**UNITEDSTATES**

**SECURITIESAND 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 the quarterly period ended July 1, 2006**

**OR**

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

**For the transition period from          to          **

**CommissionFile No. 1-8183**

**SUPREME INDUSTRIES, INC.**

(Exact name ofregistrant as specified in its charter)

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

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

(Address of principalexecutive offices)

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.                          Yes  x   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the ExchangeAct (check one):
| Large accelerated filer  o | Accelerated filer  o | Non-accelerated filer  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 of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

| **Common Stock ($.10 Par Value)** |   | **Outstanding  at July 25, 2006** |
|-----------------------------------|--------|-----------------------------------|
| **Class A**                       |   | **10,585,826**                    |
| **Class B**                       |   | **2,109,133**                     |

 

 

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SUPREMEINDUSTRIES, INC.

CONTENTS
| PART I.           | FINANCIAL  INFORMATION                                                                      | 1      |
|-------------------|---------------------------------------------------------------------------------------------|--------|
|              |                                                                                        |   |
| ITEM  1.          | Financial  Statements:                                                                      | 1      |
|              |                                                                                        |   |
|              | Consolidated  Balance Sheets                                                                | 1      |
|              |                                                                                        |   |
|              | Consolidated Statements of Income                                                           | 3      |
|              |                                                                                        |   |
|              | Consolidated Statements of Cash Flows                                                       | 4      |
|              |                                                                                        |   |
|              | Notes to Consolidated Financial Statements                                                  | 5      |
|              |                                                                                        |   |
| ITEM 2.           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 10     |
|              |                                                                                        |   |
| ITEM 3.           | Quantitative and Qualitative Disclosures About Market  Risk                                 | 17     |
|              |                                                                                        |   |
| ITEM 4.           | Controls and Procedures                                                                     | 18     |
|              |                                                                                        |   |
| PART  II.         | OTHER  INFORMATION                                                                          | 18     |
|              |                                                                                        |   |
| ITEM  1.          | Legal  Proceedings                                                                          | 18     |
|              |                                                                                        |   |
| ITEM  1A.         | Risk Factors                                                                                | 19     |
|              |                                                                                        |   |
| ITEM 2.           | Unregistered Sales of Equity Securities and Use of  Proceeds                                | 22     |
|              |                                                                                        |   |
| ITEM 3.           | Defaults Upon Senior Securities                                                             | 22     |
|              |                                                                                        |   |
| ITEM 4.           | Submission of Matters to a Vote of Security Holders                                         | 22     |
|              |                                                                                        |   |
| ITEM  5.          | Other  Information                                                                          | 22     |
|              |                                                                                        |   |
| ITEM 6.           | Exhibits                                                                                    | 23     |
|              |                                                                                        |   |
| SIGNATURES        | 23                                                                                          |
|              |                                                                                        |   |
| INDEX TO EXHIBITS | 24                                                                                          |
|              |                                                                                        |   |
| EXHIBITS          |                                                                                        |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.    FINANCIAL STATEMENTS.**

**Supreme Industries, Inc. andSubsidiaries**

Consolidated Balance Sheets
| ** **                                       | ** ** | **July 1,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------|-------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**         | ** **  | **2005**              | ** ** |
| ** **                                       | ** ** | **(Unaudited)**  | ** **  | ** **            | ** ** |
| **Assets**                                       |       |             |        |                  |       |
|                                             |       |             |        |                  |       |
| Current assets:                                  |       |             |        |                  |       |
| Cash and cash equivalents                        |       | $                | 398,411     |                  | $          | 1,515,532 |   |
| Investments                                      |       | 2,401,379        |        | 1,168,922             |       |
| Accounts receivable,  net                        |       | 33,181,607       |        | 29,594,819            |       |
| Inventories                                      |       | 50,627,371       |        | 50,730,205            |       |
| Other current assets                             |       | 2,075,217        |        | 5,600,299             |       |
|                                             |       |             |        |                  |       |
| **Total  current assets**                        |       | 88,683,985       |        | 88,609,777            |       |
|                                             |       |             |        |                  |       |
| **Property, plant and equipment,  at cost**      |       | 88,690,958       |        | 86,801,354            |       |
| Less,  Accumulated depreciation and amortization |       | 41,205,964       |        | 39,343,641            |       |
|                                             |       |             |        |                  |       |
| **Property,  plant and equipment, net**          |       | 47,484,994       |        | 47,457,713            |       |
|                                             |       |             |        |                  |       |
| **Goodwill and intangible assets,  net**         |       | 1,426,833        |        | 735,014               |       |
| **Other assets**                                 |       | 938,017          |        | 549,350               |       |
|                                             |       |             |        |                  |       |
| **Total assets**                                 |       | $                | 138,533,829 |                  | $          | 137,351,854 |   |

The accompanyingnotes are a part of the consolidated financial statements.

1

----

 
| ** **                                                   | ** ** | **July 1,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------|-------------|-----------------------|------------|
| ** **                                                   | ** ** | **2006**         | ** **  | **2005**              | ** ** |
| ** **                                                   | ** ** | **(Unaudited)**  | ** **  | ** **            | ** ** |
| **Liabilities and Stockholders’ Equity** | ** ** | ** **       | ** **  | ** **            | ** ** |
|                                                         |       |             |        |                  |       |
| **Current  liabilities:**                                    |       |             |        |                  |       |
| Current maturities of long-term debt                         |       | $                | 1,835,346   |                  | $          | 1,816,092 |   |
| Trade accounts payable                                       |       | 15,657,655       |        | 15,675,073            |       |
| Accrued income taxes                                         |       | 119,478          |        | 380,721               |       |
| Other accrued liabilities                                    |       | 9,360,768        |        | 9,947,870             |       |
|                                                         |       |             |        |                  |       |
| **Total current liabilities**                                |       | 26,973,247       |        | 27,819,756            |       |
|                                                         |       |             |        |                  |       |
| **Long-term  debt**                                          |       | 32,470,366       |        | 31,378,367            |       |
|                                                         |       |             |        |                  |       |
| **Deferred  income taxes**                                   |       | 3,136,475        |        | 2,988,275             |       |
|                                                         |       |             |        |                  |       |
| **Total liabilities**                                        |       | 62,580,088       |        | 62,186,398            |       |
|                                                         |       |             |        |                  |       |
| **Stockholders’  equity**                               |       | 75,953,741       |        | 75,165,456            |       |
|                                                         |       |             |        |                  |       |
| **Total  liabilities and stockholders’ equity**         |       | $                | 138,533,829 |                  | $          | 137,351,854 |   |

The accompanyingnotes are a part of the consolidated financial statements.

