Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |   |
| **x**                                                                                                                                                             | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                              |   |
| **For the quarterly period ended June 26, 2010**                                                                                                                  |
|                                                                                                                                                              |   |
| **or**                                                                                                                                                            |
|                                                                                                                                                              |   |
| **o**                                                                                                                                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                              |   |
| **For the transition period from             to            ** |

 

**CommissionFile Number: 1-8183**

 

**SUPREME INDUSTRIES, INC.**

(Exact name ofregistrant as specified in its charter)

** **

| **Delaware**                                                      | ** ** | **75-1670945**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of

incorporation or  organization) |       | (I.R.S. Employer  Identification No.) |

 

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

(Address ofprincipal executive offices)       (ZipCode)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

| **Common Stock ($.10 Par Value)** | ** ** | **Outstanding at July 26, 2010** |
|-----------------------------------|------------|----------------------------------|
| **Class A**                  | ** ** | **12,354,346**                   |
| **Class B**                  | ** ** | **2,017,882**                    |

 

 

 

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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                                                                                    | 18                |
|               |                                                                                        |              |
| SIGNATURES         |                                                                                        |
|               |                                                                                        |
| INDEX  TO EXHIBITS |                                                                                        |
|               |                                                                                        |
| EXHIBITS           |                                                                                        |
|                    |                                                                                             |                   |  |

 

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**PART I. FINANCIAL INFORMATION**

 

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

 

**SupremeIndustries, Inc. and Subsidiaries**

Consolidated Balance Sheets

 
| ** **                                       | ** ** | **June 26,** | ** **  | **December 26,** | ** ** |
|--------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                       | ** ** | **2010**          | ** **  | **2009**              | ** ** |
| ** **                                       | ** ** | **(Unaudited)**   | ** **  | ** **            | ** ** |
| **ASSETS**                                       |       |              |        |                  |       |
|                                             |       |              |        |                  |       |
| **Current assets:**                              |       |              |        |                  |       |
| Cash  and cash equivalents                       |       | $                 | 82,508      |                  | $          | 1,222,411 |   |
| Investments                                      |       | 2,116,836         |        | 1,645,407             |       |
| Accounts  receivable, net                        |       | 26,425,876        |        | 22,710,669            |       |
| Inventories                                      |       | 40,085,021        |        | 31,553,351            |       |
| Other  current assets                            |       | 4,006,191         |        | 8,870,300             |       |
|                                             |       |              |        |                  |       |
| **Total current assets**                         |       | 72,716,432        |        | 66,002,138            |       |
|                                             |       |              |        |                  |       |
| **Property, plant and equipment, at cost**       |       | 89,042,898        |        | 89,501,666            |       |
| Less,  Accumulated depreciation and amortization |       | 47,968,229        |        | 47,264,582            |       |
|                                             |       |              |        |                  |       |
| **Property, plant and equipment, net**           |       | 41,074,669        |        | 42,237,084            |       |
|                                             |       |              |        |                  |       |
| **Other assets**                                 |       | 567,712           |        | 1,181,357             |       |
|                                             |       |              |        |                  |       |
| **Total assets**                                 |       | $                 | 114,358,813 |                  | $          | 109,420,579 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**Supreme Industries, Inc. and Subsidiaries**

Consolidated Balance Sheets, Concluded

 
| ** **                                          | ** ** | **June 26,** | ** **  | **December 26,** | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **2010**          | ** **  | **2009**              | ** ** |
| ** **                                          | ** ** | **(Unaudited)**   | ** **  | ** **            | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |       |              |        |                  |       |
|                                                |       |              |        |                  |       |
| **Current liabilities:**                            |       |              |        |                  |       |
| Current  maturities of long-term debt               |       | $                 | 27,782,424  |                  | $          | 26,226,289 |   |
| Trade  accounts payable                             |       | 15,479,713        |        | 9,906,429             |       |
| Accrued  income taxes                               |       | 1,033,085         |        | 989,300               |       |
| Other  accrued liabilities                          |       | 7,323,483         |        | 7,386,251             |       |
|                                                |       |              |        |                  |       |
| **Total current liabilities**                       |       | 51,618,705        |        | 44,508,269            |       |
|                                                |       |              |        |                  |       |
| **Long-term debt**                                  |       | 991,308           |        | 1,115,410             |       |
|                                                |       |              |        |                  |       |
| **Deferred income taxes**                           |       | 1,211,262         |        | 1,211,262             |       |
|                                                |       |              |        |                  |       |
| **Total liabilities**                               |       | 53,821,275        |        | 46,834,941            |       |
|                                                |       |              |        |                  |       |
| **Stockholders’ equity**                       |       | 60,537,538        |        | 62,585,638            |       |
|                                                |       |              |        |                  |       |
| **Total liabilities and stockholders’ equity** |       | $                 | 114,358,813 |                  | $          | 109,420,579 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**SupremeIndustries, Inc. and Subsidiaries**

