10-Q 1 str10q_0811.txt STARCRAFT FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 2004 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-22048 STARCRAFT CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1817634 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Post Office Box 1903 1123 South Indiana Avenue Goshen, Indiana 46526 (Address of principal executive offices/zip code) Registrant's telephone number, including area code: 574/534-7827 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: [X] No: Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes: No: [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: August 6, 2004 - 8,853,191 shares of Common Stock, without par value. STARCRAFT CORPORATION June 27, 2004 Form 10-Q - INDEX - PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets - June 27, 2004 (Unaudited) and September 28, 2003 (Audited) 1 Consolidated Statements of Operations (Unaudited) for the three and nine month periods ended June 27, 2004 and June 29, 2003 2 Consolidated Statements of Cash Flow (Unaudited) for the nine month periods ended June 27, 2004 and June 29, 2004 3-4 Notes to Consolidated Financial Statements 5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 2. Changes in Securities and use of Proceeds 18 Item 6. Exhibits and Reports on Form 8-K 18-19 SIGNATURES 20-21 EXHIBITS 22-29 PART I FINANCIAL INFORMATION Item 1. Financial Statements

~~PART I FINANCIAL INFORMATION Item 1. Financial Statements~~ STARCRAFT CORPORATION (Unaudited) (Audited) CONSOLIDATED BALANCE SHEETS ~~December~~June 2827, ~~2003~~2004 September 28, 2003 -------------~~----~~ ------------------ (Dollars in Thousands) ASSETS Current Assets Cash and cash equivalents....................... $ ~~1,145~~672 $ 836 Accounts receivable, trade, less allowance for doubtful accounts: $~~207~~256 at ~~December~~June 2827, ~~2003~~2004 and $200 at September 28, 2003............. 2428,~~112~~211 28,606 Other receivables............................... 23,~~632~~689 576 Inventories ................................... 1415,~~748~~218 10,060 Tooling and engineering ~~services~~projects................ 63,~~491~~772 6,593 Deferred income taxes........................... 1,585 1,702 Other current assets............................ ~~2,452~~596 ~~2,409~~707 ------------- --------------- Total current assets........................ 5153,~~580~~743 49,080 Property and Equipment Land, buildings, and improvements............... 65,~~932~~558 63,~~005~~761 Machinery, equipment and ~~equipment~~fixtures...............~~..........~~ 813,~~499~~630 79,~~321~~565 ------------- --------------- 1519,~~431~~188 13,326 Less: ~~accumulated~~Accumulated depreciation................... 45,~~641~~772 4,190 ------------- --------------- 1013,~~790~~416 9,136 Goodwill, net ..................................... 77,443 -- Intangible assets, net .............................. 13,400 -- Other assets ................................... 1,~~107~~441 514 ------------- --------------- $ 63159,~~477~~443 $ 58,730 ============= =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt............ 390 -- Accounts payable, trade......................... $ 2120,~~682~~597 $ 19,549 Accrued expenses: Compensation and related expenses........... ~~756~~1,613 2,668 Warranty.................................... ~~698~~582 698 Income taxes................................ ~~321~~-- 3,378 Taxes - other............................... ~~289~~170 434 Other....................................... ~~503~~736 394 ------------- --------------- Total current liabilities..............~~.....~~ 24,~~249~~088 27,121 Long -term debt, net of current maturities............ 29,594 9,148 Deferred income taxes................................ 165,~~662~~092 ~~9,148~~-- Minority interest in subsidiary...................... ~~8,228~~-- 9,821 Commitments and contingencies........................ -- -- Shareholders' Equity Preferred Stock, no par value:; 2,000,000 shares-- ~~---~~ authorized, none issued................... -- -- Common Stock, no par value:; 1020,000,000 shares authorized, issued and outstanding 48,~~881~~853,~~127~~191 shares as of ~~December~~June 2827, ~~2003~~2004 and 45,~~804~~044,~~102~~307 shares as of September 28, 2003 15........... 149,~~445~~144 15,203 Additional paid-in capital..................... 3,420 3,420 Accumulated deficit............................. (452,~~828~~108) (6,151) Accumulated other comprehensive income.......... ~~301~~213 168 ------------- --------------- Total shareholders' equity ................. 14100,~~338~~669 12,640 ------------- --------------- $ 63159,~~477~~443 $ 58,730 ============= ===============

1 PART I FINANCIAL INFORMATION Item 1. Financial Statements STARCRAFT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited

3 Months Ended 9 Months Ended ------------------------------------ --------------------------------- ~~(Unaudited)~~June ~~(Unaudited)~~27, ~~December~~2004 28June 29, 2003 ~~December~~June 27, 2004 June 29, ~~2002~~2003 ------------- ------------- ------------- ------------- (Dollars in thousands, except per share amounts) Net Sales $ 4345,~~798~~099 $ 3962,~~882~~117 $ 128,053 $ 149,170 Cost of ~~Goods~~goods ~~Sold~~sold ......................... 3639,~~152~~971 3146,~~015~~910 109,616 114,625 ------------- ------------- -------------- ------------- Gross profit ...................... 75,~~646~~128 815,~~867~~207 18,437 34,545 Operating Expenses Selling and promotion ................. ~~629~~764 ~~383~~526 2,112 1,377 General and administrative 4............ 3,~~017~~689 43,~~489~~695 ~~----------~~12,372 ~~---------~~12,206 ~~Operating~~Goodwill ~~income~~impairment ................... -- -- 47,900 -- Amortization of intangibles ........... 3540 -- 900 -- ------------- ------------- -------------- ------------- Operating Income (Loss) 135 10,~~000~~986 3(44,~~995~~847) 20,962 Nonoperating (Expense) Income Interest, net ......................... (73240) (~~113~~91) (454) (307) Other, net .......................... -- 43(1) -- 18 ------------- ------------- -------------- ------------- (73240) (7092) (454) (289) ------------- ------------- -------------- ------------- Income ~~before~~(Loss) ~~minority~~Before ~~interest~~Minority Interest and ~~income~~Income ~~taxes~~ Taxes.......... 2(105) 10,~~927~~894 3(45,~~925~~301) 20,673 Minority Interest in ~~income~~Income of Subsidiary 1-- 4,~~407~~161 1610 8,~~734~~641 ------------- ------------- -------------- ------------- Income ~~before~~(Loss) ~~income~~Before ~~taxes~~Income 1Taxes (105) 6,~~520~~733 2(45,~~191~~911) 12,032 Income ~~Taxes~~taxes ~~197~~(benefit) ~~238~~(179) 2,680 42 3,121 ------------- ------------- -------------- ------------- Net ~~income~~Income (Loss) $ 174 $ 4,~~323~~053 $ 1(45,953) $ 8,911 ============= ============= ============== ============= Comprehensive income (loss) $ 76 $ 4,230 $ (45,908) $ 9,088 ============= ============= ============== ============= Basic earnings (loss) per share $ 0.2701 $ 0.4281 $ (6.25) $ 1.80 ============= ============= ============== ============= Dilutive earnings (loss) per share $ 0.2501 $ 0.3974 $ ** $ 1.65 ============= ============= ============== =============

**Not presented herein since effect is antidilutive See Notes to Consolidated Financial Statements 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements STARCRAFT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited

39 Months Ended ----------------------------------------------- ~~(Unaudited)~~June ~~(Unaudited) December 28~~27, ~~2003~~2004 ~~December~~June 29, ~~2002~~2003 -------------~~----~~ -------------~~----~~ (Dollars in ~~thousands~~Thousands) Operating Activities Net income (loss) .....................~~....~~ $ 1(45,~~323~~953) $ 18,~~953~~911 Adjustments to reconcile net income (loss) to net cash from operations: Depreciation and amortization ~~441~~......... ~~329~~2,721 889 Loss on disposal of equipment.......... 9 -- Recovery of bad debt................... (197) -- Minority interest...................... (16,~~593~~890) 16,~~734~~142 Goodwill impairment.................... 47,900 -- Change in deferred taxes............... (342) -- Change in operating assets and liabilities: Receivables ...................... 2(1,~~568~~110) 2(14,~~213~~009) Inventories ...................... (43,~~253~~929) (1,~~211~~112) Other current assets ............. 593,298 (21,~~376~~434) Accounts payable .................. (2,~~321~~824) (18,~~647)~~782 Accrued expenses................... (5,~~005~~355) (2),668 Other .......................... ~~160~~271 -- ------------ ------------- Net cash from operating activities .... (312,~~979~~401) 310,~~415~~837 ------------ ------------- Investing Activities Purchase of property and equipment (13,~~675~~810) (14,~~564~~207) Proceeds from sale of equipment........ 33 -- Acquisitions, net of cash acquired..... (1,200) -- Other assets ........................... (~~593~~275) (~~117~~287) ------------ ------------- Net cash from investing activities (35,~~468~~252) (14,~~681~~494) ------------ ------------- Financing Activities Net proceeds (payments) on revolving credit agreements .................. 717,~~514~~247 (1,~~709~~065) Payments on notes to related parties... -- (1,474) Proceeds from exercise of stock options 242 57233 Other.................................. -- -- ------------ ------------- Net cash from financing activities 717,~~756~~489 (12,~~652~~306) ------------ ------------- Increase (Decrease) in Cash and Cash Equivalents ........................... ~~309~~(164) 824,199 Cash and cash equivalents at beginning of period................. 836 284 ------------ ------------- Cash and cash equivalents at end of period....................... $ ~~1,145~~672 $ ~~366~~4,483 ============ =============

See Notes to Consolidated Financial Statements 3 PART I FINANCIAL INFORMATION Item 1. Financial Statements STARCRAFT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW - Unaudited (Continued)