2

----

**SupremeIndustries, Inc. and Subsidiaries**

ConsolidatedStatements of Income (Unaudited)

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | **July 1,** | ** ** | **June 25,** | ** ** |
| ** **                                                 | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue:**                                               |       |                             |       |                           |       |   |   |   |   |
| Net sales                                                  |       | $                                | 98,863,512 |                           | $          | 95,216,407 |   | $ | 184,610,650 |   | $ | 185,538,711 |   |
| Other income                                               |       | 96,851                           |       | 138,914                        |       | 204,091 |   | 300,218 |   |
|                                                       |       | 98,960,363                       |       | 95,355,321                     |       | 184,814,741 |   | 185,838,929 |   |
| **Costs  and expenses:**                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of sales                                              |       | 88,332,555                       |       | 82,970,295                     |       | 164,474,007 |   | 161,666,831 |   |
| Selling, general and administrative                        |       | 7,341,767                        |       | 7,294,334                      |       | 14,200,733 |   | 13,752,416 |   |
| Interest                                                   |       | 834,660                          |       | 568,387                        |       | 1,535,585 |   | 1,057,033 |   |
|                                                       |       | 96,508,982                       |       | 90,833,016                     |       | 180,210,325 |   | 176,476,280 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| **Income before income taxes**                             |       | 2,451,381                        |       | 4,522,305                      |       | 4,604,416 |   | 9,362,649 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Income taxes                                               |       | 886,000                          |       | 1,622,000                      |       | 1,666,000 |   | 3,368,000 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| **Net income**                                             |       | $                                | 1,565,381  |                           | $          | 2,900,305 |   | $ | 2,938,416 |   | $ | 5,994,649 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| **Earnings  per share:**                                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                      |       | $                                | .12        |                           | $          | .23 |   | $ | .23 |   | $ | .49 |   |
| Diluted                                                    |       | .12                              |       | .23                            |       | .23 |   | .47 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| **Shares  used in the computation of earnings per share:** |       |                             |       |                           |       |   |   |   |   |
| Basic                                                      |       | 12,692,632                       |       | 12,391,341                     |       | 12,691,143 |   | 12,288,776 |   |
| Diluted                                                    |       | 12,892,625                       |       | 12,708,871                     |       | 12,913,984 |   | 12,651,893 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| **Cash dividends per common share**                        |       | $                                | .095       |                           | $          | .035 |   | $ | .19 |   | $ | .07 |   |

The accompanyingnotes are a part of the consolidated financial statements.

3

----

**SupremeIndustries, Inc. and Subsidiaries**

Consolidated Statements of Cash Flows (Unaudited)
| ** **                                                                                 | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **July 1,**               | ** ** | **June 25,** | ** ** |
| ** **                                                                                 | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                                 |       |                           |       |   |   |
| Net income                                                                                 |       | $                              | 2,938,416  |   | $ | 5,994,649 |   |
| Adjustments to reconcile net income to net cash used  in operating activities:             |       |                           |       |   |   |
| Depreciation and amortization                                                              |       | 2,132,269                      |       | 2,031,911 |   |
| Loss on disposal of property and equipment                                                 |       | 21,045                         |       | 8,561 |   |
| Provisions for losses on doubtful receivables                                              |       | 101,766                        |       | 28,735 |   |
| Changes in operating assets and liabilities net of  effect of business acquisition in 2006 |       | (2,355,210                     | )          | (5,914,059 | ) |
|                                                                                       |       |                           |       |   |   |
| **Net cash provided by operating activities**                                              |       | 2,838,286                      |       | 2,149,797 |   |
|                                                                                       |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                                 |       |                           |       |   |   |
| Business acquisition                                                                       |       | (1,050,000                     | )          | — |   |
| Additions to property, plant and equipment                                                 |       | (2,181,914                     | )          | (2,878,352 | ) |
| Proceeds from disposal of property and equipment                                           |       | 1,936,518                      |       | 28,362 |   |
| Purchases of short-term investments                                                        |       | (1,232,457                     | )          | (1,163,000 | ) |
| Decrease (increase) in other assets                                                        |       | (127,160                       | )          | 23,817 |   |
|                                                                                       |       |                           |       |   |   |
| **Net cash used in investing activities**                                                  |       | (2,655,013                     | )          | (3,989,173 | ) |
|                                                                                       |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                                 |       |                           |       |   |   |
| Proceeds from revolving line of credit and other long-term  debt                           |       | 47,220,558                     |       | 66,065,429 |   |
| Repayments of revolving line of credit and other  long-term debt                           |       | (46,109,305                    | )          | (66,306,043 | ) |
| Payment of cash dividends                                                                  |       | (2,411,647                     | )          | (862,788 | ) |
| Proceeds from exercise of stock options                                                    |       | —                         |       | 1,505,588 |   |
|                                                                                       |       |                           |       |   |   |
| **Net cash provided by (used in) financing activities**                                    |       | (1,300,394                     | )          | 402,186 |   |
|                                                                                       |       |                           |       |   |   |
| **Change  in cash and cash equivalents**                                                   |       | (1,117,121                     | )          | (1,437,190 | ) |
|                                                                                       |       |                           |       |   |   |
| **Cash  and cash equivalents, beginning of period**                                        |       | 1,515,532                      |       | 1,736,483 |   |
|                                                                                       |       |                           |       |   |   |
| **Cash  and cash equivalents, end of period**                                              |       | $                              | 398,411    |   | $ | 299,293 |   |
|                                                                                       |       |                           |       |   |   |
| **Supplemental  disclosure of noncash investing and financing activities:**                |       |                           |       |   |   |
| Liabilities assumed in business acquisition                                                |       | $                              | 529,347    |   | $ | — |   |
| Cash dividend  declared                                                                    |       | —                         |       | 1,190,557 |   |

The accompanyingnotes are a part of the consolidated financial statements.

