================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR[ ] TRANSITION REPORT PURSUANT TO 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 OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) (WABASH NATIONAL (R) LOGO) 1000 SAGAMORE PARKWAY SOUTH LAFAYETTE, INDIANA 47905 (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (765) 771-5300Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $.01 Par Value New York Stock Exchange Series A Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes X No . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Act). Yes X No . ----- ----- The aggregate market value of voting stock held by non-affiliates of theregistrant as of June 30, 2004 was $747,413,042 based upon the closing price ofthe Company's common stock as quoted on the New York Stock Exchange compositetape on such date. The number of shares outstanding of the registrant's Common Stock as ofFebruary 23, 2005 was 30,852,779. Part III of this Form 10-K incorporates by reference certain portions ofthe registrant's Proxy Statement for its Annual Meeting of Stockholders to befiled within 120 days after December 31, 2004.================================================================================ TABLE OF CONTENTS WABASH NATIONAL CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 PAGES ----- PART IItem 1 Business........................................................................ 3Item 2 Properties...................................................................... 10Item 3 Legal Proceedings............................................................... 10Item 4 Submission of Matters to a Vote of Security Holders............................. 11PART IIItem 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............................................... 11Item 6 Selected Financial Data......................................................... 11Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 12Item 7A Quantitative and Qualitative Disclosures about Market Risk...................... 23Item 7B Risk Factors.................................................................... 24Item 8 Financial Statements and Supplementary Data..................................... 28Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................... 52Item 9A Controls and Procedures......................................................... 52PART IIIItem 10 Directors and Executive Officers of the Registrant.............................. 54Item 11 Executive Compensation.......................................................... 55Item 12 Security Ownership of Certain Beneficial Owners and Management ................. 55Item 13 Certain Relationships and Related Transactions.................................. 55Item 14 Principal Accountant Fees and Services.......................................... 55PART IVItem 15 Exhibits and Financial Statement Schedules...................................... 55SIGNATURES ................................................................................ 57 2FORWARD LOOKING STATEMENTS This Report, including documents incorporated by reference, contains andincorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Actof 1934 (the "Exchange Act"). Forward-looking statements may include the words"may," "will," "estimate," "intend," "continue," "believe," "expect," "plan" or"anticipate" and other similar words. Our "forwarding-looking statements"include, but are not limited to, statements regarding: - our business plan; - our expected revenues, income or loss and capital expenditures; - plans for future operations; - financing needs, plans and liquidity; - our ability to achieve sustained profitability; - reliance on certain customers and corporate partnerships; - shortages of raw materials, availability of capital; - dependence on industry trends; - the outcome of any pending litigation; - export sales and new markets; - acceptance of new technology and products; - government regulation; and - assumptions relating to the foregoing. Although we believe that the expectations expressed in our forward-lookingstatements are reasonable, actual results could differ materially from thoseprojected or assumed in our forward-looking statements. Our future financialcondition and results of operations, as well as any forward-looking statements,are subject to change and are subject to inherent risks and uncertainties, suchas those disclosed in this Report. Each forward-looking statement contained inthis Report reflects our management's view only as of the date on which thatforward-looking statement was made. We are not obligated to updateforward-looking statements or publicly release the result of any revisions tothem to reflect events or circumstances after the date of this Report or toreflect the occurrence of unanticipated events. Currently known risk factors that could cause actual results to differmaterially from our expectations are described in the section of this Reportentitled "Risk Factors." We urge you to carefully review that section for a morecomplete discussion of the risks of an investment in the notes and our commonstock.PART IITEM 1--BUSINESS Wabash National Corporation ("Wabash," "Company," "us," "we" or "our") isone of North America's leaders in designing, manufacturing and marketingstandard and customized truck trailers and related transportation equipment.Founded in 1985 as a start-up, we grew to over $1.4 billion in sales in 1999,and had approximately $1.0 billion in sales in 2004. We believe our success hasbeen the result of our longstanding relationships with our core customers,innovative product development, broad product line, large distribution andservice network and corporate culture. Our management team is focused onbecoming the low-cost producer in the truck trailer industry through continuousimprovement and lean manufacturing initiatives. We seek to identify and produce proprietary products that offer added valueto customers with the potential to generate higher profit margins than those ofstandardized products. We believe that we have the engineering and manufacturing capability to produce these products efficiently. Our proprietary DuraPlate(R)composite truck trailer, which we introduced in 1996, has achieved widespreadacceptance by our customers. For the last three years, sales 3of our DuraPlate(R) trailers represented approximately 80% of our total trailersshipped. We are also a competitive producer of standardized products, and areseeking to become a low-cost producer within our industry. We expect to continuea program of product development and selective acquisitions of qualityproprietary products that further differentiate us from our competitors andincrease profit opportunities. We market our transportation equipment under the Wabash(R), DuraPlate(R),DuraPlateHD(R), FreightPro(R), Arcticlite(R) and RoadRailer(R) trademarksdirectly to customers, through independent dealers and through our factory-ownedretail branch network. Historically, our marketing effort focuses on ourlongstanding core customers that represent many of the largest companies in thetrucking industry. More recently, we have actively pursued the diversificationof our customer base focusing on approximately 1,250 carriers that we refer toas mid-market. These carriers operate fleets of between 250 to 7,500 trailers,which we estimate in total accounts for approximately one million trailers. Longstanding core customers include - Schneider National, Inc.; J.B. HuntTransport Services, Inc.; Swift Transportation Corporation; Werner Enterprises,Inc.; Heartland Express, Inc.; Crete Carrier Corporation; U.S. XpressEnterprises, Inc.; Knight Transportation, Inc.; Interstate Distributor Co.;Yellow Roadway Corporation.; Old Dominion Freight Lines, Inc.; SAIA MotorFreightlines, Inc.; and Vitran Express, Inc. Mid-market customers include - CR England, Inc.; Marten Transport, LTD; USALogistics; ESTES Express Line, Inc.; Covenant Transportation, Inc.; CeladonGroup, Inc.; Jacobson Companies, Inc.; Aurora LLC; Landair Transport, Inc.; XtraLease, Inc.; USF Corporation; and New Penn Motor Express, Inc. Our relationship with our core customers has been central to our growthsince inception. Our factory-owned retail branch network, which we acquired in1997, provides additional opportunities to distribute our products and alsooffers national service and support capabilities for our customers. The retailsale of new and used trailers, aftermarket parts and maintenance service throughour retail branch network generally provides enhanced margin opportunities.Additionally, we have a network of 25 independent dealers. Wabash was incorporated in Delaware in 1991 and is the successor by mergerto a Maryland corporation organized in 1985. Wabash operates in two segments:(1) manufacturing and (2) retail and distribution. Financial results by segment,including information about revenues from customers, measures of profit and lossand total assets, and financial information regarding geographic areas andexport sales are discussed in detail within Footnote 15, Segment Reporting, ofthe accompanying Consolidated Financial Statements. Additional informationconcerning Wabash can be found on our website at www.wabashnational.com. Wabashmakes its electronic filings with the SEC, including its annual reports on Form10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendmentsto these reports, available on its website free of charge as soon as practicableafter it files or furnishes them with the SEC. Information on the website is notpart of this Form 10-K.REPOSITIONING ACTIVITIES The year 2004 marks the second year of recovery for the industry after athree-year downturn. During this period, we repositioned Wabash by focusing onthe continuous improvement of our manufacturing and retail operations, expandingour customer base, introducing products that better address customers needs,exiting non-core operations and strengthening our capital structure. We believeWabash is positioned to fully participate in the market growth that analysts arepredicting will continue into 2005 and beyond. STRATEGY We are committed to an operating strategy that seeks to deliverprofitability throughout industry cycles by executing on the core elements ofour strategic plan: - CORPORATE FOCUS. We intend to continue our transition from an organization focused on unit volume and revenue to one focused on earnings and cash flow. - PRODUCT DIFFERENTIATION. We intend to continue to provide differentiated products that generate enhanced profit margins. 4 - CONTINUOUS IMPROVEMENTS. We are focused on continuing to reduce our cost structure by adhering to continuous improvement and lean manufacturing initiatives. - CORE CUSTOMERS. We intend to maintain and enhance our long-standing customer partnerships and create new revenue opportunities by offering tailored transportation solutions. - CUSTOMER DIVERSIFICATION. We intend to continue to expand and diversify our customer base by focusing on middle market carriers with trailer fleets ranging from 250 to 7,500 units. - TRAILER PERFORMANCE IMPROVEMENTS. We are working on the development of a DuraPlate(R) trailer that minimizes maintenance for 10 years. - STRENGTHEN BALANCE SHEET. We intend to continue to enhance financial flexibility enabling us to capitalize on future market opportunities.INDUSTRY AND COMPETITION Trucking in the United States, according to the American TruckingAssociation (ATA), was estimated to be a $702 billion industry in 2003 (thelatest date such information is available), leading all other modes oftransportation. ATA estimates that approximately 69% of all freight tonnage iscarried by truck at some point during its shipment, accounting for approximately87% of freight industry revenues. Trailer demand is a direct function of theamount of freight to be transported. As the economy improves, it is forecastedthat truck carriers will need to expand their fleets, which typically results inincreased trailer orders. According to ACT Research Company, LLC (ACT), thereare approximately 2.8 million trailers in use today and the trailer replacementdemand is estimated at between 200,000 and 225,000 trailers per year. In general, the trucking industry grew throughout the 1990's and peaked in1999. A number of factors, including an economic downturn, fluctuations in fuelprices, declining asset values, limited capital, record trucking companyfailures and industry consolidation led to a historic reduction of 54% intrailer purchases from 1999 to 2002. In early 2003, the trailer industry startedseeing signs of gradual improvement. The year 2003 ended with approximately174,000 units built by the industry, a 24% improvement over 2002. The year 2004continued the upturn in the trailer market, with approximately 229,000 trailerunits built in the year, an improvement of 32% over 2003. Most truckingcompanies experienced very strong financial performances in 2004, as a capacityconstrained freight environment allowed trucking companies to raise freightrates, in-turn improving profitability. New truck emission regulations are to take effect in 2007, resulting incleaner, yet less fuel-efficient and costlier engines. As a consequence, manytrucking firms are accelerating purchases of tractors prior to the effectivedate of the regulation, significantly reducing the historical trailer-to-tractorratio of 1.5 to 1, to less than 1 to 1 during 2004, according to ACT. We believethat a return to historical averages could result in a significant increaseddemand in trailers. In January 2004, new regulations reducing driver hours (hours of service) for property-carrying commercial motor vehicles becameeffective. As a result of Court intervention, on September 30, 2004, PresidentBush signed the Surface Transportation Extension Act of 2004, allowing theseregulations to remain in effect until the earlier of a new regulation thatresolves Court-raised issues or September 30, 2005. Based upon the currentstatus of the regulation, it would be premature to attempt to determine theultimate resolution and the effect of the regulations on our industry. Wabash, Great Dane and Utility are generally viewed as the top threetrailer manufacturers and have accounted for greater than 50% of new trailermarket share in recent years. During the severe industry downturn in 2001 and2002, a number of trailer manufacturers went out of business, resulting ingreater industry consolidation. Despite market concentration, price competitionis fierce and differentiation is primarily through superior products, customerrelationships, service availability and cost. 5 The table below sets forth new trailer production for Wabash, its largestcompetitors and for the trailer industry as a whole within North America. Thedata is for all segments of the market including vans, dumps, flats, trucks,etc. Since 2002, with the exception of intermodal containers, we have mostlyparticipated in the van segment of the market. The van production has grown froma low of approximately 102,000 units in 2002 to approximately 171,000 units in2004, an improvement of 68%. During this period, we have seen our market sharegrow from approximately 26% to 28%. 2004 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- ------- WABASH(1) 48,000 36,000 27,000 32,000 66,000 70,000Great Dane 55,000 41,000 33,000(2) 22,000 47,000 58,000Utility 31,000 24,000 18,000 16,000 29,000 31,000Stoughton 15,000 9,900 10,000 6,000 15,000 15,000Other principal producers 42,000 34,000 28,000 32,000 63,000 68,000Total Industry 229,000 174,000(3) 140,000 140,000 271,000 306,000(1) Does not include approximately 1,500, 1,300 and 6,000 intermodal containers in 2004, 2003 and 2002, respectively.(2) Data revised by publisher in 2004.(3) Data revised by publisher in 2005. Sources: Individual manufacturer information, some of which is estimated,provided by Trailer Body Builders Magazine. Industry totals provided by A.C.T.Research Company, L.L.C.COMPETITIVE STRENGTHS We believe our core competitive strengths include: - LONG TERM CORE CUSTOMER RELATIONSHIPS - We are the exclusive provider of trailers to a significant number of top tier trucking companies, generating a revenue base that has helped to sustain us as one of the market leaders. - INNOVATIVE PRODUCT OFFERINGS - Our DuraPlate(R) proprietary technology provides what we believe to be a superior trailer to our customers and commands premium pricing. A DuraPlate(R) trailer is a composite plate trailer constructed with material containing a high density polyethylene core bonded between a high-strength steel skin. We believe that the competitive advantages of our DuraPlate(R) trailers over standard trailers include the following: - operate three to five years longer; - less costly to maintain; and - higher trade-in values. We have also successfully introduced innovations in our refrigerated trailers and other product lines. For example, we introduced the DuraplateHD(R) trailer and the FreightPro(R) sheet and post trailer in 2003 and wide-bodied Duraplate(R) intermodal containers in 2004. - SIGNIFICANT MARKET SHARE AND BRAND RECOGNITION - We have been one of the two largest manufacturers of trailers in North America in each of the last 10 years, with one of the most widely recognized brands in the industry. We believe we are currently the largest producer of van trailers in North America. - COMMITTED FOCUS ON OPERATIONAL EXCELLENCE - Safety, quality, on-time delivery, productivity and cost reduction are the core elements of our program of continuous improvement. We received the 2003 U.S. Senate Productivity Award for the State of Indiana for the significant cost savings and productivity we achieved in the prior two years. - TECHNOLOGY - We are recognized by the trucking industry as being a leader in developing technology to reduce trailer maintenance. - CORPORATE CULTURE - We benefit from a value driven management team and dedicated union-free workforce. 6 - EXTENSIVE DISTRIBUTION NETWORK - Twenty factory-owned retail branch locations extend our sales network throughout North America, diversifying our factory direct sales and supporting our national service contracts.REGULATION Truck trailer length, height, width, maximum weight capacity and otherspecifications are regulated by individual states. The federal government alsoregulates certain safety features incorporated in the design of truck trailers,including regulations that require anti-lock braking systems (ABS) and thatdefine rear impact guard standards. Manufacturing operations are subject toenvironmental laws enforced by federal, state and local agencies (See"Environmental Matters").PRODUCTS Since our inception, we have expanded our product offerings from a singletruck trailer product to a broad line of trailer related transportationequipment. Our manufacturing segment specializes in the development ofinnovative proprietary products for our key markets. Manufacturing segment salesrepresented approximately 77%, 70%, and 60% of consolidated net sales in 2004,2003 and 2002, respectively. Our current transportation equipment productsinclude the following: - DuraPlate(R) Trailers. DuraPlate(R) trailers utilize a proprietary technology that consists of a composite plate wall for increased durability and greater strength. Our DuraPlate(R) trailers include our recently introduced DuraPlateHD(R), a heavy duty version of our regular DuraPlate(R) trailers. - DuraPlate(R) Domestic Containers. DuraPlate(R) domestic containers utilize the same proprietary technology as our DuraPlate(R) trailers and consist of stackable containers, carried either on flat cars or stacked two-high on special "Double-Stack" railcars. - Smooth Aluminum Trailers. Smooth aluminum trailers, commonly known as "sheet and post" trailers, are the commodity trailer product purchased by the trucking industry. In 2003, we commercialized our new FreightPro(R) trailer to increase our focus on sheet and post trailers, which is the largest segment of the trailer market. - Refrigerated Trailers. Refrigerated trailers have insulating foam in the sidewalls and roof, which improves both the insulation capabilities and durability of the trailers. Our refrigerated trailers use our proprietary SolarGuard(R) technology, which we believe enables customers to achieve lower costs through reduced fuel consumption and reduced operating hours. - RoadRailer(R) Equipment. The RoadRailer(R) intermodal system is a patented bimodal technology consisting of a truck trailer and detachable rail "bogie" which permits a trailer to run both over the highway and directly on railroad lines. - Other. Our other transportation equipment includes container chassis and converter dollies. Our retail and distribution segment focuses on the sale of new and usedtrailers and providing parts and maintenance services as described below. Partsand service and used trailer sales as a percentage of total sales were impactedby increases in new trailer sales in 2004. - New trailers produced by the manufacturing segment. Additionally, we sell specialty trailers including tank trailers, dump trailers and platform trailers produced by third parties, which are purchased in smaller quantities for local or regional transportation needs. The sale of new transportation equipment through the retail branch network represented approximately 12.2%, 9.4% and 9.6% of net sales during 2004, 2003 and 2002, respectively. - Replacement parts and accessories and maintenance service both for our own and competitors' trailers and related equipment. Sales of these products and service represented approximately 5.0%, 10.8% and 14.4% of net sales during 2004, 2003 and 2002, respectively. 