Consolidated Statements of Operations (Unaudited)

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                                               | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                                |       | $                      | 60,544,185 |                 | $          | 47,582,740 |   | $ | 109,041,002 |   | $ | 96,204,729 |   |
| Cost of sales                                            |       | 54,665,742             |       | 43,740,823           |       | 99,654,089 |   | 89,458,736 |   |
| **Gross profit**                                         |       | 5,878,443              |       | 3,841,917            |       | 9,386,913 |   | 6,745,993 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Selling, general and administrative expenses             |       | 5,716,945              |       | 5,196,414            |       | 11,336,875 |   | 10,842,867 |   |
| Other income                                             |       | (179,837               | )          | (374,548             | )          | (397,005 | ) | (674,287 | ) |
| **Operating income (loss)**                              |       | 341,335                |       | (979,949             | )          | (1,552,957 | ) | (3,422,587 | ) |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Interest expense                                         |       | 359,430                |       | 519,552              |       | 878,750 |   | 976,878 |   |
| **Loss from continuing operations  before income taxes** |       | (18,095                | )          | (1,499,501           | )          | (2,431,707 | ) | (4,399,465 | ) |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Income tax benefit                                       |       | —                 |       | (573,416             | )          | — |   | (2,288,622 | ) |
| **Loss from continuing operations**                      |       | (18,095                | )          | (926,085             | )          | (2,431,707 | ) | (2,110,843 | ) |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Discontinued operations                                  |       |                   |       |                 |       |   |   |   |   |
| Operating loss of discontinued motorhome  operations     |       | (143,970               | )          | (180,961             | )          | (138,766 | ) | (394,180 | ) |
| **Net loss**                                             |       | $                      | (162,065   | )                    | $          | (1,107,046 | ) | $ | (2,570,473 | ) | $ | (2,505,023 | ) |
| **Loss Per Share:**                                      |       |                   |       |                 |       |   |   |   |   |
| Loss from continuing operations                          |       | $                      | (0.00      | )                    | $          | (0.07 | ) | $ | (0.17 | ) | $ | (0.15 | ) |
| Loss from discontinued operations                        |       | (0.01                  | )          | (0.01                | )          | (0.01 | ) | (0.03 | ) |
| **Net loss**                                             |       | $                      | (0.01      | )                    | $          | (0.08 | ) | $ | (0.18 | ) | $ | (0.18 | ) |
| **Shares used in the computation of  loss per share:**   |       |                   |       |                 |       |   |   |   |   |
| Basic                                                    |       | 14,292,955             |       | 14,185,065           |       | 14,274,747 |   | 14,165,215 |   |
| Diluted                                                  |       | 14,292,955             |       | 14,185,065           |       | 14,274,747 |   | 14,165,215 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SupremeIndustries, Inc. and Subsidiaries**

Consolidated Statements of Cash Flows (Unaudited)

 
| ** **                                                                                 | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **June 26,**    | ** ** | **June 27,** | ** ** |
| ** **                                                                                 | ** ** | **2010**             | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                                  |       |                 |       |   |   |
| Net  loss                                                                                  |       | $                    | (2,570,473 | ) | $ | (2,505,023 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                             |       | 1,975,391            |       | 2,116,500 |   |
| Provision  for losses on doubtful receivables                                              |       | 61,768               |       | 43,035 |   |
| Stock-based  compensation expense                                                          |       | 278,288              |       | 331,631 |   |
| Losses  (gains) on sale of property, plant and equipment                                   |       | 4,283                |       | (231,150 | ) |
| Changes  in operating assets and liabilities                                               |       | (1,905,516           | )          | 13,672,266 |   |
|                                                                                       |       |                 |       |   |   |
| **Net cash provided by (used in) operating activities**                                    |       | (2,156,259           | )          | 13,427,259 |   |
|                                                                                       |       |                 |       |   |   |
| **Cash flows from investing activities:**                                                  |       |                 |       |   |   |
| Additions  to property, plant and equipment                                                |       | (607,236             | )          | (1,349,694 | ) |
| Proceeds  from sale of property, plant and equipment                                       |       | 611,249              |       | 479,816 |   |
| Purchases  of investments                                                                  |       | (998,559             | )          | (28,833 | ) |
| Proceeds  from sales of investments                                                        |       | 571,996              |       | 173,830 |   |
| Decrease  in other assets                                                                  |       | 4,373                |       | 4,373 |   |
|                                                                                       |       |                 |       |   |   |
| **Net cash used in investing activities**                                                  |       | (418,177             | )          | (720,508 | ) |
|                                                                                       |       |                 |       |   |   |
| **Cash flows from financing activities:**                                                  |       |                 |       |   |   |
| Proceeds  from revolving line of credit and long-term debt                                 |       | 34,825,856           |       | 35,135,643 |   |
| Repayments  of revolving line of credit and long-term debt                                 |       | (33,393,823          | )          | (48,713,586 | ) |
| Proceeds  from exercise of stock options                                                   |       | 2,500                |       | — |   |
|                                                                                       |       |                 |       |   |   |
| **Net cash provided by (used in) financing activities**                                    |       | 1,434,533            |       | (13,577,943 | ) |
|                                                                                       |       |                 |       |   |   |
| **Change in cash and cash equivalents**                                                    |       | (1,139,903           | )          | (871,192 | ) |
|                                                                                       |       |                 |       |   |   |
| **Cash and cash equivalents, beginning of period**                                         |       | 1,222,411            |       | 932,608 |   |
|                                                                                       |       |                 |       |   |   |
| **Cash and cash equivalents, end of period**                                               |       | $                    | 82,508     |   | $ | 61,416 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