4

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**SUPREME INDUSTRIES, INC. AND SUBSIDIARIES**

Notes ToConsolidated Financial Statements

NOTE 1 - BASIS OFPRESENTATION AND OPINION OF MANAGEMENT

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions to Form 10-Q and therefore do not include all of theinformation and financial statement disclosures necessary for a fairpresentation of consolidated financial position, results of operations and cashflows in conformity with accounting principles generally accepted in the UnitedStates of America.  In the opinion ofmanagement, the information furnished herein includes all adjustments necessaryto reflect a fair statement of the interim periods reported.  All adjustments are of a normal and recurringnature.  The December 31, 2005consolidated balance sheet data was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America.

The Company hasadopted a 52 or 53 week fiscal year ending the last Saturday in December.  The results of operations for the three andsix months ended July 1, 2006 and June 25, 2005 are for 13 and 26 week periods,respectively.

NOTE 2 - OTHERCOMPREHENSIVE INCOME

Other comprehensiveincome includes unrealized gains on hedge-activity, net of tax, and unrealizeddepreciation on available-for-sale securities, net of tax.  Other comprehensive income for the three andsix months ended July 1, 2006 was $109,580 and $261,507, respectively.  Total comprehensive income combines netincome and other comprehensive income. Total comprehensive income for the three and six months ended July 1,2006 was $1,674,961 and $3,199,923, respectively.

NOTE 3 - INVENTORIES

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

|                  | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|------------------|------------|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Raw materials    |       | $                | 27,084,418 |                  | $          | 28,160,860 |   |
| Work-in-progress |       | 9,792,379        |       | 8,880,436             |       |
| Finished goods   |       | 13,750,574       |       | 13,688,909            |       |
|             |       | $50,627,371      |       | $                     | 50,730,205 |   |
|                  |            |                  |            |                       |            |  |  |

 

The valuation ofraw materials, work-in-progress and finished goods inventories at interim datesis based upon a gross profit percentage method and bills of materials.  The Company has historically had favorableand unfavorable adjustments resulting from physical inventories.  The Company continues to refine its costingprocedures for valuation of interim inventories in an effort to minimize bookto physical inventory adjustments.

5

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NOTE 4 - BUSINESSACQUISITION

On February 28,2006, the Company acquired the business operations and assets of Pony Xpress,Inc. (“Pony XPress”) for a total purchase price of $1,579,347 which consistedof $1,050,000 in cash and the assumption of certain liabilities.  Pony Xpress is a manufacturer of highlyspecialized luxury totor home products principally for the race carindustry.  This acquisition broadens theCompany’s product line and the Company has purchased a new facility in WhitePigeon, Michigan for the operations of this acquired business.  The acquisition has been accounted for as apurchase and, accordingly, the operating results have been included since thedate of acquisition.  Pro forma financialinformation reflecting the acquired business has not been presented as it isnot materially different from the Company’s historical results.  The final allocation of purchase price issubject to completion of valuations and analysis required by Statement ofFinancial Accounting Standards No. 141, “Business Combinations”.  A preliminary allocation of purchase price isas follows:

| Trade accounts receivable       |   | $       | 638,858   |   |
|---------------------------------|--------|---------|-----------|--------|
| Inventories                     |   | 161,400 |      |
| Other current  assets           |   | 29,305  |      |
| Equipment                       |   | 57,965  |      |
| Goodwill and  intangible assets |   | 691,819 |      |
|                            |   | $       | 1,579,347 |   |

 

NOTE 5 - EARNINGS PERSHARE

The number ofshares used in the computation of basic and diluted earnings per share are asfollows:
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                       | ** ** | **July 1,**            | ** ** | **June 25,**         | ** ** | **July 1,** | ** ** | **June 25,** | ** ** |
| ** **                                                                                       | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average number of shares outstanding (used in computation of  basic earnings per share) |       | 12,692,632             |       | 12,391,341           |       | 12,691,143 |   | 12,288,776 |   |
|                                                                                             |       |                   |       |                 |       |   |   |   |   |
| Effect of dilutive stock options                                                                 |       | 199,993                |       | 317,530              |       | 222,841 |   | 363,117 |   |
|                                                                                             |       |                   |       |                 |       |   |   |   |   |
| Diluted shares outstanding (used in computation of diluted earnings  per share)                  |       | 12,892,625             |       | 12,708,871           |       | 12,913,984 |   | 12,651,893 |   |

 

6

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NOTE 6 - STOCK-BASEDCOMPENSATION

The Company currently hasthree stock option plans:  the 1998 StockOption Plan under which 869,087 shares of Class A Common Stock are reserved forgrant, the 2001 Stock Option Plan under which 825,000 shares of Class A CommonStock are reserved for grant and the 2004 Stock Option Plan, as recentlyamended, under which 850,000 shares of Class A Common Stock are reserved forgrant.  Under the terms of these stockoption plans, both incentive stock options and non-statutory stock  options can be granted by a specially designatedStock Option Committee.  The 2004 StockOption Plan, as amended, also allows for awards of common stock and restrictedstock.  Options granted under the stockoption plans generally vest and become exercisable in annual installments of 331/3% beginning on the first anniversary date and the options expire five yearsafter the date of grant.  On August 4,2005, the Company’s Board of Directors approved a plan to accelerate vesting ofall outstanding stock options which were unvested at December 31, 2005.  Under Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees”, there was nocompensation expense related to the vesting of these options.  As a result of the board’s action, stockoptions to purchase 430,831 shares of the Company’s common stock became exercisableeffective December 31, 2005.  The Companygenerally issues new shares to satisfy stock option exercises.

A summary of thestatus of the Company’s outstanding stock options as of July 1, 2006, andchanges during the six months ended July 1, 2006 are as follows:
|                               | ** ** | ** **         | ** ** | **Weighted-** | ** ** |
|-------------------------------|------------|--------------------|------------|---------------|------------|
| ** **                    | ** ** | ** **         | ** ** | **Average**   | ** ** |
| ** **                    | ** ** | **Number of** | ** ** | **Exercise**  | ** ** |
| ** **                    | ** ** | **Shares**         | ** ** | **Price**     | ** ** |
| Outstanding,  January 1, 2006 |       | 921,823            |       | $             | 5.67       |   |
| Granted                       |       | 352,831            |       | 7.12          |       |
| Exercised                     |       | (11,000            | )          | 4.80          |       |
| Outstanding, July 1,  2006    |       | 1,263,654          |       | 6.09          |       |
|                               |            |                    |            |               |            |  |

 

The intrinsicvalue of the options exercised during the six months ended July 1, 2006 was$29,850.  The intrinsic value of alloptions outstanding at July 1, 2006 was $1,383,249 and outstanding options hada weighted-average remaining contractual life of 3.13 years.