~~(Unaudited)~~9 ~~(Audited)~~Months ~~December~~Ended 28June 27, ~~2003~~2004 ~~September~~June 2829, 2003 -------------~~----~~ ------------- (Dollars in Thousands) Non-~~----~~cash ~~Raw~~Investing ~~materials~~and $Financing ~~14,713~~Activities $In ~~9,583~~conjunction ~~Finished~~with ~~goods~~the ~~440~~acquisition ~~877~~of ~~-----------~~businesses ~~---------~~liabilities ~~15,153~~were ~~10,460~~assumed ~~Allowance~~as ~~for~~follows: ~~slow-moving~~Fair ~~and~~value ~~obsolete~~of ~~inventories~~assets ~~(405)~~acquired............ ~~(400)~~$147,286,853 --~~---------~~ ~~---------~~============ ~~Total~~============= Liabilities assumed...................... $ 1413,~~748~~592,653 $-- 10============ ============= Issuance of common stock................. $133,~~060~~693,000 -- ============ =============

See Notes to Consolidated Financial Statements 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STARCRAFT CORPORATION June 27, 2004 Note 1. Basis of Presentation The accompanying unaudited financial statements of Starcraft Corporation (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations. Reference is made to the Company's audited financial statements set forth in its annual report on Form 10-K for its fiscal year ended September 28, 2003. In the opinion of the management of the Company, the unaudited financial statements contain all adjustments (which include only normally recurring adjustments) necessary for a fair statement of the results of operations for the three and six month periods ended June 27, 2004 and June 29, 2003. The results of operations for the three and nine month periods ended June 27, 2004 are not necessarily indicative of the results which may be expected for the year ending October 3, 2004. The Company has adopted a 52 or 53 week fiscal year ending the last Sunday nearest to September 30. The results of operations for the three and nine month periods ended June 27, 2004 and June 29, 2003 are for 13 and 39 week periods, respectively. Certain amounts in the September 28, 2003 consolidated financial statements have been reclassified to confirm with the current presentation. These reclassifications had no effect on total assets, total shareholders' equity or net income as previously reported. Note 2. Principles of Consolidation On January 16, 2004, the Company through Wheel to Wheel Acquisition Company, LLC an Indiana limited liability Company and a wholly owned subsidiary of the Company (the "Acquisition Subsidiary"), acquired Wheel to Wheel, Inc., a Michigan corporation ("Wheel to Wheel"). Wheel to Wheel had a 50% ownership in each of Tecstar, LLC and Tecstar Manufacturing Canada Limited (collectively "Tecstar"). Through the acquisition of Wheel to Wheel, the Company now owns 100% of Tecstar, which accounts are consolidated in these financial statements at June 27, 2004. All inter-company transactions have been eliminated. Prior to January 16, 2004, the Company owned 50% of Tecstar and consolidated the accounts due to management representation on the Tecstar Board of Directors and control of its affairs. The Company accounted for the Wheel to Wheel 50% ownership as minority interest. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STARCRAFT CORPORATION June 27, 2004 Note 3. Inventories The composition of inventories is as follows (dollars in thousands):

~~3 Months Ended -------------------------------------------~~ (Unaudited) (~~Unaudited~~Audited) ~~December~~June 27, 2004 September 28, 2003 ~~December~~Raw 29materials $ 14,835 ~~2002~~$ 9,583 Finished goods 788 877 --------------~~---~~ ----------------- ~~Basic earnings per share Net income available to common stockholders $ 1~~15,~~323~~623 ~~$ 1~~10,~~953~~460 ~~==========~~Allowance ~~=========~~for ~~Weighted~~slow-moving ~~average~~and ~~common~~obsolete ~~shares~~inventories ~~outstanding~~(405) ~~4,860~~(400) 4,685 ========== ========= Basic earnings per share $ 0.27 $ 0.42 ========== ========= Diluted earnings per share Net income available to common stockholders $ 1,323 $ 1,953 ========== ========= Weighted average common shares outstanding 4,860 4,685 Add: Potential dilutive effects of incentive stock options 536 350 -------------- --------------- ~~Weighted~~Total ~~average~~$ ~~potential~~15,218 ~~diluted~~$ ~~common shares outstanding 5~~10,~~396~~060 ~~5,035~~ ========== ====~~=====~~ ~~Diluted earnings per share $ 0.25 $ 0.39~~ ========== ======~~===~~