NotesTo Consolidated Financial Statements

 

NOTE 1 - 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 six months ended June 26, 2010 and June 27, 2009 arefor 13- and 26-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 assessing the viability of selling or leasing the real estate of theSilver Crown division and expects to retain the remaining fixed assets;therefore, they are not classified as held for sale at June 26, 2010 or December 26,2009. The Company plans to sell the finished units on hand as of June 26,2010, relating to this product 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** | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **June 26, 2010** | ** ** | **June 27, 2009** | ** ** | **June 26, 2010** | ** ** | **June 27, 2009** | ** ** |
| Net sales                   |       | $                      | —     |                   | $          | 2,021,890 |   | $ | 1,567,977 |   | $ | 2,672,443 |   |
|                        |       |                   |       |                   |       |   |   |   |   |
| Pretax loss from operations |       | $                      | (143,970   | )                      | $          | (468,545 | ) | $ | (138,766 | ) | $ | (821,558 | ) |
|                        |       |                   |       |                   |       |   |   |   |   |
| Net loss                    |       | $                      | (143,970   | )                      | $          | (180,961 | ) | $ | (138,766 | ) | $ | (394,180 | ) |

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

NotesTo 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 six-month periods ended June 26, 2010 and June 27,2009, total and other comprehensive income are as follows:

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **June 26,**      | ** ** | **June 27,**    | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                 | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss                   |       | $                      | (162,065   | )                    | $          | (1,107,046 | ) | $ | (2,570,473 | ) | $ | (2,505,023 | ) |
| Other comprehensive income |       | 135,805                |       | 62,636               |       | 241,585 |   | 130,558 |   |
| Total comprehensive loss   |       | $                      | (26,260    | )                    | $          | (1,044,410 | ) | $ | (2,328,888 | ) | $ | (2,374,465 | ) |

 

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:

 
| ** **       | ** ** | **June 26,** | ** ** | **December 26,** | ** ** |
|------------------|------------|-------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Raw  materials   |       | $                 | 20,474,160 |                  | $          | 17,512,758 |   |
| Work-in-progress |       | 6,832,878         |       | 6,528,059             |       |
| Finished  goods  |       | 12,777,983        |       | 7,512,534             |       |
|             |       | $                 | 40,085,021 |                  | $          | 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 byobservable market 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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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

Notes To ConsolidatedFinancial 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 June 26, 2010 and December 26, 2009 becauseof the relatively short maturities of these financial instruments.  The carrying amount of long-term debt,including current maturities, approximated fair value as of June 26, 2010and December 26, 2009, based upon terms and conditions available to theCompany at those dates in comparison to the terms and conditions of itsoutstanding long-term debt.

 

NOTE6 — REVOLVING LINE OF CREDIT

 

Therevolving line of credit and a letter of credit facility are part of a CreditAgreement as amended and restated on December 23, 2008 (the “CreditAgreement”).  On March 31, 2010, Supreme Corporation, the Company’swholly-owned subsidiary, together with certain of the Company’s direct orindirect subsidiaries, amended its existing credit facility to requireadditional collateral and mortgages on all real estate owned by SupremeCorporation and its subsidiaries.

 

Duringthe second quarter of 2010, the Company was not in compliance with anearnings-related covenant and a minimum tangible net worth covenant in itsCredit Agreement.  The Company is in theprocess of obtaining appropriate waivers for the covenant violations and hasrecently completed discussions with its lender, and a new credit agreement isbeing drafted and is anticipated to be executed with the agreed upon terms andconditions.  The new agreement isexpected to maintain the letter of credit line at $3.5 million but increase theline of credit available to Supreme Corporation and its subsidiaries to $30million from $25 million and modify the two financial covenants regardingminimum tangible net worth and adjusted EBITDA measurements based upon a profitimprovement plan presented to the lender during the second quarter. Inaddition, the new agreement is expected to have a maturity date of December 31,2011, a reintroduction of performance-based pricing, and negative pledges onall real estate in lieu of mortgages. Despite its non-compliance with certaincovenants, the Company has made scheduled payments of principal and interest ona timely basis.

