1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998 OR TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE [ ] SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _______________________ Commission File Number: 1-10883 ------------------------------------------------------- WABASH NATIONAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-1375208 -------- ---------- (State of Incorporation) (IRS Employer Identification Number) 1000 Sagamore Parkway South, Lafayette, Indiana 47905 ------------------ ----- (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (765)448-1591 -------------- 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of common stock outstanding at November 13, 1998 was 22,962,245.
2 WABASH NATIONAL CORPORATION INDEX FORM 10-Q <TABLE> <CAPTION> Page ---- <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 1998 and 1997 2 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk (Not Applicable) - PART II - OTHER INFORMATION Item 2. Changes in Securities 14 Item 6. Exhibits and Reports on Form 8-K 14 </TABLE>
3 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <TABLE> <CAPTION> September 30, December 31, 1998 1997 ------------- ------------ (Unaudited) (Note 1) ASSETS <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 25,503 $ 14,647 Accounts receivable, net 161,039 161,249 Current portion of finance contracts 7,594 7,697 Inventories 259,747 211,359 Prepaid expenses and other 14,990 12,962 --------- --------- Total current assets 468,873 407,914 --------- --------- PROPERTY, PLANT AND EQUIPMENT, net 132,885 108,798 --------- --------- EQUIPMENT LEASED TO OTHERS, net 38,443 43,986 --------- --------- FINANCE CONTRACTS, net of current portion 67,613 51,539 --------- --------- INTANGIBLE ASSETS, net 32,027 11,152 --------- --------- OTHER ASSETS 7,875 6,481 --------- --------- TOTAL ASSETS $ 747,716 $ 629,870 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 2,931 $ 4,148 Accounts payable 123,980 94,083 Accrued liabilities 38,832 29,471 --------- --------- Total current liabilities 165,743 127,702 --------- --------- LONG-TERM DEBT, net of current maturities 181,913 231,880 --------- --------- DEFERRED INCOME TAXES 32,255 26,440 --------- --------- OTHER NONCURRENT LIABILITIES AND CONTINGENCIES 17,913 17,332 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock 5 4 Common stock, 22,962,245 and 19,954,874 shares issued and outstanding, respectively 230 200 Additional paid-in capital 236,218 135,611 Retained earnings 114,718 91,980 Treasury stock at cost, 59,600 shares (1,279) (1,279) --------- --------- Total stockholders equity 349,892 226,516 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 747,716 $ 629,870 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 1
4 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, -------------------------- --------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> NET SALES $ 334,113 $ 246,403 $965,458 $577,897 COST OF SALES 303,279 225,236 879,698 533,987 --------- --------- -------- -------- Gross Profit 30,834 21,167 85,760 43,910 GENERAL AND ADMINISTRATIVE EXPENSES 7,469 5,538 20,833 12,130 SELLING EXPENSE 3,286 2,583 9,483 5,802 --------- --------- -------- -------- Income from operations 20,079 13,046 55,444 25,978 OTHER INCOME (EXPENSE): Interest Expense (3,382) (4,467) (11,558) (11,572) Other, net (406) 223 (699) 461 --------- --------- -------- -------- Income before income taxes 16,291 8,802 43,187 14,867 PROVISION FOR INCOME TAXES 6,462 3,750 17,197 6,104 --------- --------- -------- -------- Net Income $ 9,829 $ 5,052 $ 25,990 $ 8,763 --------- --------- -------- -------- PREFERRED STOCK DIVIDENDS 418 264 946 478 --------- --------- -------- -------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 9,411 $ 4,788 $ 25,044 $ 8,285 ========= ========= ======== ======== Earnings per share: Basic $ 0.41 $ 0.24 $ 1.16 $ 0.43 ========= ========= ======== ======== Diluted $ 0.41 $ 0.24 $ 1.14 $ 0.42 ========= ========= ======== ======== CASH DIVIDENDS PER SHARE $ 0.035 $ 0.035 $ 0.105 $ 0.095 ========= ========= ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements. 2