Note 4. Goodwill Goodwill represents the excess of the Wheel to Wheel purchase price over the fair value of the assets acquired. Under SFAS No. 142 the goodwill is not amortized and is assessed annually for impairment, chosen by management as the end of the second quarter. Effective March 28, 2004, management determined the goodwill to be impaired and recorded a $47.9 million impairment charge. Note 5. Intangible Assets Intangible assets represent the customer relationship and business contracts acquired through the acquisition of Wheel to Wheel. The customer relationship is valued at $10 million and is being amortized using the straight-line method over 20 years. The contracts are valued at $4.5 million and are being amortized over the life of the respective contract. Amortization expense was $540 thousand for the quarter ended June 27, 2004, and $900 thousand for the nine month period ended June 27, 2004. Note 6. Long-term Debt The Company entered into a $30 million dollar revolving credit agreement with its current lending institution on January 16, 2004. Advances under the agreement are limited to a specific percentage of eligible receivables and inventory, subject to a maximum of $30 million. The advances bear interest subject to a pricing matrix with ranges of 3/4% below the prime rate to 1/4% above the prime rate dependent upon a ratio of funded debt to EBITDA. The revolver also contains a LIBOR based borrowing option with rates ranging from 150 to 250 basis points above Euro dollar rates, dependent upon the same ratio of funded debt to EBITA. The credit facility matures April 1, 2006 and as a result, all borrowings under the credit facility at June 27, 2004 are classified as long-term debt. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STARCRAFT CORPORATION June 27, 2004 Note 7. Comprehensive Income Other comprehensive income consists of foreign currency translation adjustments. Other comprehensive income for the three months ended June 27, 2004 and June 29, 2003 was $2 thousand and $177 thousand, respectively. Other comprehensive income for the nine months ended June 27, 2004 and June 29, 2003 was $45 thousand and $177 thousand, respectively. Note 8. Subsequent Event Effective July 13, 2004, subsequent to quarter end, the Company issued $15 million in principal amount of unsecured senior subordinated convertible notes in a private placement to accredited investors. The notes bear interest at 8.5% and mature in July 2009, with semi-annual interest payments payable on January 1 and July 1 of each year, commencing January 1, 2005. The interest payments can be made in either cash or stock at the Company's discretion. The notes are convertible, subject to certain conditions, into shares of Starcraft's Common Stock at a conversion price of $15.60. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STARCRAFT CORPORATION June 27, 2004 Note 9. Earnings Per Share The computation of basic and dilutive earnings (loss) per share follows (in thousands, except share and per share amounts):

3 Months Ended (Unaudited) 9 Months Ended (Unaudited) --------------------------------- ---------------------------- ~~(Unaudited)~~June ~~(Unaudited)~~27, ~~December~~2004 28June 29, 2003 ~~December~~June 27, 2004 June 29, ~~2002~~2003 ------------- ------------- ------------- ------------- ~~(Dollars~~Basic inearnings ~~thousands,~~(loss) ~~except~~ per share ~~amounts~~Net income (loss) ~~Net~~available ~~Income~~to -common asstockholders ~~reported~~$ 74 $ 14,~~323~~053 $ 1(45,953) ~~Deduct:~~$ ~~total~~8,911 ~~stock-based~~============= ~~employee~~============ ~~compensation~~============= ~~expense~~============= ~~determined~~Weighted ~~under~~average ~~fair~~common ~~value~~shares ~~based~~outstanding ~~methods~~8,853 ~~for~~4,991 ~~all~~7,357 ~~awards 986 31 ---------- --------- Net income - pro forma $ 337 $ 1~~4,~~922~~961 ============= ============ ~~Earnings~~============= ~~per~~============= ~~share - as reported~~ Basic earnings (loss) per share $ 0.2701 $ 0.4281 $ (6.25) $ 1.80 ============= ============ ~~Diluted~~============= ============= Dilutive earnings (loss) per share Net income (loss) available to common stockholders $ ~~0.25~~74 $ ~~0.39~~4,053 $ (45,953) $ 8,911 ============= ============ ~~Earnings~~============= ~~per~~============= ~~share~~Weighted average common shares outstanding 8,853 4,991 7,357 4,961 Add: Potential dilutive effects of incentive stock options 405 506 516 453 ------------- ~~pro~~------------ ~~forma~~------------ ~~Basic~~------------- ~~earnings~~453 ~~per~~Weighted ~~share~~average $potential ~~0.07~~dilutive $common ~~0.41~~shares outstanding 9,258 5,497 7,873 5,414 ============= ============ ~~Diluted~~============= ============= Dilutive earnings (loss) per share $ 0.0601 $ 0.3874 $ (**) $ 1.65 ============= ============ ============= =============

**Not presented herein since effect is antidilutive During the second fiscal quarter of 2004 the Company declared and issued a 5% Common Stock dividend. As a result, the Company issued 421,539 additional shares of common stock. The number of basic and dilutive shares, along with the basic and dilutive earnings per share shown above reflect the stock dividend for all periods shown. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STARCRAFT CORPORATION June 27, 2004 Note 10. Stock-Based Compensation The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure." Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for the stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, the Company recognizes no compensation expense for the stock options. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation."