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

7

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Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), “Share-Based Payment” as interpreted by SEC StaffAccounting Bulletin No. 107.  SFAS No.123R supersedes APB Opinion No. 25, and amends SFAS No. 95, “Statement of CashFlows.” Generally, the approach in SFAS No. 123R is similar to the approachdescribed in SFAS No. 123, “Accounting for Stock-Based Compensation.”  However, SFAS No. 123R requires allstock-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values at the dateof grant.

The Company has electedto use the modified prospective transition method for implementing SFAS No.123R.  Under this transition method,compensation expense will include:  (a) compensationexpense for all share-based payments granted prior to, but not yet vested asof, January 1, 2006, based on the grant date fair value estimated in accordancewith the original provisions of SFAS No. 123, and (b) compensation expense forall share-based payments granted on or after January 1, 2006, based on thegrant date fair value estimated in accordance with the provisions of SFAS No.123R.  Because the Company elected to usethe modified prospective transition method, results for prior periods have notbeen restated and new awards are valued and accounted for prospectively uponadoption.  

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

Compensation expense,relative to stock options, included in the Consolidated Statements of Incomefor the three and six month periods ended July 1, 2006 was approximately$17,000.  The following assumptions wereutilized in the determination of the compensation expense:
| Risk free interest rate |   | 5.03    | %      |
|-------------------------|--------|---------|--------|
| Expected life           |   | 5 years |   |
| Expected  volatility    |   | 32.23   | %      |
| Expected dividends      |   | 5.39    | %      |

 

8

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The following tableillustrates the pro forma effect on net earnings and earnings per share if theCompany had applied the fair value recognition provisions of SFAS No. 123 inthe previous year:

|                                                                                                 | ** ** | **Three**         | ** ** | ** **          | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                                                                      | ** ** | **Months**        | ** ** | **Six Months** | ** ** |
| ** **                                                                                      | ** ** | **Ended**         | ** ** | **Ended**           | ** ** |
| ** **                                                                                      | ** ** | **June 25,** | ** ** | **June 25,**   | ** ** |
| ** **                                                                                      | ** ** | **2005**          | ** ** | **2005**            | ** ** |
| Net income, as  reported                                                                        |       | $                 | 2,900,305  |                | $          | 5,994,649 |   |
| Deduct,  Stock-based compensation expense determined under fair value based method,  net of tax |       | (83,942           | )          | (154,807            | )          |
| Pro forma net  income                                                                           |       | $                 | 2,816,363  |                | $          | 5,839,842 |   |
|                                                                                            |       |              |       |                |       |
| Basic earnings  per share, as reported                                                          |       | $                 | .23        |                | $          | .49 |   |
| Diluted earnings  per share, as reported                                                        |       | .23               |       | .47                 |       |
|                                                                                            |       |              |       |                |       |
| Pro forma basic  earnings per share                                                             |       | .23               |       | .48                 |       |
| Pro forma diluted  earnings per share                                                           |       | .22               |       | .46                 |       |

 

NOTE 7 - COMMON STOCK

The Company paid cashdividends, to all Class A and Class B common stockholders, of nine and one-halfcents ($0.095) and nineteen cents ($0.19) per share for the three and sixmonths ended July 1, 2006, respectively, and three and one-half cents ($0.035)and seven cents ($0.07) per share for the three and six months ended June 25,2005, respectively.

NOTE 8 - SUBSEQUENT EVENT

On August 8, 2006, theCompany’s Board of Directors declared a nine and one-half cent ($0.095) pershare cash dividend payable on August 28, 2006 to all class A and B commonstockholders of record on August 21, 2006.

NOTE 9 - EFFECT OFRECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL STATEMENTS WHEN ADOPTEDIN A FUTURE PERIOD

In July 2006, theFinancial Accounting Standards Board released Financial Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (“FIN 48”).  This Interpretation revises the recognitiontest for tax positions taken in tax returns such that a tax benefit is recordedonly when it is more likely than not that the tax position will be allowed uponexamination by taxing authorities.  Theamount of such a tax benefit to record is the largest amount that is morelikely than not to be allowed.  Anyreduction in deferred tax assets or increase in tax liabilities upon adoptionwill correspondingly reduce retained earnings. The Company has not yet determined the effect of adopting FIN 48 whichis effective for the Company’s next fiscal year commencing December 31, 2006.

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**ITEM 2.****                                                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

**Results of Operations**

***Revenue(includes net sales and other income)***

Net sales for the threemonths ended July 1, 2006 increased $3.7 million, or 3.8%, to $98.9 millioncompared to $95.2 million for the three months ended June 25, 2005.  Net sales for the six months ended July 1,2006 decreased $0.9 million, or 0.5% to $184.6 million from $185.5 million forthe six months ended June 25, 2005.  Theincrease in net sales for the three months ended July 1, 2006 was primarilyattributable to our StarTrans Bus Division which had a 31% increase compared tothe same quarter last year.  This largeincrease is due to a new cycle of Transit Authority ordering and a strong demandfor mid-size buses. The truck division’s net sales were relatively constantfrom quarter-to-quarter.  For the sixmonths ended July 1, 2006, fleet sales decreased by 25% primarily due to anindustry-wide reduction in truck purchases by our major fleet customers.  The decrease in fleet sales was offset by a4% increase in our core dry freight product line and a 34% increase in ourStarTrans Bus Division sales compared to the six months ended June 25, 2005.

On February 28, 2006, weacquired the business operations and assets of Pony Xpress, Inc. (“PonyXpress”), a manufacturer of highly specialized vehicles presently focused onthe race car industry.  Though thepurchase was not a large acquisition, it provides us with the foundation forour newly formed “Silver Crown” subsidiary. Silver Crown has unique manufacturing expertise that will enable ourentry into additional highly specialized vehicles including those used inhomeland security.  In the second half of2006, Silver Crown will be introducing higher-end products and broadening thePony Xpress product line. 

Our sales backlog was$81.1 million at July 1, 2006 compared to a $72.6 million sales backlog at June25, 2005. 

Other income for thethree months ended July 1, 2006 and June 25, 2005 was unchanged at $0.1million.  For the six months ended July1, 2006, other income totaled $0.2 million compared to $0.3 million for the sixmonths ended June 25, 2005.  Other incomeconsists of interest income, rental income, gain on sale of assets and othermiscellaneous income received by the Company through its various businessactivities.