 

Underthe current Credit Agreement, the Company has available borrowings, asrestricted by the borrowing base, of approximately $2.0 million as of June 26,2010.  Since the Company is in default ofthe two financial covenants referred to above the lender could disallowborrowings under the current Credit Agreement (though they have not done so),and management expects to be able to continue to borrow as needed up to theamount of the available borrowing base until the new agreement is signed.Interest on outstanding borrowings under the bank revolving line of credit isbased on the bank’s prime rate, or certain basis points above LIBOR, dependingon the pricing option selected and the Company’s leverage ratio.  TheCompany’s cash management system and revolving line of credit are designed tomaintain zero cash balances and, accordingly, checks outstanding in excess ofbank balances are classified as additional borrowings under the revolving lineof credit.

 

NOTE7 - LOSS PER SHARE

 

As of June 26, 2010,the assumed exercise or issuance of 215,861 shares and 234,068 shares for thethree- and six-month periods, respectively, relating to stock plans were notincluded in the computation of diluted loss per share. As of June 27,2009, the assumed exercise or issuance of 164,238 shares and 180,928 shares forthe three-and six month period, respectively, relating to stock plans were notincluded in the diluted loss per share. Inclusion of these shares in the respective periods would have beenantidilutive.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

NotesTo Consolidated Financial Statements, Concluded

 

NOTE8 - STOCK-BASED COMPENSATION

 

Thefollowing table summarizes the activity for the unvested restricted stock unitsand restricted stock for the six months ended June 26, 2010:

 
| ** **                        | ** ** | ** **     | ** ** | **Weighted  -** | ** ** |
|-----------------------------------|------------|----------------|------------|-----------------|------------|
| ** **                        | ** ** | ** **     | ** ** | **Average**     | ** ** |
| ** **                        | ** ** | **Number  of** | ** ** | **Grant  Date** | ** ** |
| ** **                        | ** ** | **Shares**     | ** ** | **Fair  Value** | ** ** |
| Unvested,  December 26, 2009 |       | 111,736        |       | $               | 4.62       |   |
| Granted                           |       | —         |       | n/a             |       |
| Vested                            |       | (45,166        | )          | 5.04            |       |
| Unvested,  June 26, 2010     |       | 66,570         |       | $               | 4.34       |   |

 

Thetotal fair value of the shares vested during the six months ended June 26,2010, was $227,498.

 

Asummary of the status of the Company’s outstanding stock options as of June 26,2010, and changes during the six months ended June 26, 2010, are asfollows:

 
| ** **                          | ** ** | ** **    | ** ** | **Weighted -** | ** ** |
|-------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                          | ** ** | ** **    | ** ** | **Average**    | ** ** |
| ** **                          | ** ** | **Number of** | ** ** | **Exercise**   | ** ** |
| ** **                          | ** ** | **Shares**    | ** ** | **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, June 26, 2010     |       | 880,596       |       | $              | 4.53       |   |

 

Asof June 26, 2010, outstanding options had an intrinsic value of $98,539and a weighted-average remaining contractual life of 4.17 years.

 

Totalunrecognized compensation expense related to all share-based awards outstandingat June 26, 2010, is approximately $459,000 and is to be recorded over aweighted average contractual life of 0.94 years.

 

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**SUPREMEINDUSTRIES, INC. AND SUBSIDIARIES**

 

**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 Corporation, is one of the nation’sleading manufacturers of specialized commercial vehicles. Utilizing anationwide direct sales and distribution network, as well as manufacturing andservice facilities in nine states across the continental United States, Supremeis able to meet the needs of customers across all of North 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 offerings include products such as customized armored vehicles,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 second quarter of 2010, we began to experience increases in revenues, andaccordingly, we were able to improve our results from a pre-tax operating lossfrom continuing operations of $1.5 million in the second quarter of 2009 to apre-tax operating loss of $18,000 in the second quarter of 2010.  We also improved our gross profit in 2010 by55% for the second quarter and 39% for the six months as compared with thecorresponding periods in 2009.  Basedupon industry intelligence coupled with our own increased backlog, we arebeginning to see business conditions are improving. However, we continue tomaintain a conservative and cautious view of the economy as we move forward.