7 - Used transportation equipment primarily taken in trade from our customers upon the sale of new trailers. The ability to remarket used equipment promotes new sales by permitting trade-in allowances and offering customers an outlet for the disposal of used equipment. The sale of used trailers represented approximately 4.8%, 7.3% and 11.3% of net sales during 2004, 2003 and 2002, respectively.CUSTOMERS Our customer base has historically included many of the nation's largesttruckload common carriers, leasing companies, private fleet carriers,less-than-truckload (LTL) common carriers, and package carriers. Since 2002, wehave been successful in diversifying our customers from 61% of units soldattributable to large core customers to 67% to non-core customers in 2004. Thishas been accomplished while maintaining these core customer relationships. Ourfive largest customers accounted for 23%, 27% and 30% of our aggregate net salesin 2004, 2003 and 2002, respectively. In 2004, no single customer represented at least 10% of our sales. In 2003,Schneider National, Inc., accounted for approximately 14% of net sales and in2002, J.B. Hunt Transportation Services, Inc. accounted for approximately 11% ofnet sales. International sales, primarily to Canadian customers, accounted forless than 10% of net sales for each of the last three years. We have establishedrelationships as a supplier to many large customers in the transportationindustry, including the following: - Truckload Carriers: Schneider National, Inc.; J.B. Hunt Transport Services, Inc.; Swift Transportation Corporation; Werner Enterprises, Inc.; Heartland Express, Inc.; Crete Carrier Corporation; U.S. Xpress Enterprises, Inc.; Knight Transportation, Inc.; and Interstate Distributor Co. - Leasing Companies: Transport International Pool, Inc.; Penske Truck Leasing Co. LP; Wells Fargo Equipment Finance, Inc.; Xtra Lease, Inc.; Transport Services, Inc.; and Aurora LLC. - Private Fleets: Safeway, Inc.; The Home Depot, Inc.; The Kroger Co.; and Sysco Corporation. - Less-Than-Truckload Carriers: Yellow Roadway, Inc.; Old Dominion Freight Lines, Inc.; SAIA Motor Freightlines, Inc.; FedEx Corp; and Vitran Express, Inc.MARKETING AND DISTRIBUTION We market and distribute our products through the following channels: - factory direct accounts; - our factory-owned distribution network; and - independent dealerships. Factory direct accounts are generally large fleets, over 7,500 trailersthat are high volume purchasers. Historically, we have focused on the factorydirect market where customers are highly aware of the life-cycle costs oftrailer equipment and, therefore, are best equipped to appreciate the design andvalue-added features of our products. In 2003, we launched sales and marketinginitiatives targeted at 1,250 mid-size fleets (operations with between 250 and7,500 trailers) of the industry. Our factory-owned distribution network generates retail sales of trailersto smaller fleets and independent operators located in geographic regions whereour branches are located. This branch network enables us to provide maintenanceand other services to customers. The branch network and our Used Trailer Centersprovide an outlet for used trailers taken in trade upon the sale of newtrailers, which is a common practice with fleet customers. We also sell our products through a nationwide network of over 25independent dealerships. The dealers primarily serve mid-market and smallersized carriers and private fleets in the geographic region where the dealer islocated and on occasion may sell to large fleets. The dealers may also performservice work for many of their customers. 8RAW MATERIALS We utilize a variety of raw materials and components including steel,polyethylene, aluminum, lumber, tires and suspensions, which we purchase from alimited number of suppliers. Significant price fluctuations or shortages in rawmaterials or finished components may adversely affect our results of operations.In 2004 and for the foreseeable future, we expect that the raw materials used inthe greatest quantity will be the steel, aluminum, polyethylene and wood used inour trailers. Our component suppliers have advised us that they have adequatecapacity to meet our current and expected demands in 2005. Price increases forprincipal raw materials and components, aluminum, steel, plastic and timber,began during 2003, continued in 2004 and are expected to continue into 2005. OurHarrison, Arkansas laminated hardwood floor facility provides the majority ofour requirements for trailer floors.BACKLOG Orders that have been confirmed by the customer in writing and can beproduced during the next 18 months are included in our backlog. Orders thatcomprise backlog may be subject to changes in quantities, delivery,specifications and terms. Our backlog of orders was approximately $280 millionand $200 million at December 31, 2004 and 2003, respectively. We expect tocomplete the majority of our backlog orders within the next 12 months.PATENTS AND INTELLECTUAL PROPERTY Wabash holds or has applied for 63 patents in the United States on variouscomponents and techniques utilized in our manufacture of truck trailers. Inaddition, we hold or have applied for 44 patents in two foreign countries. Ourpatents include intellectual property related to the manufacture of trailersusing our proprietary DuraPlate(R) product, which we believe offers us asignificant competitive advantage. Wabash also holds or has applied for 31 trademarks in the United States, aswell as 13 trademarks in foreign countries. These trademarks include theWabash(R) and Wabash National(R) brand names as well as trademarks associatedwith our proprietary products such as the DuraPlate(R) trailer and theRoadRailer(R) trailer.RESEARCH AND DEVELOPMENT Research and development expenses are charged to earnings as incurred andwere $2.6 million, $2.1 million and $2.0 million in 2004, 2003 and 2002,respectively.ENVIRONMENTAL MATTERS Our facilities are subject to various environmental laws and regulations,including those relating to air emissions, wastewater discharges, the handlingand disposal of solid and hazardous wastes, and occupational safety and health.Our operations and facilities have been and in the future may become the subjectof enforcement actions or proceedings for non-compliance with such laws or forremediation of company-related releases of substances into the environment.Resolution of such matters with regulators can result in commitments tocompliance abatement or remediation programs and in some cases the payment ofpenalties. (See Item 3 "Legal Proceedings.") We believe that our facilities are in substantial compliance withapplicable environmental laws and regulations. Our facilities have incurred, andwill continue to incur, capital and operating expenditures and other costs incomplying with these laws and regulations in both the United States and abroad.However, we currently do not anticipate that the future costs of environmentalcompliance will have a material adverse effect on our business, financialcondition or results of operations.EMPLOYEES As of December 31, 2004 and 2003, we had approximately 3,300 full-timeassociates. No full-time associates were under a labor union contract as ofDecember 31, 2004. We place a strong emphasis on employee relations througheducational programs and quality improvement teams. We believe our employeerelations are good. Additionally, we had temporary employees of approximately 700 and approximately 500 at December 31, 2004 and 2003, respectively. 9ITEM 2--PROPERTIESMANUFACTURING FACILITIES We own and operate two trailer manufacturing facilities in Lafayette,Indiana and a trailer floor manufacturing facility, 0.5 million sq. ft., inHarrison, Arkansas. Our main Lafayette facility, 1.2 million sq. ft., housestruck trailer and composite material production, tool and die operations, research laboratories, management offices and headquarters. The second Lafayettefacility is 0.6 million sq. ft. We have the capacity to produce approximately75,000 trailers annually on a three-shift, five-day work week schedule. We closed a trailer manufacturing plant located in Ft. Madison, Iowa(255,000 sq. ft.) during 2001, and a flooring operation in Sheridan, Arkansas(117,000 sq. ft.) during 2000. These properties are held for sale and areclassified in Prepaid Expenses and Other in the accompanying ConsolidatedBalance Sheets.RETAIL AND DISTRIBUTION FACILITIES Retail and distribution facilities include 10 sales and service branchesand 10 locations that sell new and used trailers (seven of which are leased).Each sales and service branch consists of an office, parts warehouse and servicespace, and ranges in size from 20,000 to 50,000 square feet per facility.Thirteen branches are located in nine states and seven branches are located insix Canadian provinces. During the fourth quarter of 2004, we committed to a plan to dispose ofcertain retail and distribution facilities. As of December 31, 2004, sixfacilities are held for sale and included in Prepaid Expenses and Other in theaccompanying Consolidated Balance Sheets. We own a 0.3 million sq. ft. warehouse facility in Lafayette, Indiana. Wabash owned properties are subject to security interests held by our banklenders.ITEM 3--LEGAL PROCEEDINGS There are certain lawsuits and claims pending against Wabash that arose inthe normal course of business. None of these claims are expected to have amaterial adverse effect on our financial position or its results of operations. Brazil Joint Venture In March 2001, Bernard Krone Industria e Comercio de Maquinas AgricolasLtda. ("BK") filed suit against Wabash in the Fourth Civil Court of Curitiba inthe State of Parana, Brazil. This action seeks recovery of damages plus pain andsuffering. Because of the bankruptcy of BK, this proceeding is now pendingbefore the Second Civil Court of Bankruptcies and Creditors Reorganization ofCuritiba, State of Parana (No. 232/99). This case grows out of a joint venture agreement between BK and Wabashrelated to marketing the RoadRailer(R) trailer in Brazil and other areas ofSouth America. When BK was placed into the Brazilian equivalent of bankruptcylate in 2000, the joint venture was dissolved. BK subsequently filed its lawsuitagainst the Company alleging that it was forced to terminate business with othercompanies because of exclusivity and non-compete clauses purportedly found inthe joint venture agreement. BK asserts damages of approximately $8.4 million. We answered the complaint in May 2001, denying any wrongdoing. We believethat the claims asserted by BK are without merit and we intend to defend ourposition. We believe that the resolution of this lawsuit will not have amaterial adverse effect on our financial position, liquidity or future resultsof operations; however, at this stage of the proceeding, no assurance can begiven as to the ultimate outcome of the case. Environmental In September 2003, Wabash was noticed as a potentially responsible party(PRP) by the United States Environmental Protection Agency pertaining to theMotorola 52nd Street (Phoenix, Arizona) Superfund Site pursuant to theComprehensive Environmental Response, Compensation and Liability Act. PRPsinclude current and former 10owners and operators of facilities at which hazardous substances were disposedof. EPA's allegation that we were a PRP arises out of the operation of a formerbranch facility located approximately five miles from the original site, whichwe acquired and subsequently disposed of. According to the notice, the sitecurrently encompasses an area of groundwater contaminated by volatile organiccompounds seven miles long and one mile wide. The site was placed on theNational Priorities List in 1989. Motorola has been operating an interimgroundwater containment remedy since 2001. Wabash does not expect that theseproceedings will have a material adverse effect on our financial condition orresults of operations. In connection with a federal environmental investigation into our formerHuntsville, Tennessee manufacturing facility, we paid a $0.4 million finerelated to two misdemeanor violations of the Clean Water Act, and entered into acompliance agreement with the United States Environmental Protection Agency(EPA), which was finalized in November 2004. We do not believe that the enteringinto of the compliance agreement will have a material adverse impact on ourresults or operations.ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None to report.PART IIITEM 5--MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is traded on the New York Stock Exchange (tickersymbol: WNC). The number of record holders of the Company's common stock atFebruary 23, 2005 was 949. On February 24, 2005, the Company's board of directors declared a quarterlydividend of $0.045 per share to be paid on April 4, 2005 to holders of record onMarch 17, 2005. The Company last paid dividends on its common shares in thethird quarter of 2001. The Company's asset-based loan agreements limit thepayment of cash dividends to up to $10 million per year. Payments of cashdividends depend on future earnings, capital availability and financialcondition. High and low stock prices for the last two years were: High Low ------ ------ 2003 First Quarter $ 9.12 $ 4.95 Second Quarter $15.11 $ 6.08 Third Quarter $19.75 $13.78 Fourth Quarter $30.39 $15.972004 First Quarter $30.73 $22.16 Second Quarter $29.53 $22.00 Third Quarter $30.91 $24.90 Fourth Quarter $28.55 $21.82ITEM 6--SELECTED FINANCIAL DATA The following selected consolidated financial data with respect to theCompany for each of the five years in the period ended December 31, 2004, havebeen derived from the Company's consolidated financial statements. The followinginformation should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidatedfinancial statements and notes thereto included elsewhere herein. 11 Years Ended December 31, --------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- -------- -------- --------- ---------- (Dollar amounts in thousands, except per share data) STATEMENT OF OPERATIONS DATA:Net sales $1,041,096 $887,940 $819,568 $ 863,392 $1,332,172Cost of sales 915,310 806,963 773,756 970,066 1,213,550Loss on asset impairment -- 28,500 2,000 10,500 -- ---------- -------- -------- --------- ---------- Gross profit (loss) 125,786 52,477 43,812 (117,174) 118,622Selling, general and administrative expenses 56,577 61,499 80,759 84,364 58,529Restructuring charge -- -- 1,813 37,864 36,338 ---------- -------- -------- --------- ---------- Income (loss) from operations 69,209 (9,022) (38,760) (239,402) 23,755Interest expense (10,809) (31,184) (34,945) (23,520) (26,800)Foreign exchange gains and losses, net 463 5,291 5 (1,706) --Equity in losses of unconsolidated affiliate -- -- -- (7,668) (3,050)Restructuring charges -- -- -- (1,590) (5,832)Loss on debt extinguishment (607) (19,840) (1,314) -- --Other, net 749 (2,472) 3,546 (1,139) 877 ---------- -------- -------- --------- ---------- Income (loss) before income taxes 59,005 (57,227) (71,468) (275,025) (11,050)Income tax expense (benefit) 600 -- (15,278) (42,857) (4,314) ---------- -------- -------- --------- ---------- Net income (loss) $ 58,405 $(57,227) $(56,190) $(232,168) $ (6,736) ========== ======== ======== ========= ==========Basic earnings (loss) per common share $ 2.10 $ (2.26) $ (2.43) $ (10.17) $ (0.38) ========== ======== ======== ========= ==========Diluted earnings (loss) per common share $ 1.80 $ (2.26) $ (2.43) $ (10.17) $ (0.38) ========== ======== ======== ========= ==========Cash dividends declared per common share $ -- $ -- $ -- 0.09 $ 0.16 ========== ======== ======== ========= ========== Years Ended December 31, ---------------------------------------------------- 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- (Dollar amounts in thousands) BALANCE SHEET DATA:Working capital $109,989 $ 41,970 $ 55,052 $111,299 $270,722Total equipment leased to others & finance contracts $ 19,534 $ 32,069 $132,853 $160,098 $108,451Total assets $432,046 $397,036 $565,569 $692,504 $781,614Total debt and capital lease obligations $127,500 $227,316 $346,857 $412,017 $238,260Stockholders' equity $164,574 $ 22,162 $ 73,984 $130,985 $367,233ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition andResults of Operations ("MD&A") describes the matters that we consider to beimportant to understanding the results of our operations for each of the threeyears in the period ended December 31, 2004, and our capital resources andliquidity as of December 31, 2004. Our discussion begins with our assessment ofthe condition of the North American trailer industry along with a summary of theactions we have taken to reposition Wabash. We then analyze the results of ouroperations for the last three years, including the trends in the overallbusiness and our operations segments, followed by a discussion of our cash flowsand liquidity, capital markets events and transactions, our new credit facility,and contractual commitments. We then provide a review of the critical accounting judgments and estimates that we have made which we believe are most important toan understanding of our MD&A and our consolidated financial statements. Theseare the critical accounting policies that affect the recognition and measurementof our transactions and the balances in our consolidated financial statements.We conclude our MD&A with information on recent accounting 12pronouncements which we adopted during the year, as well as those not yetadopted that are expected to have an impact on our financial accountingpractices. We have two reportable segments: manufacturing and retail and distribution.The manufacturing segment produces trailers that are sold to customers whopurchase trailers directly or through independent dealers and to the retail anddistribution segment. The retail and distribution segment includes the sale ofnew and used trailers, as well as the sale of aftermarket parts and servicethrough its retail branch network.EXECUTIVE SUMMARY The year 2004 marks the second year of recovery for the industry after athree-year downturn. During this period, we repositioned Wabash by focusingon the continuous improvement of our manufacturing and retail operations,expanding our customer base, introducing products that better address customersneeds, exiting non-core operations and strengthening our capital structure. Webelieve Wabash is positioned to fully participate in the market growth thatanalysts are predicting will continue into 2005 and beyond.OPERATING PERFORMANCE We measure our operating performance in four key areas - Safety, Quality,Productivity and Cost Reduction. Our objective, be better tomorrow than we aretoday, is simple, straightforward and easily understood by all our associates. - Safety. We have achieved a four-fold improvement in the total recordable incident rate since June 2002, and our safety metrics have improved each quarter for 10 straight quarters. We believe improved safety translates into higher labor productivity and lower costs as a result of less time missed due to injuries. - Quality. We measure our quality performance in terms of: - First pass yield: How many units pass all inspection criteria without requiring rework? Our first pass yield metrics have improved from 20% in 2002 to 95% during 2004. - Warranty: We measure, among other things, the number and severity of warranty claims. While improvements are being noted and we are encouraged by the results, a longer term perspective is required before declaring success. - Productivity. We measure productivity on many fronts. Some key indicators include production line speed, man-hours per trailer and inventory levels. Improvements in these areas translate into: - Increased available capacity, which we estimated to be over 75,000 units annually based on a three-shift, five-day work week. - Effective management of inventory has resulted in inventory turns of currently 10 turns per year compared to approximately six turns in 2002. - Cost Reduction. During 2002, we introduced our continuous improvement initiative (CI). As of December 2004, we believe CI has become a way of life. Since introduction, over 300 CI events have been completed. As a result of our focus in these areas, we received the 2003 U.S. SenateProductivity Award for the State of Indiana for the significant cost savings andproductivity we achieved in the prior two years.INDUSTRY TRENDS Freight transportation in the United States, according to the AmericanTrucking Association (ATA), was estimated to be a $702 billion industry in 2003(the latest such information is available). ATA estimates that approximately 69%of all freight tonnage is carried by trucks at some point during its shipment,accounting for approximately 87% of freight industry revenue in the UnitedStates. Trailer demand is a direct function of the 13amount of freight to be transported. To monitor the state of the industry, weevaluate a number of indicators related to trailer manufacturing and thetransportation industry. Information is obtained from sources such as A.C.T.Research Co., LLC (ACT), ATA, Cass Logistics, and Eno Transportation Foundation.Recent trends we have observed include the following: - IMPROVEMENT IN THE NUMBER OF UNITS SHIPPED. After reaching a high of approximately 306,000 units shipped in 1999, shipments by the U.S. trailer industry declined to approximately 140,000 units in each of 2001 and 2002. Unit shipments improved to approximately 174,000 units in 2003 and were approximately 229,000 in 2004. ACT estimates that 2005 shipments will be approximately 271,000 units. Our view is that shipments will be approximately 5% to 10% lower than the ACT forecast due to the impact of raw material costs on trailer prices and tractor purchases in advance of new emission regulations. - INCREASING AGE OF TRUCKLOAD MOTOR CARRIER TRAILER FLEETS. During the three-year period ending December 31, 2003, (the latest such information is available) the average age of trailer fleets increased from approximately 44 months to 55 months. We believe this increase resulted in part from deferred purchases by many motor carriers. This trend suggests to us that there may be pent-up replacement demand for trailers. - INCREASING RATE OF NEW TRAILER ORDERS. Quarterly industry order placements were in the range of 10,000 units to 15,000 units per month during each of the six quarters ended December 31, 2003. During 2004, the total trailer quarterly average order rates ranged from 18,500 to 26,000 units. The fourth quarter of 2004 order rate average of 26,000 units was the strongest quarterly average order rate since 1999. - OTHER DEVELOPMENTS. Other developments and our view of their potential impact on the industry include: - New federal emission standards that come into effect in 2007 could result in improved demand for trailers in 2005 and part of 2006, as motor carriers may focus their capital spending on tractors in advance of the regulations taking effect. A similar pattern occurred in advance of the October 2002 enactment of new emission standards. - Technology advances in trailer tracking and route management implemented by motor carriers have increased trailer utilization and lowered trailer-to-tractor ratios and could result in trailer demand. - New federal hours-of-service rules became effective in January 2004. We initially believed that these rules would negatively impact driver productivity and that this could result in increased demand for trailers. As a result of Court intervention, on September 30, 2004, President Bush signed the Surface Transportation Extension Act of 2004, allowing these regulations to remain in effect until the earlier of a new regulation that resolves Court-raised issues or September 30, 2005. To date, we believe that there has been a limited amount of increased business as a result of the regulation. If the regulation is permanently suspended, there is the potential for cancellation of refrigerated units and some increase of trade-ins that could affect used trailer prices. 14RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage ofnet sales for the periods indicated: Percentage of Net Sales Years Ended December 31, ------------------------ 2004 2003 2002 ----- ----- ----- Net sales 100.0% 100.0% 100.0%Cost of sales 87.9 90.9 94.4Loss on asset impairment -- 3.2 0.3 ----- ----- ----- Gross profit 12.1 5.9 5.3General and administrative expense 4.0 4.7 7.0Selling expense 1.5 2.2 2.8Restructuring charge -- -- 0.2 ----- ----- ----- Income (loss) from operations 6.6 (1.0) (4.7)Interest expense (1.0) (3.5) (4.3)Foreign exchange gains and losses, net 0.1 0.6 --Loss on debt extinguishment (0.1) (2.2) (0.2)Other, net 0.1 (0.3) 0.5 ----- ----- ----- Income (loss) before income taxes 5.7 (6.4) (8.7)Income tax expense (benefit) 0.1 -- (1.8) ----- ----- ----- Net income (loss) 5.6% (6.4)% (6.9)%2004 COMPARED TO 2003NET SALES Net sales in 2004 increased $153.2 million compared to the 2003 period. The2003 year included $58.9 million of sales associated with our rental and leasingand aftermarket parts distribution businesses (Asset Sales). By businesssegment, net sales to external customers and related units sold were as follows(in millions): Year Ended December 31, ----------------------------- 2004 2003 % Change 2004 2003 % Change -------- ------- -------- Net Sales by segment: Manufacturing $ 806.0 $ 620.1 30% Retail and Distribution 235.1 267.8 (12%) -------- -------Total $1,041.1 $ 887.9 17%New trailer units: Manufacturing 45,100 36,900 22% Retail and Distribution 6,100 4,100 49% -------- -------Total 51,200 41,000 25%Used trailer units 6,900 11,700 (41%) Improving conditions in both the overall economy and the transportationindustry coupled with the expansion of our customer base, drove a 22% increasein unit volume in the manufacturing segment. In response to significantincreases in raw material prices, we increased our average selling pricethroughout the year. In the fourth quarter of 2004, our average selling priceincreased approximately 10% compared to the 2003 period with the full yearincrease being approximately 6%. 15 The 2004 sales in the retail and distribution segment were lower than theprior year period, which included $58.9 million of sales associated with theaforementioned Assets Sales. A $44.2 million increase in new trailer salescaused by a 49% increase in units was partially offset by reductions in usedtrailer sales. The decrease in used trailer sales resulted from constrained usedequipment availability, as transportation companies retain equipment to meetrequirements. Branch parts and services sales were up approximately 3% despiteclosing four full service locations in 2003 and one during 2004.GROSS PROFIT Gross profit as a percent of sales was 12.1% in 2004 compared to 5.9% in2003, which included a $28.5 million asset impairment charge taken on certainassets of our rental and leasing and aftermarket parts assets. As discussedbelow, both of our segments contributed as follows (in millions): Years Ended December 31, ------------------------- 2004 2003 $ Change ------ ----- -------- Gross Profit (loss) by segment: Manufacturing $110.8 $61.3 $49.5 Retail and Distribution 16.8 (9.2) 26.0 Eliminations (1.8) 0.4 (2.2) ------ ----- -----Total Gross Profit $125.8 $52.5 $73.3 The manufacturing segment's gross profit as a percentage of sales was 13.7%in 2004, a 3.8 percentage point increase from the prior year period. During2004, due to increases in our key raw materials - principally steel and wood,our average per trailer raw material costs, including the effects of product mixincreased approximately 9.7% from the prior period, which exceeded increases inour average selling price resulting in a negative impact on gross profit of $6.5million. The shortfall from rising material costs was more than offset by thecontinued improvement in our labor and overhead utilization of $32.3 million, the impact of higher volumes of $21.3 million and a reduction in warrantyexpense of $1.4 million. The 2004 gross profit in the retail and distribution segment improved $26.0million from the prior year. The 2003 period included a $28.5 million assetimpairment charge and $10.3 million of gross profit associated with the AssetSales. Gross profit in 2004 was positively impacted by higher new trailervolumes and margins and improved used trailer margins, offset by continuedconstraints on used trailer volumes. The 2004 period includes $1.1 million ofprofit related to the sale of used RoadRailer(R) bogies.GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for 2004 of $41.6 million were flatcompared to the prior year. The 2004 period included $2.3 million in increasedtechnology costs and $1.0 million in charges related to legal settlements. The2003 period included $2.6 million in debt refinancing costs, $2.0 million incosts from operations affected by the Asset Sales and $0.9 million related tobranch closings.SELLING EXPENSE Selling expense decreased $4.9 million to $15.0 million in 2004, comparedto $19.9 million in the prior year period due to the impact of the Asset Salesand the closing of 12 branch locations during 2003.OTHER INCOME (EXPENSE) Interest expense totaled $10.8 million in 2004; a decrease of $20.4 millionfrom the prior year period due to lower effective interest rates resulting fromthe debt refinancing completed in the third quarter of 2003 and reduced averageborrowings. Foreign exchange was a gain of $0.5 million in 2004 and a gain of $5.3million in 2003, which reflected the significant weakening of the US dollarrelative to the Canadian dollar in 2003. 16 Loss on debt extinguishment was $19.8 million in 2003 and $0.6 million in2004. The 2003 loss represents the additional costs associated with the earlyextinguishment of the Company's Senior Series Notes and Bank Debt. The 2004 lossrepresents the write-off of deferred debt costs associated with the pay-off ofour Bank Term Loan in the fourth quarter with proceeds from the common stockissuance. Other, net was income of $0.7 million in 2004, compared to an expense of$2.5 million for the 2003 period. The 2003 expense included a $3.2 million losson the sale of a large portion of our finance portfolio, $1.3 million charge forthe settlement of a legacy RoadRailer(R) transaction and a $0.8 million loss onthe sale of certain assets, offset by gains of $2.9 million on the sale ofclosed branch properties.INCOME TAXES In 2004, we recognized income tax expense of $0.6 million primarily relatedto Federal and state alternative minimum tax (AMT). The 2004 income tax expenseis significantly below the normal statutory tax rate primarily because of theutilization of net operating loss (NOL) carryforwards. No income tax expense orbenefit was recognized in 2003. Because of uncertainty related to therealizability of NOLs in excess of those utilized, a full valuation allowancecontinues to be recorded against deferred tax assets at December 31, 2004.2003 COMPARED TO 2002NET SALES Net sales improved 8% from 2002. Base upon ACT data, the first quarter of2002 is believed to have been the low point of the industry downturn that beganin 2000. By business segment, net external sales and related units sold were asfollows (dollars in millions): Years Ended December 31, ---------------------------- 2003 2002 % Change ------- ------- -------- Net Sales by segment: Manufacturing $ 620.1 $ 492.3 26% Retail and Distribution 267.8 327.3 (18)% ------- -------Total $ 887.9 $ 819.6 8% ======= =======New trailer units: Manufacturing 36,900 30,900 19% Retail and Distribution 4,100 3,600 14% ------- -------Total 41,000 34,500 19% ======= =======Used trailer units 11,700 17,600 (34)% ======= ======= The manufacturing segment's sales improvement was driven by demand for newtrailers and improved product mix. Average selling price increased 4.7%primarily due to product mix: for example, we sold approximately 5,000 fewerlower priced containers and chassis in 2003 compared to 2002. The decrease in the retail and distribution segment's net sales reflects: - used trailer sales decline of $27.5 million as unit sales fell 34% due to completing the disposition of excess inventories during 2002 and the impact of closing certain locations; - the sale of certain assets of the aftermarket parts distribution business and the trailer rental and leasing business in September 2003 primarily accounts for $27.7 million of the sales decline; - branch parts and services sales decline of $8.7 million primarily due to closing full service branches; offset by - new trailer sales increase of $4.4 million due to a 19% increase in equivalent store units sold, offset partially by the impact of closing certain locations. 17GROSS PROFIT (LOSS) Gross profit as a percent of sales was 9.1% for 2003 compared to 5.6% in2002, before asset impairment charges of $28.5 million and $2.0 million in 2003and 2002, respectively. The 2003 asset impairment charge was taken on certainassets of the rental and leasing and aftermarket parts businesses. A summary ofgross profit by segment follows (in millions): Years Ended December 31, ------------------------ 2003 2002 $ Change 2003 2002 $ Change ----- ----- -------- Gross Profit (Loss) by segment: Manufacturing $61.3 $22.2 $ 39.1 Retail and Distribution (9.2) 21.5 (30.7) Eliminations 0.4 0.1 0.3 ----- ----- ------Total Gross Profit $52.5 $43.8 $ 8.7 ===== ===== ====== The manufacturing segment's gross profit increased due to higher volumesand improved product mix, coupled with realizing cost savings driven by ourcontinuous improvement initiatives. The segment's 2003 gross profit percentageof 9.9% exceeded the 8.9% attained in 1999, the most recent production cyclepeak. The retail and distribution segment's gross profit for 2003 was negativelyimpacted by the $28.5 million asset impairment charge and $3.9 million intrailer valuation charges. Gross profit for 2002 was negatively impacted by $4.8million in loss contingencies and asset impairment charges related to equipmentheld for lease and $5.4 million in used trailer valuation charges. Additionally,the lower gross profit resulted from lower margins on used trailer sales and theimpact of selling certain assets of the rental and leasing and aftermarket partsbusinesses in September 2003. New trailers margins held steady in relation to2002.GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased $16.0 million to $41.6million for 2003, compared to $57.6 million for the same period in 2002. The2003 expense included $2.6 million in debt restructuring costs, $0.9 millionrelated to the branch closings, offset in part by a $0.8 million recovery of VATtaxes. The 2002 expense included $10.6 million in bad debt expense mainlyrelated to the finance and leasing businesses, $2.2 million in severanceaccruals, $1.9 million in write-downs related to the disposition of our airplaneand $1.2 million in debt restructuring costs.SELLING EXPENSES Selling expenses decreased $3.2 million to $19.9 million in 2003, comparedto $23.1 million in 2002. The decrease primarily reflects the impact of retailbranch closings and the September 2003 sale of certain assets of our trailerrental and leasing and aftermarket parts businesses.OTHER INCOME (EXPENSE) Interest expense totaled $31.2 million for 2003, a decrease of $3.8 millionfrom the prior year. Through the first three quarters of 2003, interest expenseexceeded that of 2002 due to higher interest rates and increased amortization ofdebt costs resulting from debt restructurings in 2002 and 2003. The debtrefinancing and assets sales during the second half of 2003 resulted in lowerinterest rates and average borrowings, respectively. Foreign exchange gains and losses, net were gains of $5.3 million for 2003,primarily occurring in the first six months of the year reflecting astrengthening of the Canadian dollar compared to the U.S. dollar. Loss on debt extinguishment of $19.8 million in 2003 primarily representsthe additional costs associated with the early extinguishment of our thenoutstanding debt. Other, net for 2003 was a net expense of $2.5 million compared to a netincome of $3.5 million for the same period in 2002. The 2003 period included a$3.2 million loss on the sale of a large portion of our finance portfolio, $1.3million charge for the settlement of a legacy RoadRailer(R) transaction and a$0.8 million loss on the 18sale of certain assets, offset in part by gains of $2.9 million on the sale ofclosed branch properties. The 2002 period included gains on the sale of closedbranch properties.INCOME TAXES We recorded no income tax benefit in 2003 due to uncertainties surroundingthe realizability of benefits associated with NOLs. The 2002 benefit recordedrepresents an additional realizable federal NOL carry-back claim filed andreceived under the provisions of the Job Creation and Worker Assistance Act of2002, which revised the permitted carry-back period for NOLs generated during2001 from two years to five years.LIQUIDITY AND CAPITAL RESOURCESCAPITAL STRUCTURE Today, our capital structure is comprised of a mix of equity and debt afterovercoming significant losses incurred during the years 2000 through 2003. In2004, we were able to further solidify our financial footing through improvedoperating performance and proceeds from our equity offering, as well asamendments to our bank debt agreements. These 2004 actions, described below,resulted in repayment or refinancing of essentially all of our bank debt,increased our financial flexibility and further reduced the effective rate onborrowings. Our objective is to generate operating cash flows sufficient tosatisfy normal requirements for working capital and capital expenditures and bepositioned to take advantage of market opportunities.Equity Offering On November 3, 2004, we completed the issuance of 3,450,000 shares of ourcommon stock resulting in net proceeds of $75.7 million. With the proceeds fromthe issuance, we paid off the remaining balance on our bank term loan of $25.8million, using the remaining proceeds to pay down borrowings under our bankrevolver, in conjunction with the early pay-off of the bank term loan.Debt Amendment On December 30, 2004, we amended and restated our asset-based loanagreement (ABL Facility), which we had originally entered into in September2003. The amended facility is secured by our property, plant and equipment,inventory and accounts receivable and the amount available to borrow varies inrelation to the balances of those accounts among other things, as defined in theagreements. As of December 31, 2004, borrowing capacity was $117.6 million withno debt outstanding. The most notable amendments to the facility included: - Reduced the capacity under the ABL Facility from $175 million to $125 million. - Extended the maturity date of the facility from September 30, 2006 to September 30, 2007. - Eliminated financial covenants and certain other restrictions so long as unused availability remains above $40 million. - Allowed payment of cash dividends up to $10 million per year. - Reduced the borrowing rates and fees. Interest on the ABL Facility is variable, based on the London InterbankOffer Rate (LIBOR) plus 150 basis points or the bank's alternative rate, asdefined in the agreement. At December 31, 2004, the 30-day LIBOR was 2.4%. Wepay a commitment fee on the unused portion of the facility at a rate of 25points per annum. All interest and fees are paid monthly. For the quarter endedDecember 31, 2004, the weighted average interest rate was 4.56%. Cash Flow Operating activities provided $56.9 million in cash in 2004 compared to$58.3 million in the prior year period. Improved cash flows from net income(adjusted for non-cash items) of $57.9 million was more than sufficient to fundincreased working capital requirements as outlined below: - Accounts receivables increased $20.6 million during 2004 compared to an increase of $40.7 million in 2003, reflecting the higher level of fourth quarter sales in both years and in 2003, comparatively strong late in the year sales. Days sales outstanding, a measure of working capital efficiency that 19 measures the amount of time a receivable is outstanding, was approximately 28 days in both 2004 and 2003. - Inventory increased $8.5 million during 2004 compared to decreasing $51.4 million in 2003. The 2004 increase results from an average increase in raw material costs of approximately 9.7% and early purchase of approximately $6.0 million in raw materials in advance of announced price increases partially offset by reductions in new and used trailer units. The 2003 decrease results principally from the reduction of new and used trailer units in inventory. Inventory turns, a commonly used measure of working capital efficiency that measures how quickly inventory turns, of 10 times in 2004 was comparable to the prior year. - Finance contracts decreased $11.4 million in 2004 from 2003 as the wind down of our financing business continues. Investing activities used $8.7 million in cash during 2004, a decrease of$69.0 million from the cash provided in 2003, which included proceeds of $53.5million from the sale of certain assets of our trailer leasing and rental andaftermarket parts businesses. The 2004 period included capital expenditures of$15.5 million, partially offset by proceeds of $6.8 million primarily from thesale of closed properties. Financing activities used $18.9 million in cash during 2004 primarily forthe repayment of $98.8 million in debt from proceeds of a $75.7 million issuanceof common stock with the remainder coming from operating cash flows. With theexception of the convertible notes, we were able to pay-off substantially all ofour indebtedness in 2004.Capital Expenditures Capital spending amounted to approximately $15.5 million for 2004 and isanticipated to be in the range of $25-35 million for 2005. Spending in 2005 isplanned to include approximately $10 million for the first phase of a $40million multi-year program to replace four trailer assembly lines, approximately$12 million of a $20 million two-year project for engineering and businessprocess systems improvements and approximately $7 million for normalmaintenances.Outlook The industry recovery that began in 2003 is expected to continue into 2005and beyond. ACT estimates that production of trailers in 2005 will beapproximately 271,000 units. The continued expansion in production is predicatedon a number of factors including improving general economic conditions andpent-up trucking industry demand for replacement units as the average age oftrailer fleets increases. We expect to participate in the industry growth because (1) our corecustomers are among the dominant participants in the trucking industry, (2) our DuraPlate(R) trailer continues to have increased market acceptance, (3) ourfocus on developing solutions that reduce our customers trailers maintenancecosts, and (4) the success we are achieving expanding our presence into themiddle market carriers - approximately 1,250 carriers with fleet sizes rangingfrom 250 to 7,500 units that represent a fleet that totals approximately onemillion trailers. In 2004, we added approximately 225 new customers and soldapproximately 6,000 units to this segment of the market. We believe that Wabash is well positioned to benefit from an increaseddemand for trailers because of the improvements that have been made over thelast three years. As a result of our continuous improvement initiatives, we havereduced the total cost of producing a trailer and effectively increasedproduction capacity. Additionally, we have become much more efficient in the useof working capital. Key to 2005 will be our ability to manage through thecustomers perception that raw material prices will decline in the near term witha corresponding decrease in new trailer prices. This perception results inreduced order size and delays in order placement. As of December 31, 2004, our liquidity position, cash on hand and availableborrowing capacity amounted to approximately $117.6 million and debt and leaseobligations, both on and off the balance sheet, amounted to approximately $132.6million (including $5.1 million not on the balance sheet). We expect that in2005, Wabash will be able to generate sufficient cash flow from operations tofund working capital and capital expenditure requirements. 20CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS A summary of payments of our contractual obligations and commercialcommitments, both on and off balance sheet, as of December 31, 2004 are asfollows: $ Millions 2005 2006 2007 2008 2009 Thereafter Total ---------- ----- ----- ---- ------ ---- ---------- ------ DEBT (excluding interest): Senior Convertible Notes $ -- $ -- $ -- $125.0 $ -- $ -- $125.0 Bank Revolver -- -- -- -- -- -- -- Other Notes Payable 2.0 0.5 -- -- -- -- 2.5 ----- ----- ---- ------ ---- ---- ------ TOTAL DEBT $ 2.0 $ 0.5 $ -- $125.0 $ -- $ -- $127.5 ===== ===== ==== ====== ==== ==== ======OTHER: Currency Forward Contracts $ 0.8 $ -- $ -- $ -- $ -- $ -- $ 0.8 Operating Leases 2.4 1.6 0.4 0.2 0.1 0.4 5.1 ----- ----- ---- ------ ---- ---- ------ TOTAL OTHER $ 3.2 $ 1.6 $0.4 $ 0.2 $0.1 $0.4 $ 5.9 ===== ===== ==== ====== ==== ==== ======OTHER COMMERCIAL COMMITMENTS:Letters of Credit $ 7.4 $ -- $ -- $ -- $ -- $ -- $ 7.4Purchase Commitments 45.3 9.0 -- -- -- -- 54.3Residual Guarantees 3.0 9.9 3.5 -- -- -- 16.4 ----- ----- ---- ------ ---- ---- ------ $55.7 $18.9 $3.5 $ -- $ -- $ -- $ 78.1 ===== ===== ==== ====== ==== ==== ======TOTAL OBLIGATIONS $60.9 $21.0 $3.9 $125.2 $0.1 $0.4 $211.5 ===== ===== ==== ====== ==== ==== ====== Residual Guarantees represent purchase commitments related to certain newand used trailer transactions as well as certain production equipment. We alsohave purchase options of $52.8 million on the aforementioned trailers andequipment. To the extent that the value of the underlying property is less thanthe residual guarantee and the value is not expected to be recovered, we haverecorded a loss contingency. Purchase Commitments include raw material purchase commitments and minimumpurchase commitments under a parts purchase agreement we entered into inconnection with the sale of certain assets of our aftermarket parts distributionbusiness. The raw material commitments relate to $33.3 million of aluminumpurchases. Under the parts purchase agreement, we are required to purchaseapproximately $12.0 million and $9.0 million in parts from the buyer in 2005 and2006, respectively. We do not believe the purchase commitments will exceedbusiness requirements. Operating leases represent the total future minimum lease payments.OFF-BALANCE SHEET TRANSACTIONS We entered into no off-balance sheet financing transactions in 2003 and2004. As of December 31, 2004, we have operating leases with future minimumlease payments of $5.1 million, as disclosed in the preceding table.SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES Our significant accounting policies are more fully described in Footnote 2to our consolidated financial statements. Certain of our accounting policiesrequire the application of significant judgment by management in selecting theappropriate assumptions for calculating financial estimates. By their nature,these judgments are subject to an inherent degree of uncertainty. Thesejudgments are based on our historical experience, terms of existing contracts,our evaluation of trends in the industry, information provided by our customersand information available from other outside sources, as appropriate.We consider an accounting estimate to be critical if: - it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and - changes in the estimate or different estimates that we could have selected would have had a material impact on our financial or results of operations. 21 The table below presents information about the nature and rationale forWabash's critical accounting estimates: CRITICAL ESTIMATE NATURE OF ASSUMPTIONS/ BALANCE SHEET CAPTION ITEM ESTIMATES REQUIRED APPROACHES USED KEY FACTORS --------------------- ----------------- ------------------ --------------- ----------- Accrued liabilities and Warranty Estimating warranty We base our estimate on Failure ratesother long-term requires us to historical trends of and estimatedliabilities forecast the units sold and payment repair costs resolution of amounts, combined with existing claims and our current understanding expected future of the status of existing claims on products claims, recall campaigns sold. and discussions with our customers. Accounts Receivable - Allowance for Estimating the We base our estimates on Customer financialallowance for doubtful doubtful accounts allowance for historical experience, conditionaccounts doubtful accounts the time an account is requires us to outstanding, customer's estimate the financial condition and financial capability information from credit of customers to pay rating services. for products.Inventory Lower of cost or We evaluate future Estimates are based on Market conditions market write-downs demand for products, recent sales data, market conditions historical experience, Product type and incentive external market analysis programs. and third party appraisal services.Property, plant and Valuation of long- We are required from We estimate cash flows Future productionequipment, goodwill and lived assets time-to-time to using internal budgets estimatesother long-term assets and investments review the based on recent sales recoverability of data, and independent Discount rate certain of our trailer production assets based on volume estimates. projections of anticipated future cash flows, including future profitability assessments of various product lines.Deferred income taxes Recoverability of We are required to We use projected future Variances in future deferred tax estimate whether operating results, based projected assets - in recoverability of upon our business plans, profitability, particular, net our deferred tax including a review of including by taxing operating loss assets is more the eligible entity carry-forwards likely than not carry-forward period, based on forecasts tax planning Tax law changes of taxable earnings. opportunities and other relevant considerations. In addition, there are other items within our financial statements thatrequire estimation, but are not as critical as those discussed above. Changes inestimates used in these and other items could have a significant effect on ourconsolidated financial statements. The determination of the fair market value ofnew and used trailers is subject to variation particularly in times of rapidlychanging market conditions. A 5% change in the valuation of our inventorieswould be approximately $5 million.OTHER INFLATION We have historically been able to offset the impact of rising costs throughproductivity improvements as well as selective price increases. As a result,inflation has not had, and is not expected to have a significant impact on ourbusiness. CUSTOMER CREDIT RISK We sublease certain highly specialized RoadRailer(R) equipment to GrupoTransportation Marititma Mexicana SA (TMM), who is experiencing financialdifficulties. In August 2004, TMM completed the restructuring 22of its debt agreements and is in the process of selling certain assets. Customerpayments, which have historically been timely, are behind schedule. The customerowes us $7.3 million secured by highly specialized RoadRailer(R) equipment,which due to the nature of the equipment, has a minimal recovery value.NEW ACCOUNTING PRONOUNCEMENTS INVENTORY COSTS In November 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting (SFAS) No. 151, Inventory Costs - an amendmentof Accounting Research Bulletin (ARB) No. 43, Chapter 4. The Statement clarifiesthat abnormal amounts of idle facility expense, freight, handling costs andwasted materials should be recognized as current-period expenses regardless ofhow abnormal the circumstances. In addition, this Statement requires that theallocation of fixed overheads to the costs of conversion be based upon normalproduction capacity levels. The Statement is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. We do not anticipatethat this Statement will have a material effect on our financial position,results of operations and cash flows. SHARE-BASED PAYMENTS In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-BasedPayment. SFAS No. 123(R), which is a revision of SFAS No. 123, Accounting forStock-Based Compensation, superceded APB Opinion No. 25, Accounting for StockIssued to Employees, and amends SFAS No. 95, Statements of Cash Flows. StatementNo. 123 (R) requires that all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statements based upon their fair value. The current pro forma disclosure of the impact onearnings is no longer allowed. The Statement is effective for the first interimor annual reporting period beginning after June 15, 2005. Based upon currentlyoutstanding options expense calculated using the Black-Scholes model, theimpact, net of tax, could amount to approximately $1.1 million during the secondhalf of 2005 and $0.7 million in 2006.ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In addition to the risks inherent in our operations, we have exposure tofinancial and market risk resulting from volatility in commodity prices,interest rates and foreign exchange rates. The following discussion providesadditional detail regarding our exposure to these risks. a. Commodity Price Risks We are exposed to fluctuation in commodity prices through the purchase ofraw materials that are processed from commodities such as aluminum, steel, woodand polyethylene. Given the historical volatility of certain commodity prices,this exposure can significantly impact product costs. We may manage aluminumprice changes by entering into fixed price contracts with our suppliers. As ofDecember 31, 2004, we had outstanding purchase commitments of approximately$33.3 million through December 2005 for materials that will be used in theproduction process. Because we typically do not set prices for our products morethan 45-90 days in advance of our commodity purchases, we can take into accountthe cost of the commodity in setting our prices for each order. To the extentthat we are unable to offset the increased commodity costs in our productprices, our results would be materially and adversely affected. b. Interest Rates As of December 31, 2004, we had no floating rate debt outstanding. c. Foreign Exchange Rates We are subject to fluctuations in the Canadian dollar exchange rate thatimpact intercompany transactions with our Canadian subsidiary, as well as U.S.denominated transactions between the Canadian subsidiaries and unrelatedparties. A five cent change in the Canadian exchange rate would result in anapproximately $0.7 million impact on results of operations. We have purchasedCanadian dollar foreign currency forward contracts in an effort to mitigatepotential Canadian currency fluctuation impact on working capital requirements.As of December 31, 2004, we had outstanding $0.8 million in forward contracts tobe settled in various increments over the next two 23months. The contracts are marked-to-market and not subject to hedge accounting.We do not hold or issue derivative financial instruments for speculativepurposes.ITEM 7B - RISK FACTORS You should carefully consider the risks described below in addition toother information contained or incorporated by reference in this Report beforeinvesting in our securities. Realization of any of the following risks couldhave a material adverse effect on our business, financial condition, cash flowsand results of operations.RISKS RELATED TO OUR BUSINESS, STRATEGY AND OPERATIONSWE HAVE GENERATED SIGNIFICANT LOSSES IN RECENT PERIODS. We incurred significant net losses during the three years prior to 2004. In2004, we reported net income of $58.4 million, but we reported net losses of$232.2 million, $56.2 million and $57.2 million for the years ended December 31,2001, 2002 and 2003, respectively. Our ability to achieve and sustain profitability in the future will depend on the successful continuedimplementation of measures to reduce costs and achieve sales goals, as well asthe ability to pass on to customers increases in raw materials and components.While we have taken steps to lower operating costs and reduce interest expense,and have seen our sales improve in recent periods, we cannot assure you that ourcost-reduction measures will be successful, sales will be sustained or increasedor that we will achieve a sustained return to profitability.OUR INVENTORIES ARE NOT MANAGED BY PERPETUAL INVENTORY CONTROL SYSTEMS. The systems and processes we use to manage and value our inventoriesrequire significant manual intervention and the verification of actualquantities requires physical inventories, which we take several times a year.Breakdowns of these systems and processes, and errors in inventory estimatesderived from these systems and processes, could go undetected until the nextphysical inventory and adversely affect our operations and financial results.AN ADVERSE CHANGE IN OUR CUSTOMER RELATIONSHIPS OR IN THE FINANCIAL CONDITION OFOUR CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS. We have relationships with a number of customers where we supply therequirements of these customers. We do not have binding agreements with thesecustomers. Our success is dependent, to a significant extent, upon the continuedstrength of these relationships and the growth of our core customers. We oftenare unable to predict the level of demand for our products from these customers,or the timing of their orders. In addition, the same economic conditions thatadversely affect us also often adversely affect our customers. As some of ourcustomers are highly leveraged and have limited access to capital, theircontinued existence may be uncertain. One of our customers, Grupo TransportationMarititma Mexicana SA (TMM), which is located in Mexico, has been experiencingfinancial difficulties even though it restructured its debt in August 2004, andis in the process of selling certain of its assets. Payments from TMM to us arecurrently behind schedule. The customer owes us $7.3 million as of December 31,2004 secured by highly specialized RoadRailer(R) equipment, which due to thenature of the equipment, has a minimal recovery value. The loss of a significantcustomer or unexpected delays in product purchases could adversely affect ourbusiness and results of operations.OUR TECHNOLOGY AND PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULDADVERSELY AFFECT OUR COMPETITIVE POSITION. We continue to introduce new products, such as the DuraPlateHD(R) and theFreight-Pro(R) trailer. We cannot assure you that these or other new products ortechnologies will achieve sustained market acceptance. In addition, newtechnologies or products that our competitors introduce may render our productsobsolete or uncompetitive. We have taken steps to protect our proprietary rightsin our new products. However, the steps we have taken to protect them may not besufficient or may not be enforced by a court of law. If we are unable to protectour proprietary rights, other parties may attempt to copy or otherwise obtain oruse our products or technology. If competitors are able to use our technology,our ability to compete effectively could be harmed. 24WE HAVE A LIMITED NUMBER OF SUPPLIERS OF RAW MATERIALS; AN INCREASE IN THE PRICEOF RAW MATERIALS OR THE INABILITY TO OBTAIN RAW MATERIALS COULD ADVERSELY AFFECTOUR RESULTS OF OPERATIONS. We currently rely on a limited number of suppliers for certain keycomponents in the manufacturing of truck trailers, such as tires, landing gear,axles and specialty steel coil used in DuraPlate(R) panels. From time to time,there have been and may in the future continue to be shortages of supplies ofraw materials or our suppliers may place us on allocation, which would have anadverse impact on our ability to meet demand for our products. Raw materialshortages and allocations may result in inefficient operations and a build-up ofinventory, which can negatively affect our working capital position. Inaddition, if the price of raw materials were to increase and we were unable to increase our selling prices or reduce our operating costs to offset the priceincreases, our operating margins would be adversely affected. The loss of any ofour suppliers or their inability to meet our price, quality, quantity anddelivery requirements could have a significant impact on our results ofoperations.DISRUPTION OF OUR MANUFACTURING OPERATIONS OR MANAGEMENT INFORMATION SYSTEMSWOULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OFOPERATIONS. We manufacture our products at two trailer manufacturing facilities inLafayette, Indiana, and one hardwood floor facility in Harrison, Arkansas. Ourprimary manufacturing facility accounts for approximately 85% of ourmanufacturing output. An unexpected disruption in our production at either ofthese facilities or in our management information systems for any length of timewould have an adverse effect on our business, financial condition and results ofoperations.THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Many of our executive officers, including our CEO William P. Greubel andCOO Richard J. Giromini, are critical to the management and direction of ourbusiness. Our future success depends, in large part, on our ability to retainthese officers and other capable management personnel. The unexpected loss ofthe services of any of our key personnel could have an adverse effect on theoperation of our business, as we may be unable to find suitable management toreplace departing executives on a timely basis.THE INABILITY TO REALIZE ADDITIONAL COSTS SAVINGS COULD WEAKEN OUR COMPETITIVEPOSITION. If we are unable to continue to successfully implement our program of costreduction and continuous improvement, we may not realize additional anticipatedcost savings, which could weaken our competitive position.WE ARE SUBJECT TO CURRENCY EXCHANGE RATE FLUCTUATIONS, WHICH COULD ADVERSELYAFFECT OUR FINANCIAL PERFORMANCE. We are subject to currency exchange rate risk related to sales through ourfactory-owned retail distribution centers in Canada. For the years endedDecember 31, 2004 and 2003, currency exchange rate fluctuations had a favorableimpact of $0.5 million and $5.3 million, respectively, on our results ofoperations. We cannot assure you that future currency exchange rate fluctuationswill not have an adverse affect on our results of operations.RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS COULD LIMIT OUR FINANCIAL ANDOPERATING FLEXIBILITY AND SUBJECT US TO OTHER RISKS. The agreements governing our indebtedness include certain covenants thatrestrict, among other things, our ability to: - incur additional debt; - pay dividends on our common stock in excess of $10 million per year; - repurchase our common stock; - consolidate, merge or transfer all or substantially all of our assets; 25 - make certain investments, mergers and acquisitions; and - create certain liens. Additionally, should our available borrowing capacity drop below $40 million, we would be subject to a minimum fixed charge coverage ratio which could limit our ability to make capital expenditures and further limit the amount of dividends we could pay. Our ability to comply with such agreements may be affected by events beyondour control, including prevailing economic, financial and industry conditions.In addition, upon the occurrence of an event of default under our debtagreements, the lenders could elect to declare all amounts outstanding under ourdebt agreements, together with accrued interest, to be immediately due andpayable.RISKS PARTICULAR TO THE INDUSTRY IN WHICH WE OPERATEOUR BUSINESS IS HIGHLY CYCLICAL, WHICH COULD ADVERSELY AFFECT OUR SALES ANDRESULTS OF OPERATIONS. The truck trailer manufacturing industry historically has been and isexpected to continue to be cyclical, as well as affected by overall economicconditions. New trailer production for the trailer industry reached its mostrecent peak of approximately 306,000 units in 1999, falling to approximately140,000 by 2001 and rebounding to approximately 229,000 units in 2004. Customershistorically have replaced trailers in cycles that run from five to twelveyears, depending on service and trailer type. Poor economic conditions canadversely affect demand for new trailers and in the past have led to an overallaging of trailer fleets beyond this typical replacement cycle. Customers' buyingpatterns can also reflect regulatory changes, such as the new federalhours-of-service rules and anticipated 2007 federal emissions standards. Ourbusiness is likely to continue to be highly cyclical based on current andexpected economic conditions and regulatory factors.SIGNIFICANT COMPETITION IN THE INDUSTRY IN WHICH WE OPERATE MAY RESULT IN OURCOMPETITORS OFFERING NEW OR BETTER PRODUCTS AND SERVICES OR LOWER PRICES, WHICHCOULD RESULT IN A LOSS OF CUSTOMERS AND A DECREASE IN OUR REVENUES. The truck trailer manufacturing industry is highly competitive. We competewith other manufacturers of varying sizes, some of which may have greaterfinancial resources than we do. Barriers to entry in the standard truck trailermanufacturing industry are low. As a result, it is possible that additionalcompetitors could enter the market at any time. In the recent past, themanufacturing over-capacity and high leverage of some of our competitors, alongwith the bankruptcies and financial stresses that affected the industry,contributed to significant pricing pressures. If we are unable to compete successfully with other trailer manufacturers,we could lose customers and our revenues may decline. In addition, competitivepressures in the industry may affect the market prices of our new and usedequipment, which, in turn, may adversely affect our sales margins and results ofoperations.WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL LAWS AND REGULATIONS, AND OUR COSTSRELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY WITH, EXISTING OR FUTURELAWS AND REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OFOPERATIONS. The length, height, width, maximum weight capacity and other specificationsof truck trailers are regulated by individual states. The Federal governmentalso regulates certain truck trailer safety features, such as lamps, reflectivedevices, tires, air-brake systems and rear-impact guards. Changes oranticipation of changes in these regulations can have a material impact on ourfinancial results, as our customers may defer purchasing decisions and we mayhave to reengineer products. In addition, we are subject to variousenvironmental laws and regulations dealing with the transportation, storage,presence, use, disposal and handling of hazardous materials, discharge of stormwater and underground fuel storage tanks and may be subject to liabilityassociated with operations of prior owners of acquired property. In 2004, wepaid $0.4 million and agreed to a compliance agreement with the EPA related toviolations of the federal Clean Water Act at our former Huntsville, Tennessee manufacturing facility. If we are found to be in violation of applicable laws or regulations in thefuture, it could have an adverse effect on our business, financial condition andresults of operations. Our costs of complying with these or any other current orfuture environmental regulations may be significant. In addition, if we fail tocomply with existing or future laws and regulations, we may be subject togovernmental or judicial fines or sanctions. 