***Costof sales and gross profit***

Gross profit decreased by$1.7 million, or 14.0%, to $10.5 million (10.7% of net sales) for the threemonths ended July 1, 2006 compared to $12.2 million (12.9% of net sales) forthe three months ended June 25, 2005. For the six months ended July 1, 2006, gross profit decreased $3.7million, or 15.6%, to $20.1 million (10.9% of net sales) compared to $23.9million (12.9% of net sales) for the six months ended June 25, 2005.  The following table presents the componentsof cost of sales as a percentage of net sales and the changes fromperiod-to-period:

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|               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | **Percent** | ** ** | **July 1,** | ** ** | **June 25,** | ** ** | **Percent** | ** ** |
| ** **    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
| Material      |       | 58.5                             | %          | 56.9                           | %          | 1.6 | % | 57.8 | % | 56.7 | % | 1.1 | % |
| Direct labor  |       | 13.9                             |       | 14.1                           |       | -0.2 |   | 14.0 |   | 14.0 |   | 0.0 |   |
| Overhead      |       | 14.4                             |       | 13.8                           |       | 0.6 |   | 14.8 |   | 13.9 |   | 0.9 |   |
| Delivery      |       | 2.5                              |       | 2.3                            |       | 0.2 |   | 2.5 |   | 2.5 |   | 0.0 |   |
|          |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Cost of sales |       | 89.3                             |       | 87.1                           |       | 2.2 |   | 89.1 |   | 87.1 |   | 2.0 |   |
|          |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Gross profit  |       | 10.7                             | %          | 12.9                           | %          | -2.2 | % | 10.9 | % | 12.9 | % | -2.0 | % |

 

**Material** –Material cost as a percentage of net sales increased for the three and sixmonth periods ended July 1, 2006 when compared to the corresponding periods in2005. The increase was primarily attributable to product mix and higher rawmaterial costs.

With regards to product mix, the bus divisionaccounted for 17% and 18% of net sales for the three and six months ended July1, 2006 as compared to 14% and 13% for the three and six months ended June 25,2005, respectively.    The bus productshave a higher material cost percentage and the increased sales volume in thisdivision elevated our overall material percentage from period-to-period.

Additionally, during the first half of 2006 weexperienced significant upward cost pressures on aluminum, steel and woodcomponents used in the production of truck bodies.  To combat these cost increases, the Companyimplemented price increases ranging from 3% to 5% on a majority of its truckdivision products effective late May 2006. However, as a result of differingcompetitive circumstances nationally and regionally, the results of priceincreases can vary by customer type, specific product and by geographic region.  The anticipated increased revenue associatedwith these price increases will be gradually and increasingly realizedthroughout the third quarter.  Thisdelayed effect is principally due to the industry practice of not applyingprice increases to existing orders and outstanding quotes, the aggregate ofwhich in late May was substantial and thus has caused the delayed effect ofrealizing any significant benefit from the price increases.  We continue to closely monitor our majorcommodity costs through communication with key suppliers, utilizing costmonitoring tools and developing strategies to mitigate cost and availabilityissues.  However, the Company willconsider additional price increases should commodity prices continue torise.  The Company also continuallystrives to reduce the cost of its product offerings through the use ofinnovative materials, robotics and improved processes.

**Direct Labor** –Direct labor as a percentage of net sales was constant for the six monthperiods ended July 1, 2006 and June 25, 2005 and reflected a small decrease inthe current quarter compared to the second quarter of last year.

A delay in OEM supplied chassis caused the Company totemporarily shut down production lines in the first quarter which negativelyaffected labor and overhead absorption. Despite these challenges, direct labor as a percentage of net salesremained relatively constant when comparing period-to-period.

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**Overhead** –Overhead as a percentage of net sales increased 0.6% and 0.9%, respectively,for the three and six month periods ended July 1, 2006 when compared to thecorresponding periods in 2005.                                                                                           

The increase was due primarily to increased workers’compensation costs, warranty expense and repairs and maintenance.  Additionally, the Company was unfavorablyimpacted by higher utility costs due to rising natural gas prices   These increases were somewhat offset byreductions in group health insurance, claim costs, and miscellaneous otherexpense reductions.

**Delivery** –Delivery expense as a percentage of net sales was constant for the six monthperiods ended July 1, 2006 and June 25, 2005 and reflected a small increase inthe second quarter of 2006 compared to the second quarter of last year.

The Company utilized more cost effective outsidedelivery methods versus using its employees and owned equipment to deliverunits.  However, escalating fuel costsremain a concern and the Company will attempt to pass on these higher fuelcosts despite competitive pressures in its marketplace, though no assurance canbe given in this regard.

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

Selling and general andadministrative (“G&A”) expenses were $7.3 million (7.4% of net sales) forthe three months ended July 1, 2006, 0.3% lower than the three months endedJune 25, 2005. For the six months ended July 1, 2006, selling and G&Aexpenses increased $0.4 million, or 3.3%, to $14.2 million (7.7% of net sales)compared to $13.8 million (7.4% of net sales) for the six months ended June 25,2005. The following table presents selling and G&A expenses as a percentageof net sales and the changes from period-to-period:
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | ** ** | ** ** | ** ** | ** ** | **July 1,** | ** ** | **June 25,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(millions)**             | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
| Selling expenses           |       | $                                | 3.0        |                           | 3.1        | % | $ | 2.9 |   | 3.1 | % | $ | 0.1 |   | 0.0 | % | $ | 5.5 |   | 3.0 | % | $ | 5.0 |   | 2.7 | % | $ | 0.5 |   | 0.3 | % |
| General and Adm.  expenses |       | 4.3                              |       | 4.3                            |       | 4.4 |   | 4.6 |   | (0.1 | ) | -0.3 |   | 8.7 |   | 4.7 |   | 8.8 |   | 4.7 |   | (0.1 | ) | 0.0 |   |
|                       |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                      |       | $                                | 7.3        |                           | 7.4        | % | $ | 7.3 |   | 7.7 | % | $ | — |   | -0.3 | % | $ | 14.2 |   | 7.7 | % | $ | 13.8 |   | 7.4 | % | $ | 0.4 |   | 0.3 | % |

 

**Selling expenses**– Selling expenses increased by $0.1 million to $3.0 million for the threemonths ended July 1, 2006 from $2.9 million for the three months ended June 25,2005.   For the six months ended July 1,2006, selling expenses increased $0.5 million to $5.5 million compared to $5.0million for the six months ended June 25, 2005.