5 WABASH NATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> Nine Months Ended September 30, ----------------------- 1998 1997 --------- --------- (Unaudited) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 25,990 $ 8,763 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation and amortization 12,606 13,986 Bad debt provision 614 424 Deferred income taxes 6,370 2,302 Equity in losses of unconsolidated affiliate 2,200 -- Change in operating assets and liabilities, excluding effects of the acquisitions-- Accounts receivable 4,548 (51,302) Inventories (31,983) (48,242) Prepaid expenses and other (575) 743 Accounts payable and accrued liabilities 31,969 59,713 Other, net (634) (1,147) --------- --------- Net cash provided by (used in) operating activities 51,105 (14,760) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (22,847) (16,696) Investment in equipment leased to others (9,619) (34,987) Investment in finance contracts (24,645) (19,343) Acquisitions, net of cash acquired, (Note 6) (9,515) (15,129) Investment in unconsolidated affiliate (1,965) -- Payments for RoadRailer technology -- (1,086) Proceeds from sale of leased equipment and finance contracts 11,119 58,778 Principal payments on finance contracts 5,495 3,897 Other, net 117 60 --------- --------- Net cash used in investing activities (51,860) (24,506) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from: Long-term debt -- 25,000 Long-term revolver 247,400 272,500 Common stock, net of expenses 87,484 742 Payments: Long term debt (28,280) (2,956) Long-term revolver (292,000) (248,500) Common stock dividends (2,201) (1,733) Preferred stock dividends (792) (437) Net cash provided by --------- --------- financing activities 11,611 44,616 --------- --------- NET INCREASE IN CASH 10,856 5,350 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,647 5,514 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,503 $ 10,864 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 3
6 WABASH NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, Unaudited) NOTE 1. GENERAL The consolidated financial statements included herein have been prepared by Wabash National Corporation and subsidiaries (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the financial statements and the notes thereto included in the Company's 1997 Annual Report on Form 10-K. In the opinion of the registrant, the accompanying financial statements contain all material adjustments (consisting only of normal recurring adjustments), necessary to present fairly the consolidated financial position of the Company at September 30, 1998 and December 31, 1997 and its results of operations for the three and nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month period ended September 30, 1998 and 1997. NOTE 2. INTANGIBLE ASSETS Intangible assets, net of accumulated amortization of $7.2 million and $6.4 million at September 30, 1998 and December 31, 1997, respectively, relate primarily to goodwill and other intangible assets associated with the Cloud Acquisition (See Note 6 for further discussion) and RoadRailer acquisition costs. These amounts are being amortized on a straight-line basis over periods ranging from five to forty years. NOTE 3. INVENTORIES Inventories consisted of the following: <TABLE> <CAPTION> September 30, December 31, 1998 1997 ------------- ----------- (Unaudited) <S> <C> <C> Raw material and components $143,551 $ 75,629 Work in process 18,740 16,892 Finished goods 32,692 68,164 Aftermarket parts 27,096 25,386 Used trailers 37,668 25,288 -------- -------- $259,747 $211,359 ======== ======== </TABLE> 4
7 NOTE 4. EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards (SFAS No. 128, "Earnings Per Share") during 1997. SFAS No. 128 simplifies the computation of earnings per share (EPS) and requires the presentation of two amounts: basic and diluted EPS. As required, all prior period EPS data has been restated to conform with the provisions of this statement. A reconciliation of the numerators and denominators of the basic and diluted EPS computations, as required by SFAS No. 128, is presented below: <TABLE> <CAPTION> Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------- 1998 1997 1998 1997 -------- ------- -------- ------- <S> <C> <C> <C> <C> BASIC: Net income 9,829 5,052 25,990 8,763 Preferred stock dividends (418) (264) (946) (478) ------- ------- ------- ------- Net income, basic 9,411 4,788 25,044 8,285 ------- ------- ------- ------- Common shares, basic 22,962 19,939 21,662 19,463 ------- ------- ------- ------- BASIC EPS $ 0.41 $ 0.24 $ 1.16 $ 0.43 ======= ======= ======= ======= DILUTED: Net income, basic 9,411 4,788 25,044 8,285 Effect of dilutive securities: Convertible preferred stock 264 -- 792 -- ------- ------- ------- ------- Net income, assuming full dilution 9,675 4,788 25,836 8,285 ------- ------- ------- ------- Common shares, basic 22,962 19,939 21,662 19,463 Effect of dilutive securities: Convertible preferred stock 823 -- 823 -- Stock Options 26 126 98 54 ------- ------- ------- ------- Common shares, assuming full dilution 23,811 20,065 22,583 19,517 ------- ------- ------- ------- DILUTED EPS $ 0.41 $ 0.24 $ 1.14 $ 0.42 ======= ======= ======= ======= </TABLE> NOTE 5. LEASING OPERATIONS Wabash National Finance Corporation (the Finance Company), a wholly-owned subsidiary of the Company, provides leasing and finance programs to customers for new and used trailers. The Finance Company's lease revenues, excluding revenue from the sale of leased trailers of $2.4 million and $3.5 million, were $16.4 million and $16.1 million during the nine months ended September 30, 1998 and 1997 respectively. Income before income taxes was $2.0 million and $0.6 million during the nine months ended September 30, 1998 and 1997 respectively. 5
