information currently available to,management.  Although management believes that the expectations reflectedin such forward-looking statements are reasonable, it can give no assurancethat the expectations reflected in such forward-looking statements arereasonable, and it can give no assurance that such expectations will prove tobe correct.  Important factors that could cause actual results to differmaterially from such expectations include, without limitation, an economicslowdown in the specialized vehicle industry, limitations on the availabilityof chassis on which the Company’s products are dependent, availability of rawmaterials, raw material cost increases, and severe interest rateincreases.  Furthermore, the Company can provide no assurance that suchraw 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.**                                    **QUANTITATIVEAND QUALITATIVE DISCLOSURES 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 26, 2009.

 

**ITEM 4.****            CONTROLS AND PROCEDURES.**

 

a.                                      Evaluation ofDisclosure Controls and Procedures.

 

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 25, 2010.

 

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b.             Changes in Internal Control over Financial Reporting.

 

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, bycollusion 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.

 

**PART II.****                                ****OTHER INFORMATION**

 

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

 

TheCompany is subject to various investigations, claims, and legal proceedingscovering a wide range of matters that arise in the ordinary course of itsbusiness activities.  Each of thesematters is subject to various uncertainties, 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.

 

OnJanuary 21, 2009, The Armored Group (“TAG”) filed a complaint against theCompany in the Superior Court of the State of Arizona in and for the County ofMaricopa alleging breach of oral contract and other claims.  TAG alleges that, under an oral agreementbetween it and the Company, the Company has an obligation to pay to TAG a 10%commission on all sales of armored vehicles to the United States Department ofState under a contract with the United States Department of State providing forup to $100,000,000 in sales.  As of September 25,2010, sales of armored vehicles to the United States Department of State underthis contract were approximately $24,000,000. Since the Company believed that this lawsuit is totally without merit(there was never any such oral agreement or factual basis for TAG’s otherclaims), the Company filed a Motion for Summary Judgment which was denied bythe trial court on October 6, 2010. No date for a jury trial has been set. The Company has instructed its attorneys to vigorously contest TAG’sclaim.  However, due to the inherentnature of litigation, the ultimate outcome of this case (whether by jury trialor otherwise) is uncertain and unpredictable.

 

**ITEM 1A.****                          ****RISKFACTORS.**

 

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 26, 2009, which is herein incorporated by reference.  We have added an additional risk factor toreflect current litigation.

 

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**We arecurrently subject to litigation, the unfavorable outcome of which might have amaterial adverse effect on our financial condition, results of operation andcash flows.**

 

TheArmored Group has filed a complaint against the Company alleging breach of anoral contract and other claims.  Sincethe Company believed that this lawsuit is totally without merit (there wasnever any such oral agreement or factual basis for TAG’s other claims), theCompany filed a Motion for Summary Judgment which was denied by the trial courton October 6, 2010.  No date for ajury trial has been set.  We haveinstructed our attorneys to vigorously contest TAG’s claim.  However, due to the inherent nature oflitigation, the ultimate outcome of this case (whether by jury trial orotherwise) is uncertain and unpredictable. If the final resolution of this litigation is unfavorable to us, ourfinancial condition, results of operation and cash flows might be materiallyadversely affected.

 

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

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 4.****            RESERVED.**

 

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

 

OnNovember 1, 2010, the Company’s wholly-owned subsidiary, Supreme IndianaOperations, Inc. (“SIO”), and Ford Motor Company (“Ford”) enteredinto the Ford Authorized Converter Pool Agreement (the “Bailment Agreement”),pursuant to which we obtain vehicle chassis for our specialized vehicleproducts.  The Bailment Agreement supersedes the agreement between SupremeCorporation and Ford, effective May 1, 2008, solely to reflect the mergerof SIO with and into our wholly-owned subsidiary, SupremeCorporation, with SIO being the surviving entity.

 

Webuild specialized vehicles and install other equipment on such chassis and thecompleted vehicles (the “Vehicles”) are sold to authorized Ford dealers. Under the Bailment Agreement, chassis are obtained by bailment and held by usfor a period of 90 days without charge.  If any of the chassis havenot been utilized in a purchased Vehicle after 90 days, storagecharges will begin to accrue on such chassis beginning on the 91st day untilsuch time that such chassis are re-billed to an authorized Forddealer.  The storage charges will be based on the published interestrate for bank prime loans plus points, which number of points will increase ona sliding scale the longer such chassis is not utilized in a purchased vehicle.

 

Foreach chassis, bailment shall end upon the earlier of:  (1) the timethat the chassis is sold by Ford to an authorized Ford dealer; and (2) uponauthorized return of the chassis to Ford by us.

 

Theforegoing description of the Bailment Agreement is incomplete and is qualifiedin its entirety by reference to the Bailment Agreement, a copy of which isincluded as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

 

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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* |   | Ford  Authorized Converter Pool Agreement, dated November 1, 2010, between  Supreme Indiana Operations, Inc. and Ford Motor Company.                                                                                                                                                                          |
| 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 5, 2010 | Herbert  M. Gardner                                    |
|                         | Chairman  of the Board and Chief Executive Officer     |
|                         |                                                   |
|                         |                                                   |   |
|                         | By:                                                    | /s/  Jeffery D. Mowery |
| DATE:  November 5, 2010 | 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*  |       | Ford  Authorized Converter Pool Agreement, dated November 1, 2010, between Supreme  Indiana Operations, Inc. and Ford Motor Company.                                                                                                                                                                           |
| 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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