~~Year~~3 Months Ended 9 Months Ended ------------------------------------- -------------------------------- ~~December~~June 2827, 2004 June 29, 2003 ~~December~~June 27, 2004 June 29, ~~2002~~2003 ------------- ------------- ------------- ------------- (Dollars in thousands, except per share amounts) Net ~~Income~~income (loss) - as reported $ 174 $ 4,~~323~~053 $ 1(45,953) $ 8,911 Deduct: ~~pro~~total stock-~~forma~~based ~~provision~~employee compensation expense determined under fair value based methods for ~~income~~all ~~taxes~~awards ~~417~~536 ~~483~~17 2,182 112 ------------- ------------- ------------ ------------- Net income (loss) - pro forma $ ~~906~~(462) $ 14,~~470~~036 $ (48,135) $ 8,799 ============== ============= ============== ============= Earnings (loss) per share - as reported Basic ~~Earnings~~earnings (loss) per share $ 0.2701 $ 0.4281 $ (6.25) $ 1.80 ============== ============= ============== ============= Dilutive earnings (loss) per share $ 0.2501 $ 0.3974 $ (**) $ 1.65 ============== ============= ============== ============= Earnings (loss) per share - pro forma Basic ~~Earnings~~earnings (loss) per share $ (0.1905) $ 0.3181 $ (6.54) $ 1.77 ============== ============= ============== ============= Dilutive earnings (loss) per share $ (**) $ 0.1774 $ 0(**) $ 1.2962 ============== ============= ============== =============