8 At September 30, 1998 and December 31, 1997 respectively, the Finance Company had $66.5 million and $54.9 million in long-term debt, comprised of $59.0 million and $39.0 million in intercompany debt to the Company and $7.5 and $15.9 million in debt due to third parties, of which $6.9 million and $8.4 was guaranteed by the Company. Also at September 30, 1998 and December 31, 1997 respectively, the Finance Company had total assets of $117.4 million and $107.1 million, consisting primarily of Equipment Held for Lease of $38.4 million and $44.0 million and Finance Contracts, including current portion, of $75.2 million and $59.2 million. During March 1998, the Finance Company sold approximately $8.8 million of its equipment leased to others to a large financial institution. Simultaneously, the Finance Company leased the equipment back and entered into a sublease arrangement with a customer. This lease is accounted for as an operating lease. The lease with the financial institution provides for approximately $2.6 million of end of lease term residual value commitments. NOTE 6. ACQUISITIONS On July 14, 1998, the Company acquired Cloud Corporation and Cloud Oak Flooring Company, Inc. (the Cloud Acquisition) in a merger and stock purchase, respectively, manufacturers of laminated hardwood floors for the truck body and trailer industry. For financial statement purposes the Cloud Acquisition was accounted for as a purchase and, accordingly, Cloud's combined results are included in the consolidated financial statements since the date of acquisition. The aggregate consideration for this transaction included $9.7 million in cash, $13.2 million in convertible preferred stock and the assumption of $32.1 million in liabilities. The excess of the purchase price over the underlying assets acquired is approximately $21.9 million. This amount has been allocated to goodwill and other intangible assets based upon a preliminary estimate of fair values. These amounts are being amortized on a straight-line basis over periods of five to forty years. The values assigned to the acquired assets and liabilities could change following the resolution of certain pre-acquisition contingencies related to environmental laws and ERISA. While these matters are at an early stage and it is not possible to predict the outcome with certainty, based on currently available information the Company does not believe the outcome of these matters will be material to the consolidated results of operations or financial condition of the Company. The Company is indemnified by the sellers of the acquired companies and the Company believes that these contingencies would be covered by the indemnification provisions of those agreements. On April 16, 1997, the Company acquired substantially all of the remaining assets of Fruehauf Trailer Corporation (Fruehauf), a manufacturer and marketer of truck trailers and related parts. The following unaudited pro forma consolidated results of operations of the Company and the acquired assets of Fruehauf assume the acquisition occurred as of January 1, 1997 (in millions, except per share data): 6
9 <TABLE> <CAPTION> Nine Months Ended Sept.30, 1998 1997 - - ------------------------------------------------------------------------------- <S> <C> <C> Net Sales $ 965.5 $ 607.6 Net Income $ 26.0 $ 8.3 Net Income per common share $ 1.14 $ 0.42 - - ------------------------------------------------------------------------------- </TABLE> In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1997 or of future results of the combined operations under the ownership and management of the Company. NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION <TABLE> <CAPTION> Nine Months Ended September 30, (In thousands) 1998 1997 <S> <C> <C> - - -------------------------------------------------------------------------------- Cash paid during the period for: Interest $ 10,752 $ 13,248 Income taxes 10,464 845 - - -------------------------------------------------------------------------------- Noncash investing and financing activities: Preferred stock issued for acquisitions 13,153 17,600 Common stock issued for acquisition -- 17,750 - - -------------------------------------------------------------------------------- Acquisitions, net of cash acquired: Accounts receivable, net $ 4,952 $ 13,955 Inventory, net 16,405 20,163 Prepaid expenses and other 743 4,072 Property, plant and equipment 8,334 25,269 Goodwill and other intangibles 21,891 -- Deferred income taxes 1,265 -- Other Assets 