 

Wehave experienced improved demand for all product lines including truck, bus,and armored vehicles.  Our sales backlogwas $91.7 million at June 26, 2010, as compared with $69.4 million at March 27,2010 and $61.2 million at June 27, 2009.  With product enhancementsto our Signature body to improve customer satisfaction, pent-up truck demand(due to historic lows in purchases over the past two years) and our improvedbacklog, we are well-positioned to improve our performance going forward,subject to a continued recovery of the truck market.

 

Wealso continue to look for opportunities to make our operations leaner and haveimplemented additional cost reductions that will be realized during theremainder of 2010.  The cumulative 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 June 26, 2010, increased $12.9 million to$60.5 million as compared with $47.6 million for the three months ended June 27,2009.  Net sales for the six months ended June 26, 2010, increased$12.8 million to $109.0 million compared with $96.2 million for the six monthsended June 27, 2009.  The followingtable presents the components of net sales and the changes from period toperiod:

 
| ** **                | ** ** | **Three Months Ended** | ** **   | **Six Months Ended** | ** ** |
|---------------------------|------------|------------------------|--------------|----------------------|------------|
| **($000’s omitted)** | ** ** | **Jun 26,  2010**      | ** **   | **Jun 27,  2009**    | ** ** | **Change** | ** ** | **Jun 26,  2010** | ** ** | **Jun 27,  2009** | ** ** | **Change** | ** ** |
| Specialized vehicles:     |       |                   |         |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Trucks                    |       | $                      | 35,100       |                 | $          | 25,208 |   | $ | 9,892 |   | 39.2 | % | $ | 56,988 |   | $ | 51,653 |   | $ | 5,335 |   | 10.3 | % |
| Buses                     |       | 17,429                 |         | 16,656               |       | 773 |   | 4.6 | % | 38,075 |   | 30,675 |   | 7,400 |   | 24.1 | % |
| Armored vehicles          |       | 6,614                  |         | 4,348                |       | 2,266 |   | 52.0 | % | 11,624 |   | 10,491 |   | 1,133 |   | 10.7 | % |
|                      |       | 59,143                 |         | 46,212               |       | 12,931 |   | 28.0 | % | 106,687 |   | 92,819 |   | 13,868 |   | 14.8 | % |
| Composites                |       | 1,401                  |         | 1,371                |       | 30 |   | 2.2 | % | 2,354 |   | 3,386 |   | (1,032 | ) | -30.5 | % |
|                      |       | $                      |  60,544 |                 | $          | 47,583 |   | $ | 12,961 |   | 27.2 | % | $ | 109,041 |   | $ | 96,205 |   | $ | 12,836 |   | 13.3 | % |

 

Thetruck division sales increase of $9.9 million, or 39%, for the quarter isprimarily attributable to the improved retail truck market and the shipment ofa fleet order which was delayed from the first quarter to the second quarterdue to material and supply-chain issues. We have experienced improved backlog for trucks and believe we arewell-positioned to benefit from the favorable industry indicators beingreported and the potential for trucking companies to begin replacing agingequipment.

 

OurStarTrans bus division continued to experience strong demand, increasing itssales by $0.8 million for the quarter and $7.4 million for the first half of2010.  The increases are due in part to the availability of funds from the2009 federal economic stimulus plan with state and local transit authoritiespurchasing additional product.  With our strong backlog, we anticipatecontinued favorable contributions from our bus division for the remainder of2010.

 

Thearmored division continued to experience increased demand with revenueincreases of $2.3 million for the quarter and $1.1 million for the first halfof 2010.  These increases are primarily the result of our contract withthe U.S. Department of State to produce armored Suburbans for embassies abroadand improved cash-in-transit demand.  We believe that the armored divisionis well-positioned for the remainder of 2010 due to the increased backlog andthe positive response we are receiving from other governmental agencies regardingour armored product offerings and quality.

 

Thedecrease in composite sales of fiberglass reinforced plywood and otherfiberglass products of $1.0 million, or 30.5%, for the first six months of 2010was due to lower fiberglass sales resulting from the overall economic downturn.

 

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

 

Grossprofit increased by $2.1 million, or 55.3%, to $5.9 million for the threemonths ended June 26, 2010, as compared with $3.8 million for the threemonths ended June 27, 2009.  For the six months ended June 26,2010, gross profit increased by $2.7 million, or 38.8%, to $9.4 millioncompared with $6.7 million for the six months ended June 27, 2009.  The following table presents the componentsof cost of sales as a percentage of net sales and the changes from period toperiod:

 
| ** **    | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|---------------|------------|-------------------------|------------|-------------------------|------------|
| ** **    | ** ** | **June 26,  2010** | ** ** | **June 27,  2009** | ** ** | **Percent  Change** | ** ** | **June 26,  2010** | ** ** | **June 27,  2009** | ** ** | **Percent Change** | ** ** |
| Material      |       | 58.6                    | %          | 58.8                    | %          | (0.2 | )% | 58.0 | % | 58.4 | % | (0.4 | )% |
| Direct Labor  |       | 14.1                    |       | 13.8                    |       | 0.3 |   | 14.3 |   | 13.9 |   | 0.4 |   |
| Overhead      |       | 15.2                    |       | 17.1                    |       | (1.9 | ) | 16.6 |   | 18.5 |   | (1.9 | ) |
| Delivery      |       | 2.4                     |       | 2.2                     |       | 0.2 |   | 2.5 |   | 2.2 |   | 0.3 |   |
| Cost of sales |       | 90.3                    |       | 91.9                    |       | (1.6 | ) | 91.4 |   | 93.0 |   | (1.6 | ) |
| Gross profit  |       | 9.7                     | %          | 8.1                     | %          | 1.6 | % | 8.6 | % | 7.0 | % | 1.6 | % |

 

**Material** — Material cost as apercentage of net sales decreased by 0.2% and 0.4% for the three and six monthsended June 26, 2010, respectively, as compared with the correspondingperiods in 2009. The decrease in the material percentage was attributed to ahigher proportion of specialty products sold through our bus division. This was partially offset by an increase in the material percentage due to achange in the overall product mix.

 

Asthe general economic environment begins to show signs of improvement, thepotential for raw material cost increases remains a concern for certaincommodities (aluminum, steel, and wood).  We closely monitor all majorcommodities and continually review the financial stability of our primaryvendors.  We also strive to reduce manufacturing costs through the use ofimproved technologies, processes, and supply-chain management tactics and strategies.

 

**Direct Labor** — Direct labor as apercentage of net sales increased by 0.3% and 0.4% for the three and six monthsended June 26, 2010, respectively, as compared with the correspondingperiods in 2009.   The increase in the direct labor percentage was dueto new employee training costs in order to support the higher production andsales levels in 2010. Historically, our labor percentage has increased duringramp-up periods due to new employee training costs.

 

**Overhead** — Manufacturing overhead asa percentage of net sales decreased by 1.9% for the three and six months ended June 26,2010, as compared with the corresponding periods in 2009.  The overalloverhead percentage declined due to the fixed nature of certain overheadexpenses that do not fluctuate with sales volume changes.  Additionally, the decrease in the overheadpercentage was the result of our cost reduction efforts which have includedpersonnel reductions, process improvements, and plant consolidations.

 

**Delivery** — Delivery as a percentageof net sales increased by 0.2% and 0.3% for the three and six months ended June 26,2010, respectively, as compared with the corresponding periods in 2009. The Company continues to explore more cost-effective delivery methods tomitigate the adverse impact of ongoing high fuel costs.

 

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***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 June 26, 2010, ascompared with $5.2 million for the three months ended June 27, 2009. For the six months ended June 26, 2010, selling and G&A expenseincreased by $0.5 million, or 4.6%, to $11.3 million compared with $10.8million for the six months ended June 27, 2009.  The following table presents selling andG&A expenses as a percentage of net sales and the changes from period toperiod:

 
| ** **                 | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended**   | ** ** |
|----------------------------|------------|-------------------------|------------|-------------------------|------------|
| **($000’s  omitted)** | ** ** | **June 26,  2010** | ** ** | **June 27,  2009** | ** ** | **Change** | ** ** | **June 26,  2010** | ** ** | **June 27,  2009** | ** ** | **Change** | ** ** |
| Selling  expenses          |       | $                       | 2,021      |                    | 3.3        | % | $ | 1,719 |   | 3.6 | % | $ | 302 |   | (0.3 | )% | $ | 3,942 |   | 3.6 | % | $ | 3,709 |   | 3.9 | % | $ | 233 |   | (0.3 | )% |
| G&A  expenses          |       | 3,696                   |       | 6.1                     |       | 3,477 |   | 7.3 |   | 219 |   | (1.2 | ) | 7,395 |   | 6.8 |   | 7,134 |   | 7.4 |   | 261 |   | (0.6 | ) |
| Total                      |       | $                       | 5,717      |                    | 9.4        | % | $ | 5,196 |   | 10.9 | % | $ | 521 |   | (1.5 | )% | $ | 11,337 |   | 10.4 | % | $ | 10,843 |   | 11.3 | % | $ | 494 |   | (0.9 | )% |

 

**Selling expenses** — Selling expensesincreased for the three and six months ended June 26, 2010, as comparedwith the corresponding period in 2009.  The increase for the three and sixmonths was primarily attributable to higher commission expense resulting fromthe improvement in the sales volume. However, selling expenses as a percentageof sales decreased 0.3% for the three and six months as compared with thecorresponding periods in 2009.