26A DECLINE IN THE VALUE OF USED TRAILERS COULD ADVERSELY AFFECT OUR RESULTS OFOPERATIONS. General economic and industry conditions, as well as the supply of usedtrailers, influence the value of used trailers. As part of our normal businesspractices, we maintain used trailer inventories and have entered into financecontracts secured by used trailers, as well as residual guarantees and purchasecommitments for used trailers. Declines in the market value for used trailers orthe need to dispose of excess inventories has had, and could in the future have,an adverse effect on our business, financial condition and results ofoperations.PRODUCT LIABILITY AND OTHER CLAIMS. As a manufacturer of products widely used in commerce, we are subject toregular product liability claims as well as warranty and similar claims allegingdefective products. From time to time claims may involve material amounts andnovel legal theories, and any insurance we carry may prove inadequate toinsulate us from material liabilities for these claims.RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCKOUR COMMON STOCK HAS EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, PRICEVOLATILITY AND A LOW TRADING VOLUME. The trading price of our common stock has been and may continue to besubject to large fluctuations. Our common stock price may increase or decreasein response to a number of events and factors, including: - trends in our industry and the markets in which we operate; - changes in the market price of the products we sell; - the introduction of new technologies or products by us or our competitors; - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; - operating results that vary from the expectations of securities analysts and investors; - announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, financings or capital commitments; - changes in laws and regulations; and - general economic and competitive conditions. This volatility may adversely affect the prices of our common stockregardless of our operating performance. The price of our common stock also maybe adversely affected by the amount of common stock issuable upon conversion ofour 3 1/4% convertible senior notes due 2008. Assuming $125 million in aggregateprincipal amount of these notes are converted at a conversion price of $19.20,the number of shares of our common stock outstanding would increase by 6.5 million, or approximately 21%. The conversion feature of our 3 1/4% convertiblesenior notes is subject to adjustment in connection with the payment of cashdividends. As a result of any future payment of a cash dividend, upon anyconversion of the notes we would be required to issue additional shares ofcommon stock. In addition, our common stock has experienced low trading volume in thepast. 27ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGES ----- Report of Independent Registered Public Accounting Firm................. 29Consolidated Balance Sheets as of December 31, 2004 and 2003............ 30Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002..................................... 31Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002............................... 32Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002..................................... 33Notes on Consolidated Financial Statements.............................. 34 28 Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders of Wabash National CorporationWe have audited the accompanying consolidated balance sheets of Wabash NationalCorporation as of December 31, 2004 and 2003, and the related consolidatedstatements of operations, shareholders' equity, and cash flows for each of thethree years in the period ended December 31, 2004. These financial statementsare the responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of Wabash NationalCorporation at December 31, 2004 and 2003, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with U.S. generally accepted accountingprinciples.We also have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Wabash NationalCorporation's internal control over financial reporting as of December 31, 2004,based on criteria established in Internal Control--Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2005 expressed an unqualified opinion thereon. ERNST & YOUNG LLPIndianapolis, IndianaFebruary 28, 2005 29 WABASH NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands) December 31, --------------------- 2004 2003 --------- --------- ASSETSCURRENT ASSETS: Cash and cash equivalents $ 41,928 $ 12,552 Accounts receivable, net 87,512 66,641 Current portion of finance contracts 2,185 4,727 Inventories 94,600 84,996 Prepaid expenses and other 16,313 10,249 --------- --------- Total current assets 242,538 179,165PROPERTY, PLANT AND EQUIPMENT, net 123,626 130,594EQUIPMENT LEASED TO OTHERS, net 14,030 21,187FINANCE CONTRACTS, net of current portion 3,319 6,155GOODWILL, net 33,698 36,045OTHER ASSETS 14,835 23,890 --------- --------- $ 432,046 $ 397,036 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES: Current maturities of long-term debt $ 2,000 $ 7,337 Accounts payable 78,107 68,437 Other accrued liabilities 52,442 61,421 --------- --------- Total current liabilities 132,549 137,195LONG-TERM DEBT, net of current maturities 125,500 219,979OTHER NONCURRENT LIABILITIES AND CONTINGENCIES 9,423 17,700STOCKHOLDERS' EQUITY: Preferred stock, 300,000 shares authorized, 0 shares issued and outstanding -- -- Common stock 75,000,000 shares authorized, $0.01 par value, 30,807,370 and 26,849,257 shares issued and outstanding, respectively 309 269 Additional paid-in capital 325,512 242,682 Retained deficit (162,097) (220,502) Accumulated other comprehensive income 2,129 992 Treasury stock at cost, 59,600 common shares (1,279) (1,279) --------- --------- Total stockholders' equity 164,574 22,162 --------- --------- $ 432,046 $ 397,036 ========= ========= The accompanying notes are an integral part of these Consolidated Statements. 30 WABASH NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) Years Ended December 31, -------------------------------- 2004 2003 2002 ---------- -------- -------- NET SALES $1,041,096 $887,940 $819,568COST OF SALES 915,310 806,963 773,756LOSS ON ASSET IMPAIRMENT -- 28,500 2,000 ---------- -------- -------- Gross profit 125,786 52,477 43,812GENERAL AND ADMINISTRATIVE EXPENSES 41,600 41,635 57,625SELLING EXPENSES 14,977 19,864 23,134RESTRUCTURING CHARGE -- -- 1,813 ---------- -------- -------- Income (loss) from operations 69,209 (9,022) (38,760)OTHER INCOME (EXPENSE): Interest expense (10,809) (31,184) (34,945) Foreign exchange gains and losses, net 463 5,291 5 Loss on debt extinguishment (607) (19,840) (1,314) Other, net 749 (2,472) 3,546 ---------- -------- -------- Income (loss) before income taxes 59,005 (57,227) (71,468)INCOME TAX EXPENSE (BENEFIT) 600 -- (15,278) ---------- -------- -------- Net income (loss) 58,405 (57,227) (56,190)PREFERRED STOCK DIVIDENDS -- 1,053 1,563 ---------- -------- --------NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 58,405 $(58,280) $(57,753) ========== ======== ========BASIC NET INCOME (LOSS) PER SHARE $ 2.10 $ (2.26) $ (2.43) ========== ======== ========DILUTED NET INCOME (LOSS) PER SHARE $ 1.80 $ (2.26) $ (2.43) ========== ======== ========COMPREHENSIVE INCOME (LOSS) Net income (loss) $ 58,405 $(57,227) $(56,190) Foreign currency translation adjustment 1,137 1,256 42 ---------- -------- --------NET COMPREHENSIVE INCOME (LOSS) $ 59,542 $(55,971) $(56,148) ========== ======== ======== The accompanying notes are an integral part of these Consolidated Statements. 31 WABASH NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) Preferred Stock Common Stock Additional Retained Other ---------------- ------------------ Paid-In Earnings Comprehensive Treasury Shares Amount Capital Amount Capital (Deficit) Income (Loss) Stock Total -------- ------ ---------- ------ ---------- --------- ------------- -------- -------- BALANCES, December 31, 2001 482,041 $ 5 23,013,847 $230 $236,804 $(104,469) $ (306) $(1,279) $130,985 Net loss for the year -- -- -- -- -- (56,190) -- -- (56,190) Foreign currency translation -- -- -- -- -- -- 42 -- 42 Preferred stock dividends -- -- -- -- -- (1,563) -- -- (1,563) Preferred stock conversion (130,041) (2) 2,589,687 26 334 -- -- -- 358 Common stock issued under: Employee stock purchase plan -- -- 5,312 1 47 -- -- -- 48 Employee stock bonus plan -- -- 10,300 -- 89 -- -- -- 89 Stock option plan -- -- 11,168 -- 82 82 Outside directors' plan -- -- 16,746 -- 133 -- -- -- 133 -------- --- ---------- ---- -------- --------- ------ ------- --------BALANCES, December 31, 2002 352,000 $ 3 25,647,060 $257 $237,489 $(162,222) $ (264) $(1,279) $ 73,984 Net loss for the year -- -- -- -- -- (57,227) -- -- (57,227) Foreign currency translation -- -- -- -- -- -- 1,256 -- 1,256 Preferred stock dividends -- -- -- -- -- (1,053) -- -- (1,053) Preferred stock conversion (352,000) (3) 823,256 8 (7) -- -- -- (2) Restricted stock amortization -- -- -- -- 225 -- -- -- 225 Common stock issued under: Employee stock bonus plan -- -- 6,370 -- 74 -- -- -- 74 Stock option plan -- -- 360,114 4 4,800 -- -- -- 4,804 Outside directors' plan -- -- 12,457 -- 101 -- -- -- 101 -------- --- ---------- ---- -------- --------- ------ ------- --------BALANCES, December 31, 2003 -- $-- 26,849,257 $269 $242,682 $(220,502) $ 992 $(1,279) $ 22,162 Net income for the year -- -- -- -- -- 58,405 -- -- 58,405 Foreign currency translation -- -- -- -- -- -- 1,137 -- 1,137 Restricted stock amortization -- -- 20,242 -- 425 -- -- -- 425 Common stock issued under: Equity offering -- -- 3,450,000 35 75,667 -- -- -- 75,702 Employee stock bonus plan -- -- 7,720 -- 224 -- -- -- 224 Stock option plan -- -- 476,498 4 6,407 -- -- -- 6,411 Outside directors' plan -- -- 3,653 1 107 -- -- -- 108 -------- --- ---------- ---- -------- --------- ------ ------- --------BALANCES, December 31, 2004 -- $-- 30,807,370 $309 $325,512 $(162,097) $2,129 $(1,279) $164,574 ======== === ========== ==== ======== ========= ====== ======= ======== The accompanying notes are an integral part of these Consolidated Statements. 32 WABASH NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years Ended December 31, --------------------------------- 2004 2003 2002 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 58,405 $ (57,227) (56,190) Adjustments to reconcile net cash provided by (used in) operating activities: Depreciation and amortization 19,441 23,788 28,626 Net (gain) loss on the sale of assets (2,089) 723 (1,322) Provision (credit) for losses on accounts receivable and finance contracts (231) 474 9,773 Cash used for restructuring activities (3,007) (3,372) (373) Restructuring and other related charges -- -- 1,813 Used trailer valuation charges 448 2,562 5,443 Loss contingencies -- -- 2,831 Loss on debt extinguishment 607 19,840 1,314 Loss on asset impairment -- 28,500 2,000 Changes in operating assets and liabilities: Accounts receivable (20,640) (40,749) 19,695 Finance contracts 5,070 16,469 5,602 Inventories (8,485) 51,416 58,335 Refundable income taxes (258) 824 24,762 Prepaid expenses and other (458) 5,009 (4,016) Accounts payable and accrued liabilities 5,081 11,286 9,776 Other, net 3,040 (1,280) 1,815 --------- --------- --------- Net cash provided by operating activities 56,924 58,263 109,884 --------- --------- ---------CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (15,495) (6,518) (5,703) Additions to equipment leased to others -- -- (9,792) Proceeds from Asset Sales -- 53,479 -- Proceeds from sale of leased equipment -- 6,498 5,295 Proceeds from the sale of property, plant and equipment 6,800 6,861 16,617 --------- --------- --------- Net cash (used in) provided by investing activities (8,695) 60,320 6,417CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of bank term loans and revolving credit facility -- 135,309 80,402 Proceeds from issuance of convertible senior notes -- 125,000 -- Proceeds from issuance of common stock 75,702 -- -- Proceeds from exercise of stock options 5,261 4,804 351 Borrowings under trade receivables and revolving credit facilities 667,522 197,650 56,798 Payments under trade receivables and revolving credit facilities (727,879) (225,501) (146,491) Payments under long-term debt and capital lease obligations (39,459) (367,089) (78,589) Preferred stock dividends paid -- (1,584) (443) Debt issuance costs paid -- (10,279) (3,805) --------- --------- --------- Net cash used in financing activities (18,853) (141,690) (91,777) --------- --------- ---------NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,376 (23,107) 24,524CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,552 35,659 11,135 --------- --------- ---------CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41,928 $ 12,552 $ 35,659 ========= ========= =========Supplemental disclosures of cash flow information:Cash paid during the year for: Interest $ 9,021 $ 21,774 $ 27,913 Income taxes paid (refunded), net $ 1,137 $ (832) $ (38,153)Capital lease obligations incurred $ -- $ -- $ 14,731 The accompanying notes are an integral part of these Consolidated Statements. 33 WABASH NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. DESCRIPTION OF THE BUSINESS Wabash National Corporation (the Company) designs, manufactures and marketsstandard and customized truck trailers and intermodal equipment under theWabash(R), FreightPro(R), Articlite(R) and RoadRailer(R) trademarks. TheCompany's wholly-owned subsidiary, Wabash National Trailer Centers, Inc. (WNTC),sells new and used trailers through its retail network and provides aftermarketparts and maintenance service for the Company's and competitors' trailers andrelated equipment.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Consolidation The consolidated financial statements reflect the accounts of the Companyand its wholly-owned and majority-owned subsidiaries. All significantintercompany profits, transactions and balances have been eliminated inconsolidation. Certain reclassifications have been made to prior periods toconform to the current year presentation. These reclassifications had no effecton net losses for the periods previously reported. b. Use of Estimates The preparation of consolidated financial statements in conformity withU.S. generally accepted accounting principles requires management to makeestimates and assumptions that directly affect the amounts reported in itsconsolidated financial statements and accompanying notes. Actual results coulddiffer from these estimates. c. Foreign Currency Accounting The financial statements of the Company's Canadian subsidiary have beentranslated into U.S. dollars in accordance with Financial Accounting StandardsBoard (FASB) Statement No. 52, Foreign Currency Translation. Assets andliabilities have been translated using the exchange rate in effect at thebalance sheet date. Revenues and expenses have been translated using aweighted-average exchange rate for the period. The resulting translationadjustments are recorded as Accumulated Other Comprehensive Income (Loss) inStockholders' Equity. Gains or losses resulting from foreign currencytransactions are included in Foreign Exchange Gains and Losses, net on theCompany's Consolidated Statements of Operations. The Company recorded foreigncurrency gains of $0.5 million in 2004, $5.3 million in 2003 and $0 million in2002. As a result of a reevaluation of the retail and distribution business in2003, the Company concluded to close 12 locations, including two in Canada. Inaddition, the review resulted in management designating $30 million CDN ofintercompany loans to its Canadian subsidiary as a permanent investment.Accordingly, beginning July 1, 2003, gains and losses associated with thepermanent investment were charged to Accumulated Other Comprehensive Income(Loss) on the Consolidated Balance Sheets. As of December 31, 2004 and 2003,accumulated gains of $2.6 million and $0.9 million, respectively, have beenrecorded related to this permanent investment. d. Revenue Recognition The Company recognizes revenue from the sale of trailers and aftermarketparts when the customer has made a fixed commitment to purchase the trailers fora fixed or determinable price, collection is reasonably assured under theCompany's billing and credit terms and ownership and all risk of loss has beentransferred to the buyer, which is normally upon shipment or pick up by the customer. The Company recognizes revenue from direct finance leases based upon aconstant rate of return while revenue from operating leases is recognized on astraight-line basis in an amount equal to the invoiced rentals. 34 e. Used Trailer Trade Commitments The Company has commitments with certain customers to accept used trailerson trade for new trailer purchases. These commitments arise in the normal courseof business related to future new trailer orders. The Company has acceptedtrade-ins from customers of approximately $37.9 million, $32.8 million and $40.5million in 2004, 2003 and 2002, respectively. As of December 31, 2004 and 2003,the Company had approximately $4.4 million and $6.1 million, respectively, ofoutstanding trade commitments with customers, which approximates the netrealizable value. The Company's policy is to recognize losses related to thesecommitments, if any, at the time the new trailer revenue is recognized. f. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments, which are readilyconvertible into cash and have maturities of three months or less. g. Accounts Receivable and Finance Contracts Accounts receivable and finance contracts are shown net of allowance fordoubtful accounts. Accounts receivable primarily includes trade receivables. TheCompany records and maintains a provision for doubtful accounts for customersbased upon a variety of factors including the Company's historical experience,the length of time the account has been outstanding and the financial conditionof the customer. If the circumstances related to specific customers were tochange, the Company's estimates with respect to the collectibility of therelated accounts could be further adjusted. Provisions to the allowance fordoubtful accounts are charged to General and Administrative Expenses on theConsolidated Statements of Operations. The activity in the allowance fordoubtful accounts was as follows (in thousands): Years Ended December 31, --------------------------- 2004 2003 2002 ------ -------- ------- Balance at beginning of year $4,160 $ 16,217 $14,481 Provision (credit) (231) 474 9,773 Write-offs, net (944) (12,531) (8,037) ------ -------- -------Balance at end of year $2,985 $ 4,160 $16,217 ====== ======== ======= h. Inventories Inventories are primarily stated at the lower of cost, determined on thefirst-in, first-out (FIFO) method, or market. The cost of manufactured inventoryincludes raw material, labor and overhead. Inventories consist of the following(in thousands): December 31, ----------------- 2004 2003 2004 2003 ------- ------- Raw materials and components $36,146 $24,189Work in progress 4,653 4,364Finished goods 35,017 38,198Aftermarket parts 6,115 5,953Used trailers 12,669 12,292 ------- ------- $94,600 $84,996 ======= ======= The Company continually reviews the valuation of the used trailer inventoryand writes down the value of individual units when the carrying value exceedsthe estimated market value. Write downs amounting to $0.4 million, $2.6 millionand $5.4 million were charged to Cost of Sales on the Consolidated Statement ofOperations for 2004, 2003 and 2002, respectively. i. Prepaid Expenses and Other Prepaid expenses and other at December 31, 2004 and 2003 were $16.3 millionand $10.2 million, respectively. Prepaid expenses and other primarily includesprepaid expenses and assets held for sale. Prepaid expenses include insurancepremiums and computer software maintenance which are generally amortized overone 35year periods. Assets held for sale, which include closed manufacturingfacilities and branch locations, were $12.3 million and $7.0 million at December31, 2004 and 2003, respectively. At December 31, 2004 and 2003, assets held forsale included $1.7 million for a closed manufacturing facility, that was closedas part of the Company's 2001 restructuring. In accordance with Statement ofFinancial Accounting Standard (SFAS) No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets, the Company continues to review the assets forpotential impairment and appropriate classification as assets held for sale. During the fourth quarter of 2004, the Company committed to a plan todispose of certain branch locations. In accordance with SFAS No. 144, $8.3 million of property, plant and equipment and, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets, $3.2 million of goodwill allocated fromthe retail and distribution segment were reclassified to assets held for sale(see Footnote 2(l) for further discussion). Additionally, the carrying value ofthese assets was reviewed for recoverability resulting in a write-down of $1.2million charged to Other, net in the Consolidated Statement of Operations. j. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Maintenance and repairsare charged to expense as incurred, and expenditures that extend the useful lifeof the asset are capitalized. Depreciation is recorded using the straight-linemethod over the estimated useful lives of the depreciable assets. Estimateduseful lives are 33 years for buildings and building improvements and range fromthree to 10 years for machinery and equipment. Depreciation expense on property,plant and equipment was $13.0 million, $13.4 million and $14.7 million for 2004,2003 and 2002, respectively. Property, plant and equipment consist of the following (in thousands): December 31, -------------------- 2004 2003 --------- -------- Land $ 19,226 $ 23,376Buildings and building improvements 84,228 86,193Machinery and equipment 124,123 114,498Construction in progress 2,433 3,059 --------- -------- 230,010 227,126Less--accumulated depreciation (106,384) (96,532) --------- -------- $ 123,626 $130,594 ========= ======== In the second quarter of 2003, as part of an evaluation of certain assetsof its aftermarket parts business, the Company recorded a loss on assetimpairment, which included $5.1 million for property, plant and equipment. SeeFootnote 5 for further discussion of this impairment. In the fourth quarter of 2004, $8.3 million of property, plant andequipment was reclassified to Prepaid Expenses and Other as assets held forsale. See Footnote 2(i) for further discussion. k. Equipment Leased to Others Equipment leased to others at December 31, 2004 and 2003 was $14.0 millionand $21.2 million, net of accumulated depreciation of $9.3 million and $8.9million, respectively. Additions to equipment leased to others are classified asinvesting activities on the Consolidated Statements of Cash Flows. Equipmentleased to others is depreciated over the estimated life of the equipment or theterm of the underlying lease arrangement, not to exceed 15 years, with a 20%residual value or a residual value equal to the estimated market value of theequipment at lease termination. Depreciation expense on equipment leased toothers, including capital lease assets, was $3.1 million, $6.4 million and $9.3million for 2004, 2003 and 2002, respectively. The future minimum lease paymentsto be received under the lease arrangement are $1.1 million per year for2005-2009 and $1.5 million thereafter. During the second quarter of 2003, the Company recorded an asset impairmentcharge of approximately $22 million on certain assets of its trailer leasing andrental business and later on September 19, 2003, completed the sale of theseassets, which were included in Equipment Leased to Others on the ConsolidatedBalance Sheets. See Footnote 5 for further discussion of this transaction. 36 l. Goodwill The changes in the carrying amount of goodwill, net of accumulatedamortization of $1.9 million and $1.6 million, respectively, for the years endedDecember 31, 2003 and 2004 are as follows (in thousands): Retail and Manufacturing Distribution Total ------------- ------------- ------- Balance as of January 1, 2003 $18,357 $16,295 $34,652 Effects of foreign currency -- 2,743 2,743 Asset Impairment -- (1,350) (1,350) ------- ------- -------Balance as of December 31, 2003 18,357 17,688 36,045 Effects of foreign currency -- 862 862 Allocated to disposals -- (3,209) (3,209) ------- ------- -------Balance as of December 31, 2004 $18,357 $15,341 $33,698 ======= ======= ======= In accordance with SFAS No. 142, the Company tests goodwill for impairmenton an annual basis or more frequently if an event occurs or circumstances changethat could more likely than not reduce the fair value of a reporting unit belowits carrying amount. The Company estimates fair value based upon the presentvalue of future cash flows. In estimating the future cash flows, the Companytakes into consideration the overall and industry economic conditions andtrends, market risk of the Company and historical information. The Company hasconducted annual impairment tests as of October 1, 2002, 2003 and 2004 anddetermined that no impairment of goodwill existed. In the second quarter of 2003, as part of an evaluation of certain assetsof its aftermarket parts business, the Company recorded a loss on assetimpairment, which included $1.4 million of goodwill related to its aftermarketparts business. See Footnote 5 for further discussion of this impairment. During the fourth quarter of 2004, as part of a plan to dispose of certainbranch locations, $3.2 million of goodwill in retail and distribution wasallocated to the disposed locations and reclassified to Prepaid Expenses andOther as assets held for sale. The allocation was based on the relative fairvalues of the retained and to be disposed of businesses. m. Other Assets The Company has other intangible assets including patents and licenses,non-compete agreements and technology costs which are being amortized on astraight-line basis over periods ranging from two to 12 years. As of December31, 2004 and 2003, the Company had gross intangible assets of $15.5 million($3.0 million net of amortization) and $17.3 million ($4.3 million net ofamortization), respectively. Amortization expense for 2004, 2003 and 2002 was$1.3 million, $1.8 million and $2.4 million, respectively, and is estimated tobe $0.9 million, $0.7 million, $0.5 million, $0.4 million and $0.2 million for2005, 2006, 2007, 2008 and 2009, respectively. The Company capitalizes the cost of computer software developed or obtainedfor internal use in accordance with Statement of Position No. 98-1, Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use.Capitalized software is amortized using the straight-line method over three tofive years. As of December 31, 2004 and 2003, the Company had software costs,net of amortization of $0.2 million and $2.1 million, respectively. Amortizationexpense for 2004, 2003 and 2002 was $2.0 million, $2.1 million and $2.2 million,respectively. n. Long-Lived Assets Long-lived assets are reviewed for impairment in accordance with SFAS No.144, whenever facts and circumstances indicate that the carrying amount may notbe recoverable. Specifically, this process involves comparing an asset'scarrying value to the estimated undiscounted future cash flows the asset isexpected to generate over its remaining life. If this process were to result inthe conclusion that the carrying value of a long-lived asset would not berecoverable, a write-down of the asset to fair value would be recorded through acharge to operations. Fair value is determined based upon discounted cash flowsor appraisals as appropriate. 37 o. Other Accrued Liabilities The following table presents the major components of Other AccruedLiabilities (in thousands): Years Ended December 31, ------------------------- 2004 2003 ------- ------- Payroll and related taxes $12,716 $12,980Warranty accruals 8,399 10,614Accrued taxes 4,525 8,131Self-insurance accruals 8,159 7,446All other 18,643 22,250 ------- ------- $52,442 $61,421 ======= ======= The following table presents the changes in certain significant accrualsincluded in Other Accrued Liabilities as follows (in thousands): Warranty Accruals Self-Insurance Accruals ----------------- ----------------------- Balance as of January 1, 2003 $12,587 $ 6,738 Accruals 6,310 23,728 Payments (8,283) (23,020) ------- --------Balance as of December 31, 2003 $10,614 $ 7,446 Accruals 4,897 23,413 Payments (7,112) (22,700) ------- --------Balance as of December 31, 2004 $ 8,399 $ 8,159 ======= ======== The Company's warranty policy generally provides coverage for components ofthe trailer the Company produces or assembles. Typically, the coverage period isfive years. The Company's policy is to accrue the estimated cost of warrantycoverage at the time of the sale. The Company is self-insured up to specified limits for medical and workers'compensation coverage. The self-insurance reserves have been recorded to reflectthe undiscounted estimated liabilities, including claims incurred but notreported, as well as catastrophic claims as appropriate. The Company recognizes a loss contingency for used trailer residualcommitments for the difference between the equipment's purchase price and itsfair market value when it becomes probable that the purchase price at theguarantee date will exceed the equipment's fair market value at that date. p. Income Taxes The Company determines its provision or benefit for income taxes under theasset and liability method. The asset and liability method measures the expectedtax impact at current enacted rates of future taxable income or deductionsresulting from differences in the tax and financial reporting basis of assetsand liabilities reflected in the Consolidated Balance Sheets. Future taxbenefits of tax losses and credit carryforwards are recognized as deferred taxassets. Deferred tax assets are reduced by a valuation allowance to the extentthe Company concludes there is uncertainty as to their realization. q. Stock-Based Compensation The Company follows APB No. 25, Accounting for Stock Issued to Employees,in accounting for its stock options and, accordingly, no compensation cost hasbeen recognized for stock options in the consolidated financial statements.However, SFAS No. 123, Accounting for Stock-Based Compensation, as amendedrequires pro forma presentation as if compensation costs had been expensed underthe fair value method. For purposes of pro forma disclosure, the estimated fair value of the options at the date of grant is amortized to expense over thevesting period. Additional information regarding stock-based compensation isincluded in Footnote 11. The following table illustrates the effect on net lossand loss per share as if compensation expense had been recognized (in thousands,except for loss-per-share amounts): 38 Years Ended December 31, ----------------------------- 2004 2003 2002 ------- -------- -------- Report net (income) loss $58,405 $(57,227) $(56,190) Pro forma stock-based compensation expense (net of tax) (2,613) (2,670) (1,671) Stock-based employee compensation expense recorded (net of tax) 417 225 -- ------- -------- -------- Pro forma net income (loss) $56,209 $(59,672) $(57,861) ======= ======== ========Basic earnings per share: Reported net income (loss) per share $ 2.10 $ (2.26) $ (2.43) ======= ======== ======== Pro forma net income (loss) per share $ 2.02 $ (2.36) $ (2.50) ======= ======== ========Diluted earnings per share: Reported net income (loss) per share $ 1.80 $ (2.26) $ (2.43) ======= ======== ======== Pro forma net income (loss) per share $ 1.74 $ (2.36) $ (2.50) ======= ======== ======== r. New Accounting Pronouncements Inventory Costs. In November 2004, the FASB issued SFAS No. 151, InventoryCosts - an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4.The statement clarifies that abnormal amounts of idle facility expense, freight,handling costs and wasted materials should be recognized as current-periodexpenses regardless of how abnormal the circumstances. In addition, thisStatement requires that the allocation of fixed overheads to the costs ofconversion be based upon normal production capacity levels. The Statement iseffective for inventory costs incurred during fiscal years beginning after June15, 2005. The Company does not anticipate that this statement will have amaterial effect on financial position, results of operations and cash flows. Share-Based Payments. In December 2004, the FASB issued SFAS No. 123(revised 2004), Share-Based Payment. SFAS No. 123R, which is a revision of SFASNo. 123, Accounting for Stock-Based Compensation, superceded APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statements ofCash Flows. Statement No. 123R requires that all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based upon their fair value. The current pro formadisclosure of the impact on earnings is no longer allowed. The Statement iseffective for the first interim or annual reporting period beginning after June15, 2005. Based upon currently outstanding options, expense, net of tax,calculated using the Black-Scholes model would amount to approximately $1.1million during the second half of 2005 and $0.7 million in 2006.3. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments,requires disclosure of fair value information for certain financial instruments. The differences between the carrying amounts and the estimated fair values,using the methods and assumptions listed below, of the Company's financialinstruments at December 31, 2004, and 2003 were immaterial, with the exceptionof the Senior Convertible Notes. Cash and Cash Equivalents, Accounts Receivable and Accounts Payable. Thecarrying amounts reported in the Consolidated Balance Sheets approximate fairvalue. Long-Term Debt. The fair value of long-term debt, including the currentportion, is estimated based on current quoted market prices for similar issuesor debt with the same maturities. The interest rates on the Company's bankborrowings under its Bank Facility are adjusted regularly to reflect currentmarket rates. The estimated fair value of the Company's Senior ConvertibleNotes, based on market quotes, is approximately $187 million and $214 million,compared to a carrying value of $125 million, as of December 31, 2004 and 2003,respectively. The carrying values of the remainder of the Company's long-termborrowings approximate fair value. 39 Foreign Currency Forward Contracts. As of December 31, 2004 and 2003, theCompany has $0.8 million and $3.9 million, respectively, in outstanding foreigncurrency forward contracts included in Other Accrued Liabilities that are not ina material gain or loss position.4. RESTRUCTURING AND OTHER RELATED CHARGES In December 2000, the Company recorded restructuring and other relatedcharges totaling $46.6 million, primarily related to the Company's exit frommanufacturing products for export to markets outside of North America,international leasing and financing activities and the consolidation of certaindomestic operations. An additional $1.6 million was subsequently providedprimarily to recognize the assumption of financial guarantees. The Company continues to pursue the sale of a facility, which had a fairmarket value of $0.8 million at December 31, 2004 and 2003, and is classified inPrepaid Expenses and Other on the Consolidated Balance Sheets. Details of the restructuring charges and reserve for the 2000 RestructuringPlan are as follows (in thousands): Utilized Original Additional ------------------ Balance Provision Provision 2000-2003 2004 12/31/04 --------- ---------- --------- ------- ---------- Restructuring of majority-owned operations $36,338 $ 227 $(33,629) $(2,936) $--Restructuring of minority interest operations 5,832 1,381 (5,980) (1,233) --Inventory write-down and other charges 4,480 -- (4,480) -- -- ------- ------ -------- ------- ---Total restructuring and other related charges $46,650 $1,608 $(44,089) $(4,169) $-- ======= ====== ======== ======= === The restructuring reserve of $4.2 million at December 31, 2003 was includedin Other Accrued Liabilities on the Consolidated Balance Sheets. The Companypaid $2.6 million and $3.1 million to settle financial and equipment guaranteesduring 2004 and 2003, respectively.5. DIVESTITURES a. Asset Sale In September 2003, the Company completed the sale of a portion of itstrailer leasing and finance operations and a portion of its aftermarket partsdistribution operations for approximately $53.5 million in cash. The principalassets sold consisted of tangible assets (i.e., accounts receivable, inventoryand equipment held for lease), relationships with a specific subset of theCompany's customers and a portion of the Company's Retail and Distributionbusiness. In accordance with SFAS No. 144, the Company has not reflected thesesales as discontinued operations as only a portion of a component was sold, theCompany will continue to generate cash flows from these components and theCompany will continue to be involved in the operations of the disposed assetsthrough, among other things, purchase and supply agreements. Net proceeds fromthe sale were used to repay a portion of the Company's outstanding indebtedness.Loss on the disposition amounted to $29.3 million, including a $28.5 millionasset impairment charge recorded in the second quarter of 2003 to recognize thatestimated cash flows were insufficient to support the carrying value. Theadditional $0.8 million loss was derived as follows (in thousands): Assets sold $52,801Transaction costs 1,503Less proceeds 53,479 ------- $ 825 ======= b. Finance Portfolio Sale In the fourth quarter of 2003, the Company completed the sale of a largeportion of the remaining finance contracts in its finance portfolio. Proceedswere $12.2 million and resulted in a charge of $4.1 million, reflecting theCompany's loss on the sale, including $0.9 million for debt extinguishmentcharges. 406. PER SHARE OF COMMON STOCK Per share results have been computed based on the average number of commonshares outstanding. The computation of basic and diluted loss per share isdetermined using net income (loss) applicable to common stockholders as thenumerator and the number of shares included in the denominator as follows (inthousands): Years Ended December 31, ----------------------------- 2004 2003 2002 ------- -------- -------- Basic earnings (loss) per share: Net income (loss) applicable to common stockholders $58,405 $(58,280) $(57,753) ======= ======== ======== Weighted average common shares outstanding 27,748 25,778 23,791 ======= ======== ======== Basic income (loss) per share $ 2.10 $ (2.26) $ (2.43) ======= ======== ========Diluted earnings (loss) per share: Net income (loss) applicable to common stockholders $58,405 $(58,280) $(57,753) After-tax equivalent of interest on convertible notes 4,828 -- -- ------- -------- -------- Diluted net income (loss) applicable to common stockholders $63,233 $(58,280) $(57,753) stockholders $63,233 $(58,280) $(57,753) ======= ======== ======== Weighted average common shares outstanding 27,748 25,778 23,791 Dilutive stock options/shares 832 -- -- Convertible notes equivalent shares 6,510 -- -- ------- -------- -------- Diluted weighted average common shares outstanding 35,090 25,778 23,791 ======= ======== ======== Diluted income (loss) per share $ 1.80 $ (2.26) $ (2.43) ======= ======== ======== Average shares outstanding diluted exclude the antidilutive effects ofconvertible preferred stock and redeemable stock options totaling approximately1.1 million shares and 0.9 million shares in 2003 and 2002, respectively.7. OTHER LEASE ARRANGEMENTS a. Equipment Financing The Company has entered into agreements for the sale and leaseback ofcertain production equipment at its manufacturing locations. During 2004, theCompany purchased the equipment under two of the agreements for $7.1 million. Asof December 31, 2004, the unamortized lease values related to the remainingagreements are approximately $1.8 million. Future minimum lease payments relatedto these arrangements are $1.0 million and $0.8 million for 2005 and 2006,respectively. The end of term residual guarantees and purchase options areminimal. These agreements contain no financial covenants; however, they docontain non-financial covenants including cross default provisions which couldbe triggered if the Company is not in compliance with covenants in other debt orleasing arrangements. Total rent expense for these leases in 2004, 2003 and 2002 were $3.9million, $4.2 million and $4.4 million, respectively. b. Other Lease Commitments The Company leases office space, manufacturing, warehouse and servicefacilities and equipment under operating leases, the majority of which expirethrough 2009. Future minimum lease payments required under these other leasecommitments as of December 31, 2004 are as follows (in thousands): Payments -------- 2005 $1,394 2006 722 2007 401 2008 236 2009 140Thereafter 394 ------ $3,287 ====== 41 Total rental expense under operating leases was $2.3 million, $4.0 millionand $5.4 million for 2004, 2003 and 2002, respectively.8. FINANCE CONTRACTS The Company previously provided financing for the sale of new and usedtrailers to its customers. The Company no longer originates finance contracts.The financing is