The higher sellingexpenses relate to a reduction in cooperative marketing credits the Companyreceives from chassis manufacturers. These credits, determined solely byprograms established by the chassis manufacturers, have historically been usedto offset marketing and promotional expenses. Additionally, selling expenses increased as a result of the acquisitionof Pony Xpress and the addition of a new corporate sales position to promotethe Company’s extensive product line.

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**G&A expenses**– G&A expenses decreased by $0.1 million to $4.3 million for the threemonths ended July 1, 2006 from $4.4 million for the three months ended June 25,2005.   For the six months ended July 1,2006, G&A expenses decreased $0.1 million to $8.7 million compared to $8.8million for the six months ended June 25, 2005.

The decrease for thethree and six month periods in G&A expenses as a percentage of net saleswas primarily due to the reduction in the incentive bonus plan which iscalculated based on pretax earnings.  Thedecrease was partially offset by an increase in office wages which was due inpart to the acquisition of Pony Xpress.

***Interestexpense***

Interest expense increasedby $0.2 million to $0.8 million (0.8% of net sales) for the three months endedJuly 1, 2006 from $.6 million (0.6% of net sales) for the three months endedJune 25, 2005.  For the six months endedJuly 1, 2006, interest expense increased $0.4 million to $1.5 million comparedto $1.1 million for the six months ended June 25, 2005.

The increase in interestexpense resulted from higher levels of borrowings against the Company’srevolving line of credit and higher interest rates.  The additional borrowings were utilized tofinance working capital requirements to produce the seasonal fleet businessproducts.  In July 2005, the Companyentered into a derivative swap agreement in an effort to mitigate the effect ofthe rising interest rate environment. The swap agreement exchanges the debt obligations floating rate forfixed interest payments over the life of the debt.

***Incometaxes***

The Company’s effectiveincome tax rate was 36.2% for the six months ended July 1, 2006 compared to36.0% for the six months ended June 25, 2005.

***Netincome and earnings per share***

Net income decreased by$1.3 million to $1.6 million (1.6% of net sales) for the three months endedJuly 1, 2006 from $2.9 million (3.0% of net sales) for the three months endedJune 25, 2005.  For the six months endedJuly 1, 2006, net income decreased $3.1 million to $2.9 million (1.6% of netsales) compared to $6.0 million (3.2% of net sales) for the six months endedJune 25, 2005. 

Basic earnings per sharewere $.12 and $.23 for the three and six months ended July 1, 2006 compared to$.23 and $.49 per share for the three and six months ended June 25, 2005.  Diluted earnings per share were $.12 and $.23for the three and six months ended July 1, 2006 compared to $.23 and $.47 pershare for the three and six months ended June 25, 2005.   

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**Liquidity and Capital Resources**

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

Borrowings under theCompany’s revolving line of credit at July 1, 2006 were $27.2 million, a $5.8million increase since December 31, 2005. The increased borrowings are directly associated with the higher levelsof accounts receivable and inventories that generally occur during the firsthalf of the year.  The Company believesthat operating cash flows and funds available under the revolving line ofcredit will be sufficient to meet the Company’s cash needs during the remainderof 2006 and the next twelve months.

***Operatingactivities***

Operating activitiesprovided $2.8 million of cash for the six months ended July 1, 2006 compared to$2.1 million for the six months ended June 25, 2005.  Net income and depreciation were the largestsources of increases from operating activities totaling $2.9 million and $2.1million, respectively, for the six months ended July 1, 2006.  Changes in operating assets and liabilitiesoffset the increase by $2.4 million for the six months ended July 1, 2006.  Higher levels of accounts receivable weresomewhat offset by a decrease of other current assets.  Inventories remained relatively flat as ofJuly 1, 2006 when compared to December 31, 2005.

***Investingactivities***

Investing activities used$2.7 million of cash for the six months ended July 1, 2006 compared to $4.0million for the six months ended June 25, 2005.

Major capitalexpenditures for the six months ended July 1, 2006 related to the purchase of amanufacturing facility located in White Pigeon, Michigan, for the expansion ofthe recently acquired operations of Pony Xpress.  Major capital disposals in the six monthsended July 1, 2006 include the sale of a portion of our Pennsylvaniamanufacturing facility as a result of relocating to a larger and more efficientfacility in 2005.  A fifty-seven thousanddollar gain on the sale of the facility was recorded in the secondquarter.  Also, the Company had anincrease in its short-term investments related to its captive insurancesubsidiary for the six months ended July 1, 2006.  The Company intends to spend less onproperty, plant and equipment in 2006 as compared with 2005 capitalexpenditures. However, we will continue to evaluate strategic opportunities forgrowth and expansion.

***Financingactivities***

Financing activities used$1.3 million of cash for the six months ended July 1, 2006 compared to $0.4million of cash provided by financing activities for the six months ended June25, 2005.

The increased level offinancing activities occurred primarily as a result of the $2.4 million of cashdividends paid during the first half of the year of 2006 compared to $0.9million paid in the first half of 2005. The Company also received no proceeds from the exercise of stock optionsin the first half of 2006 whereas $1.5 million was received in the first halfof 2005.  Borrowing under the revolvingline of credit and long-term debt increased $1.1 million during

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the first half of2006 when compared to the same period in 2005. Our board of directors approved an increase from three and one-halfcents per share to nine and one-half cents per share beginning with the thirdquarter 2005 dividend.  Businessconditions permitting, the quarterly cash dividend will remain at nine andone-half cents per share during 2006 which will approximate $4.8 million ofcash dividends to be paid to our shareholders. The Company’s credit agreement was amended in September 2005 to deletenegative covenants related to the declaration or authorization of dividends andthe entering into or the assumption of operating lease obligations.  The amendment also involved more favorableperformance pricing based on the Company’s strong balance sheet. All borrowingsunder the revolving line of credit remain unsecured.

**ContractualObligations**

Our fixed,noncancelable obligations as of July 1, 2006 were as follows:
| ** **           | ** ** | **Payments due by period** | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **           | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| Debt (a)             |       | $                                         | 34,305,712 |   | $ | 1,835,346 |   | $ | 29,163,603 |   | $ | 2,239,545 |   | $ | 1,067,218 |   |
| Operating leases (b) |       | 3,188,773                                 |       | 762,105 |   | 1,514,535 |   | 904,486 |   | 7,647 |   |
|                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                |       | $                                         | 37,494,485 |   | $ | 2,597,451 |   | $ | 30,678,138 |   | $ | 3,144,031 |   | $ | 1,074,865 |   |

 

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

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

**Off-BalanceSheet Arrangements**

As of July 1,2006, the Company had no off-balance sheet arrangements, as defined in Item303(a)(4)(ii) of SEC Regulation S-K.