1,203 -- Current liabilities (25,783) (8,980) Non-current liabilities (6,342) (4,000) Stock issued (13,153) (35,350) - - -------------------------------------------------------------------------------- Net cash paid for acquisitions $ (9,515) $(15,129) - - -------------------------------------------------------------------------------- </TABLE> NOTE 8. ACCOUNTS RECEIVABLE SECURITIZATION On March 31, 1998, Wabash National Corporation replaced its existing $40 million receivable sale and servicing agreement with a new three-year trade receivable securitization facility. The new facility allows the Company to sell, without recourse on an ongoing basis, all of their accounts receivable to Wabash Funding Corporation (Funding Corp.), a wholly-owned unconsolidated subsidiary of the Company. Simultaneously, the Funding Corp. has sold and, subject to certain conditions, may from time to time sell an undivided interest in those receivables to a large financial institution. At September 30, 1998, $83 million of proceeds have been received under the new facility. No gain or loss was recorded during the first quarter of 1998 as a result of this transaction. Amounts reflected as Accounts Receivable in the accompanying Condensed Consolidated Balance Sheets as of September 30, 1998 include an interest in receivables sold to the Funding Corp. in excess of proceeds received. 7
10 Proceeds from the sale were used to reduce outstanding borrowings under the Company's Revolving Credit Agreement and are reflected as operating cash flows in the accompanying Condensed Consolidated Statement of Cash Flows. Costs associated with this facility are classified as Selling, General and Administrative Expenses in the consolidated statement of income. In order to operate this facility on an on-going basis, the Funding Corp. is required to meet certain covenants primarily related to the performance of the accounts receivable portfolio. Servicing responsibility for these receivables resides with the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS NOTE: This discussion contains forward-looking statements. These statements should be viewed in connection with the risk factors disclosed in the Company's Registration Statement on Form S-3 (SEC File No. 333-48589). Net Sales Net sales for the three month period ended September 30, 1998 increased $87.7 million or 35.6% compared to the same period in 1997 and were $387.6 million or 67.1% higher for the nine month period ended September 30, 1998 compared to the same period in 1997. The increase in net sales for the three and nine month periods were primarily attributable to an increase in new trailer sales of $73.0 million and $317.4 million, respectively, an increase in used trailer sales of $9.1 million and $29.3 million, respectively, and an increase in aftermarket parts and service revenues of $5.7 million and $40.9 million, respectively. The increases in new trailer sales of $73.0 million and $317.4 million for the three and nine month periods, respectively, were caused by a 24.3% and 48.8% increase in units sold, along with an increase of 10.0% and 12.3% in the average sales price per unit during the same periods. These favorable conditions are the result of continued sales growth at the Company's retail outlets, increased production capabilities, increased production of the Company's composite trailer and a continued strong demand for the Company's products. The increase in used trailer sales and aftermarket parts and service revenues reflects increased volume through the Company's existing parts distribution business as well as the 31 retail outlets acquired. The Company plans to expand its retail distribution network from its current level of 31 retail outlets to approximately 50 retail outlets within 24 months. 8
11 Gross Profit Gross profit as a percentage of net sales totaled 9.2% for the three month period ended September 30, 1998 compared to 8.6% for the same period in 1997. The gross profit margin for the nine-month period ended September 30, 1998 as a percentage of sales was 8.9% versus 7.6% for the same period in 1997. The increase in the gross profit margins reflects the impact of higher margin sales of new and used trailers and aftermarket parts and service revenues generated from the retail branch outlets acquired in 1997. In addition, the improvement in product mix resulting from the completion of the Company's composite material facility in the third quarter of 1997 has allowed the Company to increase its production rates, thereby improving production efficiencies at the Company's manufacturing facilities. Income From Operations Income from operations for the three and nine month periods ended September 30, 1998 as a percentage of net sales was 6.0% and 5.7% compared to 5.3% and 4.5% for the same periods