**Not presented herein since effect is antidilutive 9 NOTES TO FINANCIAL STATEMENTS (Continued) STARCRAFT CORPORATION June 27, 2004 Note 11. Operating Segment Information The Company's principal business is the supply of the OEM Automotive Industry. The Company's previously reported Automotive Parts and Products segment no longer meets the quantitative thresholds for separate disclosure as set forth in SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Note 12. Warranty Expense The Company's OEM Automotive Supply segment provides products to Original Equipment Manufacturers ("OEM") under warranty terms similar to terms offered by the OEM to its customers, which is generally 3 years or 36,000 miles. The Company accrues an estimated liability for potential warranties at the time products are sold, based on past experience. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STARCRAFT CORPORATION -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Comparison of the three months ended June 27, 2004 (Third Quarter Fiscal Year 2004) to the three months ended June 29, 2003 (Third Quarter Fiscal Year 2003) -------------------------------------------------------------------------------- Net sales for the quarter ended June 27, 2004 decreased $17.0 million to $45.1 million from $62.1 million for the quarter ended June 29, 2003. Our Canadian second stage facility experienced a significant slowdown and accounted for $16.6 million of the $17.0 sales decline, while New Jersey declined $4.2 million due to the previously announced expiration of a second stage program. Shreveport operations were significantly favorable to prior year levels due to the effects of a new second stage program while our Haslet, Texas facility declined 19% due to an interruption in the supply of vehicles from the OEM, as well as softness in the overall automotive market and OEM large sport utility vehicle sales during the third quarter. Parts distribution sales increased 38% to $9.3 million due to sales generated from the new wheel distribution program. H2 parts sales, which are included in the parts distribution totals, declined 10% which is consistent with the decline of H2 vehicle sales. Sales relating to businesses acquired in fiscal 2004 were $4.1 million, including Wheel to Wheel sales of $1.1 million and $2.1 million in sales from our Canadian paint facility. These partially offset the above shortfalls. Gross profits decreased to $5.1 million for the quarter ended June 27, 2004. This was down $10.1 million from $15.2 million for the quarter ended June 29, 2003. Gross profit was adversely affected by several factors, most notably the profit impact of a $29.0 million decline in second stage manufacturing sales compared to third quarter of fiscal 2003. Impact on gross margin due to this decline approximates $9.0 million. We also incurred one-time charges associated with the New Jersey shutdown and costs associated with an interruption in the supply of chassis to our Haslet facilities. Impact of these issues on gross profit was $1.5 million. We did have improved sales in the Parts distribution business and our Shreveport facility; however, the $4.1 million in sales relating to businesses acquired in 2004 did not generate any gross profit. Selling and promotion expenses were $0.8 million for the third quarter of 2004 compared to $0.5 million for the fiscal 2003 quarter. Selling expenses associated with recent acquisitions were $0.2 million and accounted for most of the increase. General and administrative expenses were $3.7 million, consistent with the third quarter of fiscal 2003. General and administrative expenses associated with recent acquisitions were $0.4 million, while prior year expenses include a $1.3 million currency transaction gain on material purchases in our Canada facility. Excluding the impact of these two items, general and administrative expense declined $1.7 million, due mostly to lower incentive compensation. Amortization attributable to the intangible assets booked during the merger with Wheel to Wheel was $.5 million during the third quarter of fiscal 2004. Interest expense was $0.2 million in the third quarter versus $0.1 million during the third quarter of fiscal 2003. Higher borrowings during the quarter caused the increase and were slightly offset by favorable interest rates. Sales relating to businesses acquired in fiscal 2004 were $4.1 million, included Wheel to Wheel sales of $1.1 million and $2.1 million in sales from our Canadian paint facility. These partially offset the above shortfalls. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) STARCRAFT CORPORATION -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Comparison of the nine months ended June 27, 2004 (Third Quarter Fiscal Year 2004) to the nine months ended June 29, 2003 (Third Quarter Fiscal Year 2003) -------------------------------------------------------------------------------- Net sales for the nine months ended June 27, 2004 decreased $21.1 million to $128.1 million, from $149.2 million for fiscal 2003. The Canadian second stage program account for $16.9 million of the sales decline as volume in this facility has slowed significantly. The New Jersey facility declined $7.7 million in sales attributable to expiration of a second stage program, while our Louisiana facility is $2.0 million behind 2003 pace as the launch of a new second stage program has partially offset the expiration of another second stage program. Parts distribution sales declined $2.3 million due to declines in our H2 parts sales as retail sales levels fell off the previous years pace. Partially offsetting this decline was $6.7 million dollars in wheel sales which was a new program in fiscal 2004. Sales relating to acquisitions accounted for $9.3 million during the nine months ended June 27, 2004. Gross profit for the nine months ended June 27, 2004 was $18.4 million, compared to $34.5 million for the comparable period of fiscal 2003. The decline in second stage manufacturing revenue had significant impact on our gross profit. Second stage revenue on a nine month basis has declined $32 million from fiscal 2003 to fiscal 2004. Also, sales related to businesses acquired in 2004 totaled $9.3 million and did not contribute any gross profit. Selling and Promotion expenses were $2.1 million for the nine months ended June 27, 2004 versus $1.4 million for the comparable period of fiscal 2003. Higher marketing costs for new business development and selling and promotional expenses associated with recent acquisitions of $0.4 million caused the increase. General and Administrative expense was $12.4 million for the nine months ended June 27, 2004 versus $12.2 million for the comparable period of fiscal 2003. General and administrative expenses relating to recent acquisitions were $0.9 million for the nine months ended June 27, 2004, while prior year expenses include a $1.3 million currency transaction gain previously discussed. Excluding these two items, general and administrative expenses declined from $13.5 million in fiscal 2003 to $11.5 million in fiscal 2004 due largely to lower incentive compensation and prototype expenses. SEASONALITY AND TRENDS The Company's business sales and profits are dependent on the automotive markets in the United States. The business is influenced by a number of factors including OEM plant shutdowns, model year changeovers, atypical weather for any sales region, interest rates, gasoline prices, and OEM programs affecting price and supply. The business is also dependant upon long-term contracts. The Company provided updates on the status of our OEM programs in the Company's Annual Report on Form 10-K for the year ended September 28, 2003. Since that time, the second stage program at the New Jersey facility has been terminated earlier than expected. This program accounted for 8% of fiscal 2003 sales. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) STARCRAFT CORPORATION -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Funds available from operations and under the Company's revolving credit agreements were adequate to finance operations and provide for capital expenditures during the three months ended June 27, 2004. Long-term debt was $29.6 million at June 27, 2004 compared to $9.1 million at September 28, 2003. Operations utilized $12.4 million in cash during the first nine months of fiscal 2004, compared to generating $10.8 million of cash during the first nine months of fiscal 2003. Trade receivables, exclusive of the effects of acquisitions, were $0.4 million lower than September 28, 2003 levels. Inventory levels, exclusive of the effects of acquisitions were $5.2 million higher than September 28, 2003 levels. Wheel inventory associated with the new wheel program was $1.5 million while Shreveport inventory increased $0.8 million due to the launch of a new supply program. Other receivables and tooling development and reimbursement engineering services increased $3.1 million during the first nine months of 2004 due to investment in potential new sales programs and timing of tooling and engineering reimbursement from customers. Accrued expenses at June 27, 2004, exclusive of the effects of acquisitions, were $4.5 million lower than September 28, 2003, and were reflective of $3.1 million in Canadian tax payments and $2.5 million in incentive compensation payments. Distributions totaling $7.5 million were also made to our partner in Tecstar prior to the merger on January 16, 2004. Capital expenditures, exclusive of the effects of acquisitions, totaled $3.8 million during the first nine months of fiscal 2004. Major items included tooling expenditures for aftermarket parts of $0.8 million, $0.4 million for leasehold improvements in our Texas facility, and tooling expenditures of $1.5 million. In October 2003, Starcraft and Wheel to Wheel jointly acquired the assets of Tarxien Automotive in Ontario, Canada. Tarxien, with $3.0 million in annual sales, was acquired for its OEM-compliant horizontal paint line, and its plastic injection molding facilities that will further support Starcraft's ongoing automotive aftermarket parts business. In November 2003, the Company acquired the assets of Classic Design Concepts, Inc. of Walled Lake, Michigan. Classic Design provides design and engineering services, concepting and show car development for automotive OEMs, primarily Ford Motor Company. Classic also develops and markets aftermarket parts. Classic Design's senior staff brings additional expertise in direct sales and corporate relationships. Total purchase price of the assets net of assumed liabilities, for Tarxien Automotive and Classic Design was $1.2 million. The Company, in relation to the acquisition of Wheel to Wheel, has entered into employment contracts with three employees, that among other things, allow for severance payments of two years worth of base salary for termination without cause. Obligations under these severance agreements would total $1.8 million annually. In January 2004, the Company entered into a $30 million revolving credit agreement with its current lending institution, and a new lending institution, which matures on April 1, 2006. The facility was amended to accommodate the increased revolver needs associated with recent acquisitions and the Wheel to Wheel merger. Advances under the agreement are limited to a specific percentage of eligible receivables and 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) STARCRAFT CORPORATION -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - Continued inventory, subject to a maximum of $30 million. The advances bear interest subject to a pricing matrix with ranges of 3/4% below the prime rate to 1/4% above the prime rate dependent upon a ratio of funded debt to EBITDA. The revolver also contains a LIBOR based borrowing option with rates ranging from 150 to 250 basis points above Euro dollar rates, dependent upon the same calculation. The borrowings are collateralized by substantially all of the Company's assets. Effective July 13, 2004, Starcraft Corporation completed the private placement of $15 million of unsecured senior subordinated convertible notes. The notes were placed with accredited investors in a transaction exempt from registration under the Securities Act of 1933, pursuant to Section 4(2) of the Securities Act, and Regulation D thereunder. The notes bear interest at 8.5% and mature in July 2009 with semi-annual interest payments payable on January 1 and July 1 of each year, commencing January 1, 2005. The payments can be made in either cash or stock, to be determined at Starcraft's discretion. The notes are convertible at the option of the holder, subject to certain conditions, in whole or in part, into shares of Starcraft's common stock at a 25% premium to the previous five-day average closing price of Starcraft's stock price as of July 12, 2004. Starcraft has agreed to file within 60 days after closing a registration statement under the securities Act of 1933 to register the shares of its common stock issuable upon conversion of the notes for potential resale by noteholders. Starcraft paid a placement fee of $245,000 and an origination fee of $225,000 in respect of this issuance. The funds were used to pay down the revolver. Available funds on the revolving line of credit, subject to borrowing base limitations, approximated $17 million after pay down of the revolver with the convertible notes proceeds. The Company believes the additional capital provided by the convertible notes proceeds will better align its long term growth initiatives with capital not subject to borrowing base fluctuations, enhancing management's flexibility in addressing long and short term capital and liquidity needs as they arise. The Company believes the additional flexibility provided by the convertible notes together with borrowings available under revolving credit facilities will be sufficient to satisfy its liquidity requirements, and growth initiatives through 2005. INCOME TAXES At this time, the Company does not have U.S. federal income tax expense due to a reserve on existing deferred tax assets, which exists primarily due to operating loss carryforwards. The Company is incurring certain state taxes. As the operating loss carryforwards are utilized, the Company will begin recording U.S. federal income taxes, along with Canadian and state taxes. At June 27, 2004, the operating loss carryforwards were approximately $0.3 million. MANUFACTURING AND OPERATING TRENDS The supply program in Shreveport ended during the fourth quarter of fiscal 2003. The Company had minimal sales for this program during the first six months of 2004 compared to $6.1 million during the first six months of fiscal 2003. A new supply program started during the third quarter of fiscal 2004 which returned the Shreveport facility to profitability, and should continue at this pace fiscal 2005. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) STARCRAFT CORPORATION -------------------------------------------------------------------------------- MANUFACTURING AND OPERATING TRENDS - Continued Supply programs in the New Jersey facility are ending in 2004. The Company plans to close this facility after the programs have ended, and anticipates a shutdown by September, 2004. The Canadian facility operated at a loss for the nine months ended June 27, 2004 due to substantially reduced sales volume. Operating losses at this facility will continue to occur if sales volumes do not increase. We do not anticipate sales in the fourth quarter of fiscal 2004 to improve over current levels. Currently, the Company is working with its customer in attempts to increase sales at this location, and anticipates a return to profitability at this facility during fiscal 2005. APPLICATION OF CRITICAL ACCOUNTING POLICIES In the course of normal business and in the preparation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Some of the more significant policies include: Revenue Recognition: The Company generally manufactures products based on specific orders from customers. Shipments are generally made by common carrier after receiving authorization from the customer, and revenue is recognized upon shipment under FOB factory terms. Warranties: The Company follows the policy of accruing an estimated liability for warranties at the time the warranted products are sold. The estimate is generally based on past claims experience. Property and Equipment: Property and equipment are stated at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The Company is depreciating buildings over periods of 15 to 50 years, building improvements over periods of 5 to 20 years, and equipment over periods of 3 to 12 years. Intangible Assets and Goodwill: The identifiable intangible assets generated by the Wheel to Wheel merger will be amortized to expense over the expected lives of the assets ranging from one to twenty years. Goodwill will not be amortized to expense, but rather will be evaluated annually for any impairment in the carrying value, and adjusted accordingly through the income statement. Forward Looking Statements The foregoing discussion contains forward-looking statements regarding economic conditions and trends, adequacy of capital resources, seasonality and supply of, and demand for, the Company's products, and the prospects of Management's operating strategies, revenues and profits, all of which are subject to a number of important factors which may cause the Company's projections to be materially inaccurate. Some of such factors are described in the Company's Form 10-K for the year ended September 28, 2003, under the subsection entitled "Discussion of Forward-Looking Information" which is incorporated herein by reference. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) STARCRAFT CORPORATION -------------------------------------------------------------------------------- LONG-TERM CONTRACTUAL OBLIGATIONS: The Company assumed long-term debt obligations totaling $3.6 million, and various operating lease obligations associated with the Wheel to Wheel acquisition. The Company also entered into Employment Agreements with the majority shareholders of Wheel to Wheel. Long-term contractual obligations as of June 27, 2004 are as follows:

Effective July 13, 2004, the Company incurred $15 million in additional long-term debt in the form of senior subordinated convertible notes, due 2009. Proceeds were used to reduce bank debt under the revolving credit facility. The foregoing presentation of long-term contractual obligations at June 27, 2004, adjusted to give effect to such transaction, appears below.

16 STARCRAFT CORPORATION -------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISKS There have been no material changes from the information provided in the Company's annual report on Form 10-K for the year ended September 28, 2003. ITEM 4. CONTROLS AND PROCEDURES Starcraft carried out an evaluation, under the supervision and with the participation of Starcraft's management, including Starcraft's Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of Starcraft's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Co-Chief Executive Officers and Chief Financial Officer concluded that, at June 27, 2004, Starcraft's disclosure controls and procedures are effective in accumulating and communicating to management (including such officers) the information relating to Starcraft (including its consolidated subsidiaries) required to be included in Starcraft's periodic SEC filings. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures during the Company's last fiscal quarter, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. 17 PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds Effective July 13, 2004, Starcraft Corporation completed the private placement of $15 million of unsecured senior subordinated convertible notes. The notes were placed with accredited investors in a transaction exempt from registration under the Securities Act of 1933, pursuant to Section 4(2) of the Securities Act, and Regulation D thereunder. The notes bear interest at 8.5% and mature in July 2009 with semi-annual interest payments payable on January 1 and July 1 of each year, commencing January 1, 2005. The payments can be made in either cash or stock, to be determined at Starcraft's discretion. The notes are convertible at the option of the holder, subject to certain conditions, in whole or in part, into shares of Starcraft's common stock at a 25% premium to the previous five-day average closing price of Starcraft's stock price as of July 12, 2004. Starcraft has agreed to file within 60 days following closing a registration statement under the securities Act of 1933 to register the shares of its common stock issuable upon conversion of the notes for potential resale by noteholders. Starcraft paid a placement fee of $245,000 and an origination fee of $225,000 in respect of this issuance. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed with this report: Exhibit 4.1 - Convertible Senior Subordinated Note Purchase Agreement among Starcraft Corporation and certain purchasers, dated July 12, 2004, incorporated by reference to Exhibit 4.1 to the registrant's current report on Form 8-K filed July 14, 2004. Exhibit 10.1 - Amended and Restated Employment Agreement, dated as of May 4, 2004, between Starcraft Corporation and Michael H. Schoeffler. Exhibit 10.2 - Employment Agreement, dated as of May 24, 2004, between Starcraft Corporation and Joseph E. Katona, III. Exhibit 31.1 - Certification by Co-Chief Executive Officer required by Rule 31a-14(a) or 15d-14(a) Exhibit 31.2 - Certification by Co-Chief Executive Officer required by Rule 31a-14(a) or 15d-14(a) Exhibit 31.3 - Certification by Chief Financial Officer required by Rule 31a-14(a) or 15d-14(a) Exhibit 32- Certification required under Section 1350 18 Item 6. Exhibits and Reports on Form 8-K - Continued (b) (i) The Company filed a report on Form 8-K/A on April 1, 2004, to provide audited financial statements of Wheel to Wheel, Inc. and updated pro forma financial information. (ii) The Company filed a report on Form 8-K on April 1, 2004, to report an impairment of the goodwill associated with its acquisition of Wheel to Wheel, Inc. (iii)The Company filed a report Form 8-K on July 14, 2004 to report the private placement of $15 million of convertible senior subordinated notes. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARCRAFT CORPORATION (Registrant) August 11, 2004 By: /s/ Joseph E. Katona, III --------------------------- Joseph E. Katona, III Chief Financial Officer 20

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