**CriticalAccounting Policies and Estimates**

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

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***Allowancefor Doubtful Accounts*** - The Company maintains anallowance for doubtful accounts for estimated losses resulting from theinability of customers to make required payments.  If the financial condition of customers wereto deteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required that would affect future operatingresults

***Excessand Obsolete Inventories*** - The Company must makeestimates regarding the future use of products and provide a provision forobsolete or slow-moving inventories.  Ifactual product life-cycles, product demand or market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required that would affect future operating results.

***InventoryRelief*** - For monthly and quarterly financial reporting,cost of sales is recorded and inventories are relieved by the use of standardbills of material.  Because of thecustomized nature of the Company’s products, it is difficult to place fullreliance on the bills of material for accurate relief of inventories.  Although the Company continues to refine theprocess of creating accurate bills of materials, manual adjustments, which arebased on estimates, are necessary in an effort to assure correct relief ofinventories for products sold.  Theestimate calculations consider the customized nature of products, historicalinventory relief percentages, scrap variances and other factors which couldimpact inventory relief.  The accuracy ofthe inventory relief is not known until the annual physical inventories.  In prior years, management had concluded thatit was not practical to consider more frequent physical inventories because ofthe sales order backlog and the costs associated with ceasing production forthe purpose of conducting physical inventories. During 2005, the Company’s annual physical inventories resulted in a netunfavorable adjustment of $1.1 million which was recorded in the third quarter.  Subsequently, management has dedicatedsignificant in-house resources refining bills of materials, improving costaccounting functions and instituting new inventory policies and procedures.  In addition, management has implemented morefrequent physical inventories and expects the new policies, procedures andfrequent physical inventories will minimize inventory and cost of salesadjustments.  Favorable physicalinventory adjustments of approximately $42 thousand were recorded in the firstquarter of 2006.

***AccruedInsurance*** - The Company has a self-insured retentionagainst product liability claims with insurance coverage over and above theretention.  The Company is alsoself-insured for a portion of its employee medical benefits and workers’ compensation.  Product liability claims are routinelyreviewed by the Company’s insurance carrier and management routinely reviewsother self-insurance risks for purposes of establishing ultimate lossestimates.  In addition, management mustdetermine estimated liability for claims incurred but not reported.  Such estimates and any subsequent changes inestimates may result in adjustments to the Company’s operating results in thefuture.

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Effective January1, 2005, the Company began utilizing its newly formed and wholly-owned smallcaptive insurance company to insure certain of its business risks.  Certain risks, previously self-insured by theCompany and its subsidiaries, are now insured by the captive insurance subsidiary.  In addition, certain business risks notpreviously insured are now insured by the captive insurance subsidiary.  Since the captive insurance company has notreinsured any of its coverages, the Company’s overall self-insurance risk hasnot changed.  The captive insurancesubsidiary is expected to help the Company manage its risk exposures.  Under the Internal Revenue Code, the netunderwriting income of a small captive, as defined, is not taxable.

***AccruedWarranty*****- The Companyprovides limited warranties for periods of up to five years from the date ofretail sales.  Estimated warranty costsare provided for at the time of sale and are based upon historical experience.

**Forward-LookingStatements**

This reportcontains forward-looking statements, other than historical facts, which reflectthe view of the Company’s management with respect to future events.  When used in this report, words such as “believe,”“expect,” “anticipate,” “estimate,” “intend,” and similar expressions, as theyrelate to the Company or its plans or operations, identify forward-lookingstatements.  Such forward-lookingstatements are based on assumptions made by and information currently availableto the Company’s management.  Althoughmanagement believes that the expectations reflected in such forward-lookingstatements are reasonable, it can give no assurance that such expectations arereasonable, and it can give no assurance that such expectations will prove tohave been correct.  Important factorsthat could cause actual results to differ materially from such expectations include,without limitation, limitations on the availability of chassis on which theCompany’s product is dependent, availability of raw materials, raw materialcost increases, and severe interest rate increases.  Furthermore, the Company can provide no assurancethat such raw material cost increases can be passed on to its customers throughimplementation of price increases for the Company’s products.  The forward-looking statements containedherein reflect the current views of the Company’s management with respect tofuture events and are subject to those factors and other risks, uncertaintiesand assumptions relating to the operations, results of operations, cash flowsand financial position of the Company. The Company assumes no obligation to update the forward-lookingstatements or to update the reasons actual results could differ from thosecontemplated by such forward-looking statements.

**ITEM 3.**                  **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

There has been nomaterial change from the information provided in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

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**ITEM 4.                  CONTROLS AND  PROCEDURES.**

***Evaluationof Disclosure Controls and Procedures*** - The Company’sChief Executive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin the rules of the Securities Exchange Act of 1934) as of the end of theperiod covered by this quarterly report (the “Evaluation Date”), have concludedthat as of the Evaluation Date, the Company’s disclosure controls andprocedures were adequate and effective to ensure that material informationrelating to the Company and its consolidated subsidiaries would be made knownto them by others within those entities, particularly during the period inwhich this quarterly report was being prepared.

***Changesin Internal Controls*** - There were no changes in theCompany’s internal controls over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

The Company continues totake action to assure compliance with the internal controls, disclosurecontrols, and other requirements of the Sarbanes-Oxley Act of 2002.  Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, cannot guarantee that our internalcontrols and disclosure controls will prevent all possible errors or allfraud.  A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. In addition, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefit of controls must be relative to their costs.  Because of the inherent limitations in allcontrol systems, no system of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake.  Further, controls can be circumvented byindividual acts of some persons, by collusion of two or more persons, or bymanagement override of the controls.