in 1997. Income from operations in 1998 was impacted primarily by the increase in the gross profit margins previously discussed offset somewhat by increased selling, general and administrative expenses. The increase in selling, general and administrative expenses primarily reflects higher levels of expense associated with the retail outlets acquired in April, 1997 as well as costs associated with the Company's new accounts receivable securitization facility. Interest Expense Interest expense for the three and nine month periods ended September 30, 1998 totaled $3.4 million and $11.6 million compared to $4.5 million and $11.6 million for the same periods in 1997. The decrease in interest expense during the third quarter is primarily due to the use of proceeds from the Company's new trade receivable securitization facility which closed on March 31, 1998 coupled with proceeds from the Company's April, 1998 common stock offering to reduce the Company's long-term debt. Taxes The provision for income taxes for the three and nine month periods ended September 30, 1998 of $6.5 million and $17.2 million, respectively, represents 39.7% and 39.8% of pre-tax income for the periods compared to the provision of $3.8 million and $6.1 million, or 42.6% and 41.1% of pretax income, respectively, for the same periods in 1997. The effective tax rates are higher than the Federal statutory rates of 35% due primarily to state income taxes. 9
12 LIQUIDITY AND CAPITAL RESOURCES Operating Activities For the nine months ended September 30, 1998, cash provided by operating activities amounted to $51.1 million primarily due to net income, the add-back of non-cash charges for depreciation and amortization expense, and as discussed in more detail below, the proceeds from the sale of accounts receivable. Increased raw material inventory levels resulting from higher new trailer production was offset by related increases in accounts payable and accrued liabilities. Investing Activities For the nine months ended September 30, 1998, cash used in investing activities amounted to $51.9 million primarily due to the expansion of the Finance Company's leasing operation ($34.3 million), capital expenditures ($22.8 million) and the Cloud Acquisition ($9.5 million) offset somewhat by the sale of leased equipment and finance contracts ($11.1 million). Capital expenditures during the period were associated with increasing the Company's manufacturing operations in Lafayette, Indiana, the development of a new state of the art painting and coating system at its trailer manufacturing facility in Huntsville, Tennessee, the acquisition of a new consolidated parts center in Lafayette, increasing capacity and manufacturing productivity at its recently acquired flooring operation in Harrison, Arkansas and other operating purposes. The flooring operations were acquired in July 1998 through the merger of Cloud Corporation with a newly-formed subsidiary of Wabash and the acquisition of all of the outstanding stock of Cloud Oak Flooring. The acquisition agreements include customary representations and warranties by the sellers. Wabash is in the process of looking into certain pre-acquisition contingencies of the acquired companies relating to compliance with environmental laws and ERISA. While these matters are at an early stage and it is not possible to predict the outcome with certainty, based on currently available information the Company does not believe the outcome of these matters will be material to the consolidated results of operations or financial condition of the Company. The Company is indemnified by the sellers of the acquired companies and the Company believes that these contingencies would be covered by the indemnification provisions of those agreements. The Company continues to pursue its branch expansion strategy although no firm commitments have been entered into to date. The Company anticipates future capital expenditures related to its branch expansion strategy, the development of a new computer system in its retail network, the continuation of the capital projects previously discussed, and other activities to be $80-$100 million over the next 12 to 24 months. 10