 

**G&A expenses** — G&A expensesincreased for the three and six months ended June 26, 2010, as comparedwith the corresponding period in 2009.  The increase was primarilyattributable to engaging a consulting firm to assist the Company with itsprofit improvement plan.  These costs were offset by reduced employeeheadcount and the related payroll and benefit cost savings.  Reductions inour administrative workforce have been a significant part of the cost savingsinitiatives that we began implementing in mid-2008. G&A expenses as apercentage of sales decreased 1.2% and 0.6% for the three and six months,respectively, as compared with the corresponding periods in 2009.

 

***Other income***

 

Forthe three months ended June 26, 2010, other income was $0.2 million (0.3%of net sales) as compared with $0.4 million (0.8% of net sales) for the threemonths ended June 27, 2009.  For thesix months ended June 26, 2010, other income was $0.4 million (0.4% of netsales) as compared with $0.7 million (0.7% of net sales) for the six monthsended June 27, 2009.  Other incomeconsisted of rental income, gain or loss on sale of assets, and other miscellaneousincome received by the Company.

 

***Interest expense***

 

Interestexpense was $0.4 million (0.7% of net sales) for the three months ended June 26,2010, compared with $0.5 million (1.1% of net sales) for the three months endedJune 27, 2009.  For the six monthsended June 26, 2010, interest expense was $0.9 million (0.8% of net sales)compared with $1.0 million (1.0% of net sales) for the six months ended June 27,2009.  The bank interest expensereflected lower prevailing interest rates coupled with reduced debt levels dueto lower working capital levels.   This was somewhat offset by higher(performance-based) pricing provisions under our bank credit facility as recentoperating losses triggered an increase in interest rates. Chassis interestexpense decreased due to improved chassis management.

 

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

 

Theloss from continuing operations before income taxes was $18,000 for the threemonths ended June 26, 2010, compared to a net loss of $1.5 million (-3.2%of net sales) for the three months ended June 27, 2009.  For the six months ended June 26, 2010,the loss from continuing operations before income taxes was $2.4 million (-2.2%of net sales) compared with $4.4 million (-4.6% of net sales) for the sixmonths ended June 27, 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 received during 2010. Accordingly,we recorded a deferred tax asset for the net operating losses generated duringthe three-and six-month periods ended June 26, 2010. The ultimaterealization of these deferred tax assets is dependent upon future taxable income.Because the Company has incurred tax losses in the prior two years, there is nocertainty that the Company will utilize the full benefit of these deferred taxassets; therefore, it has recorded a valuation allowance for the net operatinglosses generated during the first half of 2010, thus no tax benefit has beenrecorded for the 2010 periods. The estimated effective income tax rate for thesix months ended June 27, 2009 was 52%. The estimated effective income taxrate for the first half of 2009 was favorably impacted by tax benefitsassociated with the Company’s wholly-owned captive insurance subsidiary,federal alternative fuel tax credits, and research and development tax credits.The combination of these tax benefits along with the incurred pretax lossesresulted in an overall tax benefit position for the Company in 2009.

 

***Discontinued Operations***

 

Asnoted earlier, the Company closed its Silver Crown luxury motorhome businessand has reflected prior-period results accordingly as discontinued operations.The unprecedented tight credit markets caused by the severe economic recessionhas led to a significant reduction in new motorhome orders and the cancellationof orders.  For the three months ended June 26, 2010, the after taxoperating loss from our Silver Crown discontinued operations was $0.1 millioncompared with an after tax operating loss of $0.2 million for the three monthsended June 27, 2009.  For the sixmonths ended June 26, 2010, the after tax operating loss from our SilverCrown discontinued operations was $0.1 million compared with an after taxoperating loss of $0.4 million for the six months ended June 27, 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** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **Jun 26,  2010**      | ** ** | **Jun 27,  2009**    | ** ** | **Change** | ** ** | **Jun 26,  2010** | ** ** | **Jun 27,  2009** | ** ** | **Change** | ** ** |
| Basic and diluted net loss per share: | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations       |       | $                      | —     |                 | $          | (0.07 | ) | $ | 0.07 |   | $ | (0.17 | ) | $ | (0.15 | ) | $ | (0.02 | ) |
| Loss from discontinued operations     |       | (0.01                  | )          | (0.01                | )          | — |   | (0.01 | ) | (0.03 | ) | 0.02 |   |
| Net Loss                              |       | $                      | (0.01      | )                    | $          | (0.08 | ) | $ | 0.07 |   | $ | (0.18 | ) | $ | (0.18 | ) | $ | — |   |

 

**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 SupremeCorporation, the Company’s wholly-owned subsidiary. Principal uses of cash havebeen to fund recent operating losses, support working capital needs, meet debtservice requirements, 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 used $2.2 million of cash for the sixmonths ended June 26, 2010, as compared with cash provided of $13.4million for the six months ended June 27, 2009.  Our net loss,adjusted for depreciation and amortization, unfavorably impacted cash flows by$0.6 million for the six months ended June 26, 2010. For the first sixmonths of 2010, cash used by operating activities was unfavorably impacted byan $8.5 million increase in inventory and a $3.7 million increase in accountsreceivable.  The increases were due tohigher production levels to support the increased backlog and the increasedsales volume.  This was offset by anincrease in accounts payable of $5.6 million and a federal income tax refundreceived generated by our 2009 net operating loss carryback totaling $4.2million.  The Company continues to improve its inventory managementresulting in higher inventory turns, which improved by over 18%quarter-over-quarter.