The design of any systemof controls also is based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.  Over time, a control may be inadequatebecause of changes in conditions or the degree of compliance with the policiesor procedures may deteriorate.  Because ofinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

**PART II.     OTHERINFORMATION**

**ITEM 1.**                  **LEGALPROCEEDINGS.**

Not applicable

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**ITEM 1A.               RISK FACTORS.**

Any investment inour Common Stock involves a high degree of risk.  You should carefully consider the risks anduncertainties described below and the other information included in thisquarterly report on Form 10-Q before purchasing our Common Stock.  Although the risks described below are therisks that we believe are material, they are not the only risks relating to ourbusiness and our Common Stock. Additional risks and uncertainties, including those that are not yetidentified or that we currently believe are immaterial, may also adverselyaffect our business, financial condition, or results of operations.  If any of the events described below occur,our business and financial results could be materially and adverselyaffected.  The market price of our CommonStock could decline due to any of these risks, perhaps significantly, and youcould lose all or part of your investment. In assessing these risks, you should also refer to the other informationcontained or incorporated by reference in our Annual Report on Form 10-K forthe year ended December 31, 2005 filed with the Securities and ExchangeCommission, including our consolidated financial statements and related notes.

**Rawmaterials**

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

**Chassisavailability**

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

**Competition**

The competitivenature of the specialized vehicle industry creates a number of challenges forthe Company.  Important factors includeproduct pricing, quality of product, lead times, geographic proximity tocustomers and the ability to manufacture a product customized to customerspecifications.  Management believes thatthe Company has a competitive advantage in each of these areas due to its yearsof experience in the industry, established dealer/distributor relationships, strongrelationships with chassis manufacturers and its nationwide presence.  However, specialized vehicles are produced bya number of smaller, regional companies, which create product pricing pressuresthat could adversely impact the

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Company’sprofits.  Chassis manufacturers have notgenerally shown an interest in manufacturing specialized vehicles, includingtruck bodies and shuttle buses, because such manufacturers’ highly-automatedassembly line operations do not lend themselves to the efficient production ofa wide variety of highly specialized vehicles with various options andequipment.

**Environmental and health andsafety liabilities**

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

Certain laws, includingthe Federal Comprehensive Environmental Response, Compensation, and LiabilityAct of 1980, as amended, have imposed strict and, under certain circumstances,joint and several liability for costs to remediate contaminated sites upondesignated responsible parties including site owners or operators and personswho dispose of wastes at, or transport wastes to, such sites.

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

**Possibility of material lossesfrom product liability and warranty claims**

We face an inherent riskof exposure to product liability claims if the use of our current and formallymanufactured products result, or are alleged to result, in personal injuryand/or property damage.  If wemanufacture a defective product, we may experience material product liabilitylosses in the future.  In addition, wemay incur significant costs to defend product liability claims.  We could also incur damages and significantcosts in correcting any defects, lost sales, and suffer damage to ourreputation.  Our product liabilityinsurance coverage may not be adequate for liabilities we could incur and maynot continue to be available on terms acceptable to us.

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

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**We dependon the services of key management personnel, the loss of whom could materiallyharm us**

Our ability to competesuccessfully and implement our business strategy depends on the efforts of oursenior management personnel.  The loss ofthe services of any one or more of these individuals could have a material adverseeffect on our business.  We do not maintainkey-man life insurance policies on any of our executives.  If we were unable to attract qualifiedpersonnel to our management, our existing management resources could becomestrained, which would harm our business and our ability to implement our strategies.

**Price volatility and low tradingvolumes**

Our Class A Common Stockhas experienced, and may continue to experience, price volatility and lowtrading volumes.  It may be difficult foryou to sell your shares in the public market at any given time at prevailingprices, and the price of our Class A Common Stock may, therefore, bevolatile.  Overall market conditions andother risk factors described herein, may cause the market price of our Class ACommon Stock to fall.  Our high and lowsales prices for the twelve-month period ended July 1, 2006, were $9.56 and$6.10, respectively.  Our Class A CommonStock is listed on the American Stock Exchange under the symbol “STS.”  However, daily trading volumes for our ClassA Common Stock are, and may continue to be, relatively small compared to manyother publicly-traded securities.  Forexample, during the twelve-month period ended July 1, 2006, our daily tradingvolume has been as low as zero.

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

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

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

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

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

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

Not applicable

**ITEM 3.**                  **DEFAULTSUPON SENIOR SECURITIES.**

Not applicable

**ITEM 4.**                  **SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS,**

SupremeIndustries, Inc.’s annual meeting of stockholders was held on May 4, 2006.  Below is a summary of matters voted upon atthat meeting.

a)  The following individuals were electedDirectors by the holders of the Company’s Class A Common Stock for a one yearterm.

|                        | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|------------------------|------------|-----------|------------|--------------|------------|
| Arthur M. Borden       |       | 8,088,069 |       | 483,357      |       |
| William C.  Hurtt, Jr. |       | 8,166,507 |       | 404,919      |       |
| Mark C. Neilson        |       | 8,164,007 |       | 407,419      |       |

 

The followingindividuals were elected Directors by the holders of the Company’s Class BCommon Stock by a vote of 2,109,133 for, 0 against.

William J. BarrettRobert J. CampbellThomas CantwellHerbert M. GardnerOmer G. KropfRobert W. Wilson

b)  An amendment and restatement to the Company’s2004 Stock Option Plan was approved by the holders of the Company’s Class A andClass B Common Stock by a vote of 7,015,802 for, 1,239,836 against, 57,043abstentions and 2,367,878 unvoted.

c)  Crowe Chizek and Company LLC was ratified asthe Company’s independent registered public accounting firm by the holders ofthe Company’s Class A and Class B Common Stock by a vote of 10,224,668 for,436,574 against, and 19,325 abstentions.

**ITEM 5.**                  **OTHERINFORMATION.**

Not applicable

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

Exhibits:

Exhibit 31.1                               Certificationof Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002

Exhibit 31.2                               Certificationof Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002

Exhibit 32.1                               Certificationof Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002

Exhibit 32.2                               Certificationof Chief Financial  Officer Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        |   | SUPREME INDUSTRIES, INC.                                                                   |
|------------------------|--------|--------------------------------------------------------------------------------------------|
|                   |   |                                                                                       |
|                   |   |                                                                                       |
|                   |   | BY:                                                                                        | /s/ Jeffery D. Mowery |   |
| DATE: August 11,  2006 |   |                                                                                       | Jeffery D. Mowery |
|                   |   |                                                                                       |
|                   |   | Vice President  of Finance and Chief  Financial Officer                                    |
|                   |   |                                                                                       |
|                   |   | (Signing on  behalf of the Registrant and as  Principal Financial and Accounting  Officer) |
|                        |        |                                                                                            |  |  |  |

 

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

 

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