13 During March, 1998, the Finance Company sold and leased back approximately $8.8 million of its Equipment Leased to Others with a large financial institution. Financing Activities For the nine months ended September 30, 1998, cash provided by financing activities amounted to $11.6 million primarily due to the issuance of common stock ($87.5 million), a net reduction in the Company's long-term revolver ($44.6 million) and a pay-down of long-term debt ($28.3 million) primarily associated with the Cloud Acquisition. On March 31, 1998, the Company replaced its existing $40 million receivable sale and servicing agreement with a new three-year trade receivable securitization facility. The new facility allows the Company to sell, without recourse on an ongoing basis, all of its accounts receivable to Wabash Funding Corporation (Funding Corp.), a wholly-owned unconsolidated subsidiary of the Company. Simultaneously, the Funding Corp. has sold and, subject to certain conditions, may from time to time sell an undivided interest in those receivables to a large financial institution. At September 30, 1998, $83 million of proceeds were received by the Company related to this new facility. Proceeds from the sale were used to reduce outstanding borrowings under the Company's Revolving Credit Agreement and are reflected as operating cash flows in the accompanying Consolidated Statement of Cash Flows. On April 28, 1998, the Company sold three million shares of its common stock in a registered public offering at a public-offering price of $30.75 per share, for net proceeds to the Company of $87.5 million. Other Other sources of funds for capital expenditures, continued expansion of businesses, dividends, principal repayments on debt, stock repurchase and working capital requirements are expected to be cash from operations, additional borrowings under the credit facilities and term borrowings and equity offerings. The Company believes that these funding sources will be adequate for its anticipated requirements. BACKLOG The Company's backlog of orders was approximately $906 million at September 30, 1998 and $832 million at December 31, 1997. The Company's backlog represents the amount of orders the Company believes to be firm. Such orders may be subject to extension, delay or cancellation under certain circumstances. 11
14 NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards (SFAS No. 128, "Earnings Per Share"), during 1997. SFAS No. 128 simplifies the computation of earnings per share (EPS) and requires the presentation of two new amounts, basic and diluted EPS. As required by SFAS No. 128, all prior period EPS data have been restated to conform with the provisions of this Statement. The adoption of Statement resulted in an immaterial difference in its computation of basic and dilutive EPS. The Company adopted SFAS No. 130, "Reporting Comprehensive Income", on January 1, 1998. SFAS No. 130 was effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for reporting and display of "comprehensive income" and its components. Comprehensive income is not reported in the accompanying Condensed Consolidated Financial Statements as the Company had no items of Other Comprehensive Income for the periods presented. In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" was issued. The statement must be adopted by the Company on December 31, 1998. Under provisions of this statement, the Company will be required to modify or expand the financial statement disclosures for operating segments, products and services, and geographic areas. Implementation of this disclosure standard will not affect the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (beginning of fiscal year 2000 for the Company). This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Management of the Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or statement of financial position. However, management anticipates that, due to its limited use of derivative instruments, the adoption of SFAS 133 will not have a significant effect on the Company's results of operations or its financial position. YEAR 2000 COMPLIANCE The Company continues to address the impact of the Year 2000 issue on its business. If not corrected certain computer applications may fail or create erroneous results at the year 2000. Specifically, with respect to the Company, this includes applications within information technology (IT) as well as non-IT equipment and machinery that may contain embedded date-sensitive microcontrollers or microchips. 12
15 Information Technology Systems The Company's assessment of all business critical IT hardware and software is 90-95% complete. It has been determined that many of the Company's applications and systems are already Year 2000 compliant, however, it will be necessary to modify or replace other applications and systems. During this assessment, it was determined that systems in place within the Company's retail and distribution network and certain of its manufacturing operations are not Year 2000 compliant. As a result, during 1998 and 1999, the Company will install new application systems within these areas which will be Year 2000 compliant. Other maintenance and project activities to be conducted in 1998 and 1999 have been initiated to bring the remaining hardware and software into compliance. If such projects are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company's plan for IT items