 

***Investingactivities***

 

Cashused in investing activities was $0.4 million for the six months ended June 26,2010, as compared with $0.7 million for the six months ended June 27,2009. During the first half of 2010, the Company made short-terminvestments totaling $1.0 million through its wholly-owned captive insurancesubsidiary and had capital expenditures totaling $0.6 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 $0.6 million.

 

***Financing activities***

 

Financingactivities provided $1.4 million of cash for the six months ended June 26,2010, principally due to borrowings on our revolving bank credit facility tosupport the increase in working capital related to higher 2010 sales andproduction levels, as compared with cash used of $13.6 million for the sixmonths ended June 27, 2009.  Because of the prevailing industryconditions and our focus on restoring profitability and reducing debt, theCompany’s Board of Directors suspended paying cash dividends effective as ofFebruary 16, 2009. Future dividends will be subject to businessconditions, the Company’s financial position, and requirements for workingcapital, property, plant, and equipment expenditures, and other corporatepurposes.

 

**Capital Resources**

 

Therevolving line of credit and a letter of credit facility are part of a CreditAgreement as amended and restated on December 23, 2008 (the “CreditAgreement”).  On March 31, 2010, Supreme Corporation, the Company’swholly-owned subsidiary, together with certain of the Company’s direct orindirect subsidiaries, amended its existing credit facility to requireadditional collateral and mortgages on all real estate owned by SupremeCorporation and its subsidiaries.

 

Duringthe second quarter of 2010, the Company was not in compliance with anearnings-related covenant and a minimum tangible net worth covenant in itsCredit Agreement.  The Company is in theprocess of obtaining appropriate waivers for the covenant violations and hasrecently completed discussions with its lender, and a new credit agreement isbeing drafted and is anticipated to be executed with the agreed upon terms andconditions.  The new agreement isexpected to maintain the letter of credit line at $3.5 million but increase theline of credit available to Supreme Corporation and its subsidiaries to $30million from $25 million and modify the two financial covenants regardingminimum tangible net worth and adjusted EBITDA measurements based upon a profitimprovement plan presented to the lender during the second quarter. Inaddition, the new agreement is expected to have a maturity date of December 31,2011, a reintroduction of performance-based pricing, and negative pledges onall real estate in lieu of mortgages. Despite its non-compliance with certaincovenants, the Company has made scheduled payments of principal and interest ona timely basis.

 

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Underthe current Credit Agreement, the Company has available borrowings, asrestricted by the borrowing base, of approximately $2.0 million as of June 26,2010.  Since the Company is in default ofthe two financial covenants referred to above the lender could disallow borrowings under the current Credit Agreement(though they have not done so), and management expects to be able to continueto borrow as needed up to the amount of the available borrowing base until thenew agreement is signed. Interest on outstanding borrowings under the bankrevolving line of credit is based on the bank’s prime rate, or certain basispoints above LIBOR, depending on the pricing option selected and the Company’sleverage ratio.  The Company’s cash management system and revolving lineof credit are designed to maintain zero cash balances and, accordingly, checksoutstanding in excess of bank balances are classified as additional borrowingsunder the revolving line of credit.

 

**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 current bankcredit facility and sufficient additional liquidity resources to finance itsexpected working capital needs for 2010.

 

**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 operating results.

 

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

 

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

 

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

 

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.****                                        ****CONTROLSAND 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’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe 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 June 26, 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 agreement betweenit 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 June 26,2010, sales of armored vehicles to the United States Department of State underthis contract were approximately $20,000,000. Because this matter is deemed by the Company to be frivolous, totallywithout merit, and completely groundless, the Company is vigorously contestingTAG’s claim and has filed a Motion for Summary Judgment to have it dismissed.

 

**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.

 

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**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.**

 

Notapplicable.

 

**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 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:  August 10, 2010 | Herbert  M. Gardner                                    |
|                                    | Chairman  of the Board and Chief Executive Officer     |
|                                    |                                                   |   |
|                                    |                                                   |   |
|                                    | By:                                                    | /s/  Jeffery D. Mowery |
|   DATE:  August 10, 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 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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