principally structured in the form of finance leases, typicallyfor a five-year term. Finance Contracts, as shown on the accompanying Consolidated BalanceSheets, are as follows (in thousands): December 31, ----------------- 2004 2003 ------- ------- Lease payments receivable $ 5,242 $11,439Estimated residual value 688 801 ------- ------- 5,930 12,240Unearned finance charges (548) (1,479) ------- ------- 5,382 10,761Other, net 122 121 ------- ------- 5,504 10,882Less: current portion (2,185) (4,727) ------- ------- $ 3,319 $ 6,155 ======= ======= The future minimum lease payments to be received from finance contracts asof December 31, 2004 are as follows (in thousands): Amounts ------- 2005 2,5582006 2,4532007 2052008 26 ----- 5,242 =====9. DEBT a. Long-term debt consists of the following (in thousands): December 31, ------------------- 2004 2003 -------- -------- Bank Revolver (due 2007) $ -- $ 60,358Bank Term Loan -- 36,766Senior Convertible Notes (due 2008) 125,000 125,000Other Notes Payable (7.25% due 2006) 2,500 5,192 -------- -------- 127,500 227,316 Less: Current maturities (2,000) (7,337) -------- -------- $125,500 $219,979 ======== ======== b. Maturities of long-term debt at December 31, 2004, are as follows (in thousands): Amounts -------- 2005 $ 2,000 2006 500 2007 -- 2008 125,000Thereafter -- ------- $127,500 ======== 42 c. Senior Convertible Notes The Company has $125 million of 3.25% five-year senior unsecuredconvertible notes (convertible notes), which are currently convertible into 6.5million shares of the Company's common stock. The convertible notes have aconversion price of $19.20 or a rate of 52.0833 shares per $1,000 principalamount of note. The convertible notes bear interest at 3.25% per annum payablesemi-annually on February 1 and August 1. If not converted, the balance is dueon August 1, 2008. d. Bank Facility In 2004, the Company paid off the $25.8 million remaining balance on itsbank term loan with a portion of the proceeds from an equity offering. As aresult, the Company wrote-off $0.6 million in unamortized deferred debt costs ofthe bank term loan as a loss on debt extinguishment. On December 30, 2004, the Company amended and restated its asset-based loanagreement (ABL Facility). The most notable amendments to the facility included: - Reducing the capacity under the ABL Facility from $175 million to $125 million; - Extending the maturity date of the facility from September 30, 2006 to September 30, 2007; - Eliminating financial covenants and certain other restrictions so long as unused availability remains above $40 million; - Allowing the Company to pay cash dividends up to $10 million; and - Reducing the borrowing rates and fees The amended facility is secured by the Company's property, plant andequipment, inventory and accounts receivable and the amount available to borrowvaries in relation to the balances of those accounts among other things, asdefined in the agreements. As of December 31, 2004, borrowing capacity under therevolver was $117.6 million. Interest on the ABL Facility revolver is variable, based on the LondonInterbank Offer Rate (LIBOR) plus 150 basis points or the bank's alternativerate, as defined in the agreement. At December 31, 2004, the 30-day LIBOR was2.4%. The Company pays a commitment fee on the unused portion of the facility ata rate of 25 points per annum. All interest and fees are paid monthly. For thequarter ended December 31, 2004, the weighted average interest rate was 4.56%. e. Covenants The Company is in compliance with all covenants of the ABL Facility as ofDecember 31, 2004.10. STOCKHOLDERS' EQUITY a. Common Stock On November 3, 2004, the Company completed the sale of 3,450,000 shares ofits common stock at a public offering price of $23.25. The sale generated netproceeds of $75.7 million which was used to pay down its bank indebtedness. b. Preferred Stock On December 29, 2003, the Company converted its issued and outstandingshares of Series B 6% Cumulative Convertible Exchangeable Preferred Stock(Series B Stock) into approximately 823,300 shares, including 1,916 from accruedand unpaid dividends, of the Company's common stock. The Series B Stockconverted into common stock at the rate of approximately 2.3 shares of commonstock for each full share of Series B Stock based on the conversion price of$21.375. As of December 31, 2004 and 2003, the Company had 300,000 shares of SeriesA Junior Participating Preferred Shares authorized with no shares issued andoutstanding. 43 The Board of Directors has the authority to issue up to 25 million sharesof unclassified preferred stock and to fix dividends, voting and conversionrights, redemption provisions, liquidation preferences and other rights andrestrictions. c. Stockholders' Rights Plan In November 1995, the Company's Board of Directors adopted a Stockholders'Rights Plan (the "Rights Plan"). The Rights Plan is designed to deter coerciveor unfair takeover tactics in the event of an unsolicited takeover attempt. Itis not intended to prevent a takeover of Wabash on terms that are favorable andfair to all stockholders and will not interfere with a merger approved by theBoard of Directors. Each right entitles stockholders to buy one one-thousandthof a share of Series A Junior Participating Preferred Stock at an exercise priceof $120. The rights will be exercisable only if a person or a group acquires orannounces a tender or exchange offer to acquire 20% or more of the Company'sCommon Stock or if the Company enters into other business combinationtransactions not approved by the Board of Directors. In the event the rightsbecome exercisable, the rights plan allows for the Company's stockholders toacquire stock of Wabash or the surviving corporation, whether or not Wabash isthe surviving corporation having a value twice that of the exercise price of therights. The rights will expire December 28, 2005 or are redeemable for $0.01 perright by our Board under certain circumstances.11. STOCK-BASED INCENTIVE PLANS a. Stock Option and Stock Related Plans The Company has stock incentive plans that provide for the issuance ofstock appreciation rights (SAR) and the granting of common stock options toofficers and other eligible employees. Restricted Stock. From time-to-time, the Company has granted to certain keyemployees and outside directors shares of the Company's stock to be earned overtime. These shares are granted at par value and recorded at the market price onthe date of grant with an offsetting balance representing the unearned portion.These grants have been made under the 2000 Stock Option Plan and 2004 Stock Incentive Plan. The grants generally vest over periods ranging from two to fiveyears. As of December 31, 2004 and 2003, there were 117,627 shares and 55,467shares, respectively, of restricted stock grants outstanding and not fullyvested with an unearned balance of $1.5 million and $0.3 million, respectively,included in additional paid-in-capital. In 2004 and 2003, the Company recordedamortization expense of $0.4 million and $0.2 million, respectively, related torestricted stock. Stock Options. At the Annual Meeting of Stockholders in May of 2004, the2004 Stock Incentive Plan was approved making available 1,100,000 shares forissuance, as well as a reduction of shares available for granting under the 2000Stock Option Plan to 100,000 shares. The Company has three non-qualified stockoption plans (the 1992, 2000 and 2004 Stock Option Plans) which allow eligibleemployees to purchase shares of common stock at a price not less than marketprice at the date of grant. Under the terms of the Stock Option Plans, up to anaggregate of approximately 3,850,000 shares are reserved for issuance, subjectto adjustment for stock dividends, recapitalizations and the like. Optionsgranted to employees under the Stock Option Plans generally become exercisablein annual installments over three to five years depending upon the grant.Options granted to non-employee directors of the Company are fully vested andexercisable six months after the date of grant. All options granted expire 10years after the date of grant. The Company has issued non-qualified stock options in connection withinducing certain individuals to commence employment with the Company. In theaggregate, the Company has issued options to purchase 385,000 shares of commonstock to three individuals. The exercise price for each option granted was setby the Compensation Committee at the fair market value of the shares subject tothat option. The Compensation Committee set vesting schedules that vest overthree years. Upon a change in control of the Company, all outstanding sharessubject to options vest. The term of each option is 10 years. 44 A summary of stock option activity and weighted-average exercise prices forthe periods indicated are as follows: Number of Weighted-Average Options Exercise Price --------- ---------------- Outstanding at December 31, 2001 1,777,725 19.39 Granted 375,000 10.01 Exercised (11,168) 7.38 Cancelled (294,981) 17.37 ---------Outstanding at December 31, 2002 1,846,576 17.93 Granted 953,250 8.46 Exercised (360,114) 13.34 Cancelled (563,360) 25.16 ---------Outstanding at December 31, 2003 1,876,352 11.83 Granted 241,055 25.12 Exercised (476,498) 13.35 Cancelled (281,374) 13.47 ---------Outstanding at December 31, 2004 1,359,535 13.31 ========= The following table summarizes information about stock options outstandingat December 31, 2004: Weighted Weighted Weighted Range of Average Average Number Average Exercise Number Remaining Exercise Exercisable Exercise Prices Outstanding Life Price at 12/31/04 Price -------- ----------- --------- -------- ----------- -------- $ 6.68 - $10.01 928,050 7.9 $ 8.61 155,397 $ 8.76$10.02 - $13.35 3,000 6.4 $12.95 3,000 $12.95$13.36 - $16.69 32,000 3.9 $15.36 32,000 $15.36$16.70 - $20.03 18,750 2.0 $18.90 18,750 $18.90$20.04 - $23.36 112,575 4.6 $21.52 105,909 $21.61$23.37 - $26.70 187,660 9.4 $23.92 -- $ 0.00$26.71 - $30.04 61,000 2.7 $28.75 61,000 $28.75$30.05 - $33.38 16,500 0.7 $33.38 16,500 $33.38 Using the Black-Scholes option valuation model, the estimated fair valuesof options granted during 2004, 2003 and 2002 were $15.35, $4.61 and $5.67 peroption, respectively. Principal assumptions used in applying the Black-Scholesmodel were as follows:Black-Scholes Model Assumptions 2004 2003 2002------------------------------- ---- ---- ---- Risk-free interest rate 4.7% 4.0% 5.1%Expected volatility 52.1% 53.5% 49.4%Expected dividend yield 0.5% 1.3% 1.3%Expected term 10 yrs. 10 yrs. 10 yrs. b. Other Stock Plans The Company has a Stock Bonus Plan (the "Bonus Plan"). Under the terms ofthe Bonus Plan, common stock may be granted to employees under terms andconditions as determined by the Board of Directors. During 2004, 2003 and 2002,7,720, 6,370 and 10,300 shares, respectively, were issued to employees at anaverage price of $28.95, $11.58 and $8.64, respectively. The expense associatedwith the grants is recognized when the shares are granted and amounted to$224,000, $74,000 and $89,000 in 2004, 2003 and 2002, respectively. At December31, 2004 and 2003, there were 452,290 and 460,010 shares, respectively,available for offering under the Bonus Plan. 4512. EMPLOYEE 401(K) SAVINGS PLAN Substantially all of the Company's employees are eligible to participate ina defined contribution plan that qualifies as a safe harbor plan under Section401(k) of the Internal Revenue Code. The Plan provides for the Company to match,in cash, a percentage of each employee's contributions up to certain limits. TheCompany's matching contribution and related expense for the plan wasapproximately $2.8 million, $2.6 million and $1.0 million for 2004, 2003 and2002, respectively.13. INCOME TAXES a. Income Tax Expense (Benefit) The consolidated income tax expense (benefit) for 2004, 2003 and 2002 consists of the following components (in thousands): 2004 2003 2002 ---- ---- -------- Current: U.S. Federal $102 $-- $(13,789) Foreign -- -- 979 State 498 -- (2,468)Deferred -- -- -- ---- --- --------Total consolidated expense (benefit) $600 $-- $(15,278) ==== === ======== The Company's effective tax rate differed from the U.S. Federal statutoryrate of 35% as follows: 2004 2003 2002 -------- -------- -------- Pretax book income (loss) $ 59,005 $(57,227) $(71,468) Federal tax expense (benefit) at 35% statutory rate 20,652 (20,029) (25,014) State and local income taxes 498 -- (1,604) U.S. federal alternative minimum tax 400 -- -- Valuation allowance (20,317) 18,857 12,706 Other (633) 1,172 (1,366) -------- -------- --------Total income tax expense (benefit) $ 600 $ -- $(15,278) ======== ======== ======== b. Deferred Taxes The Company's deferred income taxes are primarily due to temporarydifferences between financial and income tax reporting for the depreciation ofproperty, plant and equipment and tax credits and losses carried forward. The Company has a U.S. federal tax net operating loss carryforward ofapproximately $174 million, which will expire beginning in 2022, if unused, andwhich may be subject to other limitations under IRS rules. The Company hasvarious, multistate income tax net operating loss carryforwards which have beenrecorded as a deferred income tax asset of approximately $20 million, beforeallowances for impairment due to potential unrealizability. The Company hasvarious U.S. federal income tax credit carryforwards which will expire beginningin 2013, if unused. Under SFAS No. 109, Accounting for Income Taxes, deferredtax assets are reduced by a valuation allowance when, in the opinion ofmanagement, it is more likely than not that some portion or all of the deferredtax assets will not be realized. The Company has determined that a valuationallowance is necessary and, accordingly, has recorded a valuation allowance forall deferred tax assets as of December 31, 2004 and 2003, respectively. Infuture periods, the Company will evaluate the deferred income tax assetvaluation allowance and adjust (reduce) the allowance when management hasdetermined that impairment to future realizability of the related deferred taxassets, or a portion thereof, has been removed as provided in the criteria setforth in SFAS No. 109. 46 The components of deferred tax assets and deferred tax liabilities as ofDecember 31, 2004 and 2003 were as follows (in thousands): 2004 2003 -------- --------- Deferred tax (assets): Tax credits and loss carryforwards $(85,453) $(104,814) Operations restructuring -- (22,852) Other (11,828) (52,328)Deferred tax liabilities: Property, plant and equipment 6,048 68,979 Intangibles 2,457 2,403 Other 1,947 21,744 -------- ---------Net deferred tax asset before valuation allowance (86,829) $ (86,868) -------- ---------Valuation allowance 86,829 $ 86,868 -------- ---------Net deferred tax asset $ -- $ -- ======== =========14. COMMITMENTS AND CONTINGENCIES a. Litigation Various lawsuits, claims and proceedings have been or may be instituted orasserted against the Company arising in the ordinary course of business,including those pertaining to product liability, labor and health relatedmatters, successor liability, environmental and possible tax assessments. Whilethe amounts claimed could be substantial, the ultimate liability cannot now bedetermined because of the considerable uncertainties that exist. Therefore, itis possible that results of operations or liquidity in a particular period couldbe materially affected by certain contingencies. However, based on factscurrently available, management believes that the disposition of matters thatare currently pending or asserted will not have a material adverse effect on theCompany's financial position, liquidity or results of operations. Brazil Joint Venture In March 2001, Bernard Krone Industria e Comercio de Maquinas AgricolasLtda. ("BK") filed suit against the Company in the Fourth Civil Court ofCuritiba in the State of Parana, Brazil. This action seeks recovery of damagesplus pain and suffering. Because of the bankruptcy of BK, this proceeding is nowpending before the Second Civil Court of Bankruptcies and CreditorsReorganization of Curitiba, State of Parana (No.232/99). This case grows out of a joint venture agreement between BK and theCompany, which was generally intended to permit BK and the Company to market theRoadRailer(R) trailer in Brazil and other areas of South America. When BK wasplaced into the Brazilian equivalent of bankruptcy late in 2000, the jointventure was dissolved. BK subsequently filed its lawsuit against the Companyalleging among other things that it was forced to terminate business with othercompanies because of the exclusivity and non-compete clauses purportedly foundin the joint venture agreement. In its complaint, BK asserts that it has beendamaged by these alleged wrongs by the Company in the approximate amount of $8.4million. The Company answered the complaint in May 2001, denying any wrongdoing. TheCompany believes that the claims asserted against it by BK are without merit andintends to defend itself vigorously against those claims. The Company believesthat the resolution of this lawsuit will not have a material adverse effect onits financial position, liquidity or future results of operations; however, atthis early stage of the proceeding, no assurance can be given as to the ultimateoutcome of the case. Environmental In September 2003, the Company was noticed as a potentially responsibleparty (PRP) by the United States Environmental Protection Agency pertaining tothe Motorola 52nd Street, Phoenix, Arizona Superfund Site pursuant to theComprehensive Environmental Response, Compensation and Liability Act. PRPsinclude current and former owners and operators of facilities at which hazardoussubstances were disposed of. EPA's allegation that the Company was a PRP arises out of the operation of a former branch facility located approximately fivemiles from 47the original site. The Company does not expect that these proceedings will havea material adverse effect on the Company's financial condition or results ofoperations. In connection with a federal environmental investigation into the Company'sformer Huntsville, Tennessee manufacturing facility, the Company paid a $0.4million fine related to two misdemeanor violations of the Clean Water Act, andentered into a compliance agreement with the United States EnvironmentalProtection Agency (EPA), which was finalized in November 2004. We do not believethat the entering into of the compliance agreement will have a material adverseimpact on the results or operations of the Company. b. Environmental The Company generates and handles certain material, wastes and emissions inthe normal course of operations that are subject to various and evolvingfederal, state and local environmental laws and regulations. The Company assesses its environmental liabilities on an on-going basis byevaluating currently available facts, existing technology, presently enactedlaws and regulations as well as experience in past treatment and remediationefforts. Based on these evaluations, the Company estimates a lower and upperrange for the treatment and remediation efforts and recognizes a liability forsuch probable costs based on the information available at the time. As ofDecember 31, 2004, the Company had an estimated reserve of $0.5 million forremediation activities at a branch property which is held for sale. c. Used Trailer Restoration Program During 1999, the Company reached a settlement with the IRS related tofederal excise tax on certain used trailers restored by the Company during 1996and 1997. The Company has continued the restoration program with the samecustomer since 1997. The customer has indemnified the Company for any potentialexcise tax assessed by the IRS for years subsequent to 1997. As a result, theCompany has recorded a liability and a corresponding receivable of approximately$6.1 and $9.0 million in the accompanying Consolidated Balance Sheets atDecember 31, 2004 and 2003, respectively. During 2001, the IRS completed itsfederal excise tax audit of 1999 and 1998 resulting in an assessment ofapproximately $5.4 million. The Company believes it is fully indemnified forthis liability and that the related receivable is fully collectible. d. Letters of Credit As of December 31, 2004, the Company had standby letters of credit totalingapproximately $7.4 million issued in connection with workers compensation claimsand surety bonds. e. Royalty Payments The Company is obligated to make quarterly royalty payments through 2007 inaccordance with a licensing agreement related to the development of theCompany's composite plate material used on its proprietary DuraPlate(R) trailer.The amount of the payments varies with the production volume of usable material,but requires minimum royalties of $0.5 million annually through 2005. Annualpayments were $0.7 million, $1.1 million and $1.0 million in 2004, 2003 and2002, respectively. f. Used Trailer Residual Guarantees and Purchase Commitments In connection with certain historical new trailer sale transactions, theCompany had entered into agreements to guarantee end-of-term residual value,which contain an option to purchase the used equipment at a pre-determined price. By policy, the Company no longer provides used trailer residualguarantees. 