includes the following phases and timeline: (1) Assessment and Strategy - completed in 1998 and (2) Design, Implementation, Testing and Validation - in process and scheduled to be substantially completed by mid 1999. Non-Information Technology Systems The Company's assessment of non-IT systems is approximately 75% complete. It is expected that the assessment and necessary replacements or upgrades will be substantially completed by the second quarter in 1999. External Parties The Company has contacted its vendors and suppliers regarding the status of their Year 2000 compliance. Many vendors have given a positive indication that they are or will be compliant. A follow-up inquiry is being conducted with the parties identified as business critical. This process is approximately 60% complete and is expected to be substantially completed by the first quarter in 1999. While compliance issues may be identified and addressed, this process may not fully ensure these parties' Year 2000 compliance. Disruptions in the operations of these parties could have an adverse financial and operational effect on the Company. The Company is currently in the process of formulating a contingency plan in the event business critical vendors do not achieve Year 2000 compliance and suffer substantial disruptions in their operations. This plan will include identifying alternate vendors to replace those that are positively identified to be Year 2000 non-compliant and also to identify back-up vendors for those whom represent compliance in the event that their systems fail. This plan is expected to be substantially completed by mid 1999. The Company has requested compliance information from its banks and it has been determined that they expect to be compliant by the second quarter in 1999. In the event that these banks are not compliant at that time, the Company will review the possibility of relocating its banking relationships to back-up financial institutions currently being identified. 13
16 Costs of Compliance The Company estimates the total costs to be incurred in installing new application systems in the retail and distribution network and certain manufacturing operations, along with costs associated with Year 2000 compliance to be between $4.0 to $5.0 million. Through September 30, 1998, the Company has spent approximately $0.5 million related to such activities. Management believes that, with modifications to existing software and conversions to new software and hardware, the Year 2000 issue is not likely to materially impact the Company's results of operations or financial position. The Company expects all of its internal business critical IT and non-IT systems to be Year 2000 compliant and therefore no contingency plan is in place in the event of a particular system not being Year 2000 compliant. Such a plan will be developed if it becomes clear that the Company is not going to achieve its scheduled compliance objectives. However, because most computer systems are interdependent by nature, there can be no assurance that the systems of other companies on which the Company's systems rely, will be timely converted and not have an adverse effect on the Company's systems. PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES Series C 5.5% Convertible Preferred Stock On July 14, 1998, the Company issued the following as part of the consideration paid in connection with its acquisition of substantially all of the assets of Cloud Corporation and Cloud Oak Flooring Company, Inc.: 131,530 shares of Series C 5.5% Cumulative Convertible Exchangeable Preferred Stock. This stock is convertible at any time at the option of the holder, at a conversion price of $35 per share, into up to 375,800 shares of Common Stock, subject to adjustment. The Preferred Stock is subject to mandatory conversion if the average trading price of the Common Stock for 20 consecutive trading days exceeds the conversion price, or if dividends on the Preferred Stock are in arrears for at least two full quarterly periods. These securities were sold pursuant to the exemption available under Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder as a transaction not involving a public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.5 Certificate of Designations of Series C 5.5% Convertible Preferred Stock 15.1 Report of Independent Public Accountants (b) Reports on Form 8-K: 1. Form 8-K dated October 19, 1998 reporting an amendment to the Shareholders Rights Agreement to eliminate those provisions that require that certain actions may only be taken by "Continuing Directors." 14
17 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. WABASH NATIONAL CORPORATION Date: November 16, 1998 By: /s/ Rick B. Davis ----------------- ------------------ Rick B. Davis Corporate Controller and Executive Officer 15