48 Under these agreements, future payments which may be required as ofDecember 31, 2004 are as follows (in thousands): Purchase Option Guarantee Amount --------------- ---------------- 2005 $52,464 $ 2,9912006 -- 9,8072007 -- 3,527 ------- ------- $52,464 $16,325 ======= ======= In relation to the guarantees, as of December 31, 2004 and 2003, theCompany recorded loss contingencies of $0.1 million and $1.4 million,respectively. g. Purchase Commitments As part of the sale of certain assets of our aftermarket parts business, asdiscussed in Footnote 5, the Company entered into a parts purchase agreementwith the buyer. As amended, the Company is required to purchase $24 million inparts from the buyer between October 2004 and September 2006. The Company doesnot believe the purchase commitment will exceed business requirements. The buyeris subject to certain performance requirements. The Company also has $33.3million in purchase commitments through December 2005 for aluminum to meetproduction requirements.15. SEGMENTS AND RELATED INFORMATION a. Segment Reporting Under the provisions of SFAS No. 131, Disclosures about Segments of anEnterprise and Related Information, the Company has two reportable segments:manufacturing and retail and distribution. The manufacturing segment producesand sells new trailers to the retail and distribution segment or to customerswho purchase trailers direct or through independent dealers. The retail anddistribution segment includes the sale, leasing and financing of new and usedtrailers, as well as the sale of aftermarket parts and service through itsretail branch network. In addition, the retail and distribution segment includesthe sale of aftermarket parts through Wabash National Parts. The accounting policies of the segments are the same as those described inthe summary of significant accounting policies except that the Company evaluatessegment performance based on income from operations. The Company has notallocated certain corporate related charges such as administrative costs,interest and income taxes from the manufacturing segment to the Company's otherreportable segment. The Company accounts for intersegment sales and transfers atcost plus a specified mark-up. Reportable segment information is as follows (inthousands): 49 Retail and Combined Consolidated Manufacturing Distribution Segments Eliminations Total ------------- ------------ ---------- ------------ ------------ 2004 Net salesExternal customers $805,993 $235,103 $1,041,096 $ -- $1,041,096Intersegment sales 107,685 1,975 109,660 (109,660) -- -------- -------- ---------- --------- ----------Total net sales $913,678 $237,078 $1,150,756 $(109,660) $1,041,096 ======== ======== ========== ========= ==========Depreciation and amortization 13,357 6,084 19,441 -- 19,441Income (loss) from operations 73,898 (2,879) 71,019 (1,810) 69,209Reconciling items to net loss: Interest income (129) Interest expense 10,809 Foreign exchange gains and losses, net (463) Loss on debt extinguishment 607 Other (income) expense (620) Income tax expense 600 ----------Net loss 58,405 ==========Capital expenditures $ 14,240 $ 1,255 $ 15,495 $ -- $ 15,495Assets $410,087 $185,479 $ 595,566 $(163,520) $ 432,0462003Net salesExternal customers $620,120 $267,820 $ 887,940 $ -- $ 887,940Intersegment sales 52,172 878 53,050 (53,050) -- -------- -------- ---------- --------- ----------Total net sales $672,292 $268,698 $ 940,990 $ (53,050) $ 887,940 ======== ======== ========== ========= ==========Depreciation and amortization 13,843 9,945 23,788 -- 23,788Loss from operations 27,828 (37,283) (9,455) 433 (9,022)Reconciling items to net loss: Interest income (406) Interest expense 31,184 Foreign exchange gains and losses, net (5,291) Loss on debt extinguishment 19,840 Other (income) expense 2,878 ----------Net loss (57,227) ==========Capital expenditures $ 5,672 $ 846 $ 6,518 $ -- $ 6,518Assets $370,325 $188,477 $ 558,802 $(161,766) $ 397,0362002Net salesExternal customers $492,267 $327,301 $ 819,568 $ -- $ 819,568Intersegment sales 37,793 4,188 41,981 (41,981) -- -------- -------- ---------- --------- ----------Total net sales $530,060 $331,489 $ 861,549 $ (41,981) $ 819,568 ======== ======== ========== ========= ==========Depreciation and amortization 15,152 13,474 28,626 -- 28,626Restructuring charge from operations 1,813 -- 1,813 -- 1,813Loss from operations (16,566) (22,287) (38,853) 93 (38,760)Reconciling items to net loss: Interest income (282) Interest expense 34,945 Foreign exchange gains and losses, net (5) Loss on debt extinguishment 1,314 Other (income) expense (3,264) Income tax benefit (15,278) ----------Net loss (56,190) ==========Capital expenditures $ 4,514 $ 1,189 $ 5,703 $ -- $ 5,703Assets $387,263 $340,505 $ 727,768 $(162,199) $ 565,569 50 b. Geographic Information International sales, primarily to Canadian customers, accounted for lessthan 10% in each of the last three years. At December 31, 2004 and 2003, the amount reflected in property, plant andequipment, net of accumulated depreciation related to the Company's Canadiansubsidiary was approximately $2.0 million. c. Product Information The Company offers products primarily in three general categories of newtrailers, used trailers and parts and service. Other sales include leasingrevenues, interest income from finance contracts and freight. The followingtable sets forth the major product category sales and their percentage ofconsolidated net sales (dollars in thousands): 2004 2003 2002 ------------------ ---------------- ---------------- New Trailers $ 914,468 87.8% $690,465 77.8% $563,496 68.8%Used Trailers 52,960 5.1 64,843 7.3 92,317 11.3Parts and Service 58,246 5.6 98,789 11.1 119,627 14.6Other 15,422 1.5 33,843 3.8 44,128 5.3 ---------- ----- -------- ----- -------- -----Total Sales $1,041,096 100.0% $887,940 100.0% $819,568 100.0% ========== ===== ======== ===== ======== ===== d. Major Customers In 2004, no customer represented 10% or greater of consolidated net sales.The Company had one customer that represented 14% of consolidated net sales in2003, and another customer that represented 11% of consolidated net sales in2002. The Company's consolidated net sales in the aggregate to its five largestcustomers were 23%, 27% and 30% of its consolidated net sales in 2004, 2003 and2002, respectively.16. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of operationsfor fiscal years 2004, 2003 and 2002 (dollars in thousands except per shareamounts). First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- 2004 Net sales $221,597 $254,899 $277,243 $287,357 Gross profit $ 23,122 $ 36,635 $ 36,922 $ 29,107 Net income $ 6,859 $ 18,262 $ 20,294 $ 12,990 Basic earnings per share(1) $ 0.25 $ 0.67 $ 0.74 $ 0.44 Diluted earnings per share(1) $ 0.23 $ 0.56 $ 0.62 $ 0.392003 Net sales $222,508 $230,231 $215,450 $219,751 Gross profit (loss) $ 23,166 $ (3,855) $ 17,012 $ 16,154 Net income (loss) $ 1,430 $(27,268)(2) $(29,641)(3) $ (1,748)(4) Basic and diluted loss per share(1) $ 0.05 $ (1.07) $ (1.16) $ (0.08)2002 Net sales $161,952 $210,251 $241,474 $205,891 Gross profit $ 519 $ 7,310 $ 22,684 $ 13,299 Net loss $(14,589) $(21,677) $ (8,319) $(11,605) Basic and diluted loss per share(1) $ (0.65) $ (0.96) $ (0.37) $ (0.46)(1) Earnings (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may differ from annual earnings per share due to rounding.(2) The second quarter 2003 results include a $28.5 million loss on asset impairment, as discussed in Footnote 5.(3) The third quarter 2003 results include an $18.9 million loss on debt extinguishment, related to its debt refinancing.(4) The fourth quarter 2003 results include a $4.1 million loss on the sale of a large portion of the Company's finance contracts. 51ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NoneITEM 9A--CONTROLS AND PROCEDURES Disclosure Controls and Procedures Based on an evaluation under the supervision and with the participation ofthe Company's management, the Company's principal executive officer andprincipal financial officer have concluded that the Company's disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (Exchange Act)) were effective as ofDecember 31, 2004. Changes in Internal Controls There were no changes in the Company's internal control over financialreporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act,during the fourth quarter of fiscal 2004 that have materially affected or arereasonably likely to materially affect the Company's internal control overfinancial reporting. Report of Management on Internal Control Over Financial Reporting The management of Wabash National Corporation (the Company), is responsiblefor establishing and maintaining adequate internal control over financialreporting. The Company's internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with U.S. generally accepted accounting principles. Internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of the financial statements in accordance with U.S. generallyaccepted accounting principles, and that receipts and expenditures of theCompany are being made only in accordance with authorizations of management anddirectors of the Company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company's assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies and procedures may deteriorate. Management assessed the effectiveness of the Company's internal controlover financial reporting as of December 31, 2004, based on criteria foreffective internal control over financial reporting described in InternalControl - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this assessment, wehave concluded that internal control over financial reporting is effective as ofDecember 31, 2004. Ernst & Young LLP, an Independent Registered Public Accounting Firm, hasaudited the Company's consolidated financial statements and has issued anattestation report on management's assessment of the Company's internal controlover financial reporting which appears on the following page.William P. Greubel President and Chief Executive OfficerRobert J. Smith Senior Vice President and Chief Financial OfficerFebruary 28, 2005 52 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Wabash National Corporation We have audited management's assessment, included in the accompanyingReport of Management on Internal Control over Financial Reporting, that WabashNational Corporation maintained effective internal control over financialreporting as of December 31, 2004, based on criteria established in InternalControl--Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Wabash NationalCorporation's management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management's assessment and an opinion on the effectiveness of thecompany's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management's assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion. A company's internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Wabash National Corporationmaintained effective internal control over financial reporting as of December31, 2004, is fairly stated, in all material respects, based on the COSOcriteria. Also, in our opinion, Wabash National Corporation maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Wabash National Corporation as of December 31, 2004 and 2003, and therelated consolidated statements of operations, shareholders' equity, and cashflows for each of the three years in the period ended December 31, 2004 ofWabash National Corporation and our report dated February 28, 2005 expressed anunqualified opinion thereon. ERNST & YOUNG LLPIndianapolis, IndianaFebruary 28, 2005 53PART IIIITEM 10--EXECUTIVE OFFICERS OF THE REGISTRANT The Company hereby incorporates by reference the information containedunder the heading "Election of Directors" from its definitive Proxy Statement tobe delivered to stockholders of the Company in connection with the 2004 AnnualMeeting of Stockholders to be held May 12, 2005. The following are the executive officers of the Company: NAME AGE POSITION ---- --- -------- William P. Greubel 53 President, Chief Executive Officer and DirectorRichard J. Giromini 51 Executive Vice President and Chief Operating OfficerRodney P. Ehrlich 59 Senior Vice President - Chief Technology OfficerBrent A. Larson 39 Senior Vice President - Sales and MarketingTimothy J. Monahan 52 Senior Vice President - Human ResourcesRobert J. Smith 58 Senior Vice President - Chief Financial OfficerJerry R. Linzey 41 Senior Vice President - Manufacturing William P. Greubel. Mr. Greubel has been President, Chief Executive Officerand Director of the Company since May 2002. As a Director he also serves on theExecutive Committee of the Board. Mr. Greubel was a Director and Chief ExecutiveOfficer of Accuride Corporation, a manufacturer of wheels for trucks andtrailers, from 1998 until May 2002 and served as President of AccurideCorporation from 1994 to 1998. Previously, Mr. Greubel was employed byAlliedSignal Corporation from 1974 to 1994 in a variety of positions ofincreasing responsibility, most recently as Vice President and General Managerof the Environmental Catalysts and Engineering Plastics business units. Richard J. Giromini. Mr. Giromini was promoted to Executive Vice President and Chief Operation Officer on February 28, 2005. He had been Senior VicePresident - Chief Operating Officer since joining the Company on July 15, 2002.He has also served as President and a Director of Wabash National TrailerCenters, Inc. since January 2004. Prior to joining Wabash, Mr. Giromini spenthis entire career in the automotive industry. Most recently, Mr. Giromini waswith Accuride Corporation from April 1998 to July 2002, where he served incapacities as Senior Vice President - Technology and Continuous Improvement;Senior Vice President and General Manager - Light Vehicle Operations; andPresident and CEO of AKW LP. Previously, Mr. Giromini was employed by ITTAutomotive, Inc. from 1996 to 1998 serving as the Director of Manufacturing. Rodney P. Ehrlich. Mr. Ehrlich has been Senior Vice President - ChiefTechnology Officer of the Company since January 2004. From 2001-2003, Mr.Ehrlich was Senior Vice President of Product Development. Mr. Ehrlich has beenin charge of the Company's engineering operations since the Company's founding. Brent A. Larson. Mr. Larson has been Senior Vice President - Sales sinceMarch 2003. From December 2001 until February 2003, Mr. Larson was our VicePresident - Sales. Prior to that, Mr. Larson was Senior Vice President and ownerof a Canadian trailer distributorship, Breadner Trailers Ltd., for over sevenyears. Prior to that, Mr. Larson was Account Executive, Large Accounts for IBMCorporation for over eight years. Timothy J. Monahan. Mr. Monahan has been Senior Vice President - HumanResources since joining the Company on October 15, 2003. Prior to that, Mr.Monahan was with Textron Fastening Systems from 1999 to October 2003 where heserved as Vice President - Human Resources. Previously, Mr. Monahan served as Vice President - Human Resources at Beloit Corporation. Mr. Monahan serves onthe board of directors of North American Tool Corporation. Robert J. Smith. Mr. Smith was appointed Senior Vice President - ChiefFinancial Officer in October 2004, after serving as our Acting Chief FinancialOfficer since June 2004, and our Vice President and Controller since joining usin March 2003. Before joining us, Mr. Smith served from 2000 to 2001 as Directorof Finance for KPMG Consulting, Inc., now BearingPoint, Inc.; from 1993 to 2000with Great Lakes Chemical Corp. (serving from 1998 to 2000 as vice president andcontroller) and from 1983 to 1993 with Olin Corporation, including as chieffinancial officer for several of its divisions. Jerry R. Linzey. Mr. Linzey was promoted to Senior Vice President - Manufacturing on March 1, 2005. He had been Vice President, Manufacturing sinceSeptember 2002. Mr. Linzey has been Vice President, Continuous Improvementsince joining us on June 6, 2002. Prior to that, Mr. Linzey was Director, NorthAmerican Operations, for Stanley Fastening Systems. Previously, Mr. Linzey wasemployed by Delphi Automotive Systems from 1985 to 2000 in manufacturing,engineering and quality positions of increasing responsibility. 54 Code of Ethics As part of our system of corporate governance, our Board of Directors hasadopted a code of ethics that is specifically applicable to our Chief ExecutiveOfficer and Senior Financial Officers. This code of ethics is available on ourwebsite at www.wabashnational.com/about.ITEM 11--EXECUTIVE COMPENSATION The Company hereby incorporates by reference the information containedunder the heading "Compensation" from its definitive Proxy Statement to bedelivered to the stockholders of the Company in connection with the 2005 AnnualMeeting of Stockholders to be held May 12, 2005.ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company hereby incorporates by reference the information containedunder the heading "Beneficial Ownership of Common Stock" from its definitiveProxy Statement to be delivered to the stockholders of the Company in connectionwith the 2005 Annual Meeting of Stockholders to be held on May 12, 2005.ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company hereby incorporates by reference the information containedunder the headings "Related Party Transactions" and "Equity Compensation PlanInformation" from its definitive Proxy Statement to be delivered to thestockholders of the Company in connection with the 2005 Annual Meeting ofStockholders to be held on May 12, 2005.ITEM 14--PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by Item 14 of this form and the audit committee'spre-approval policies and procedures regarding the engagement of the principalaccountant are incorporated herein by reference from its definitive ProxyStatement to be delivered to the stockholders of the Company in connection withthe 2005 Annual Meeting of Stockholders to be held on May 12, 2005 under thecaption "Audit Committee Report - Independent Auditor Fees."PART IVITEM 15--EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) Financial Statements: The Company has included all required financial statements in Item 8 of this Form 10-K. The financial statement schedules have been omitted as they are not applicable or the required information is included in the Notes to the consolidated financial statements.(b) Exhibits: The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below: 2.01 Purchase Agreement dated March 31, 1997, as amended (1)2.02 Asset Purchase Agreement dated July 22, 2003 (14)2.03 Amendment No. 1 to the Asset Purchase Agreement dated September 19, 2003 (14)3.01 Certificate of Incorporation of the Company (2)3.02 Certificate of Designations of Series A Junior Participating Preferred Stock (2)3.03 Amended and Restated By-laws of the Company (9)4.01 Specimen Stock Certificate (7)4.02 Rights Agreement between the Company and Harris Trust and Savings Bank as Rights Agent dated December 4, 1995 (2)4.03 First Amendment to Shareholder Rights Agreement dated October 21, 1998 (3)4.04 Second Amendment to Shareholder Rights Agreement dated December 18, 2000 (5)4.05 Indenture for the 3.25% Convertible Senior Notes due August 1, 2008, between the registrant, as issuer, and Wachovia Bank, National Association, as Trustee, dated as of August 1, 2003 (13)4.06 Registration Rights Agreement for 3.25% Convertible Senior Notes due August 1, 2008, dated August 1, 2003 (13)10.01# 1992 Stock Option Plan (2) 55 10.02 Indemnification Agreement between the Company and Roadway Express, Inc. (4)10.03# 2000 Stock Option Plan (6)10.04# Consulting and Non-Competition Agreement dated July 16, 2001 between Donald J. Ehrlich and Wabash National Corporation (7)10.05# 2001 Stock Appreciation Rights Plan (8)10.06# Executive Employment Agreement dated April 2002 between the Company and William P. Greubel (9)10.07# Executive Employment Agreement dated June 28, 2002 between the Company and Richard J. Giromini (10)10.08# Nonqualified Stock Option Agreement dated July 15, 2002 between the Company and Richard J. Giromini (10) 10.09# Restricted Stock Agreement between the Company and Richard J. Giromini (10)10.10# Executive Employment Agreement dated June 14, 2002 between the Company and Mark R. Holden (10)10.11# Nonqualified Stock Option Agreement dated May 6, 2002 between the Company and Mark R. Holden (10)10.12# Non-qualified Stock Option Agreement between the Company and William P. Greubel (10)10.13# First Amendment to Executive Employment Agreement dated December 4, 2002 between the Company and William P. Greubel (11)10.14# Restricted Stock Agreement between the Company and William P. Greubel (11)10.15# Second Amendment to Executive Employment Agreement dated June 2, 2003 between the Company and William P. Greubel (12)10.16 Loan and Security Agreement dated September 23, 2003 (15)10.17 Amendment No. 1 to Loan and Security Agreement dated October 23, 2003 (15)10.18 Amendment No. 3 to Loan and Security Agreement dated December 11, 2003 (15)10.19# 2004 Stock Incentive Plan (16)10.20 Waiver and Amendment No. 4 to Loan and Security Agreement dated September 9, 2004 (17)10.21# Form of Associate Stock Option Agreements under the 2004 Stock Incentive Plan (17)10.22# Form of Associate Restricted Stock Agreements under the 2004 Stock Incentive Plan (17)10.23# Form of Executive Stock Option Agreements under the 2004 Stock Incentive Plan (17)10.24# Form of Executive Restricted Stock Agreements under the 2004 Stock Incentive Plan (17)10.25 Amended and Restated Loan and Security Agreement dated December 30, 2004 (18)21.00 List of Significant Subsidiaries (19)23.01 Consent of Ernst & Young LLP (19)31.01 Certification of Principal Executive Officer (19)31.02 Certification of Principal Financial Officer (19)32.01 Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (19) # Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Form 8-K filed on May 1, 1997 (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (No. 33-42810) or the Registrant's Registration Statement on Form 8-A filed December 6, 1995 (item 3.02 and 4.02) (3) Incorporated by reference to the Registrant's Form 8-K filed on October 26, 1998 (4) Incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 1999 (5) Incorporated by reference to the Registrant's Amended Form 8-A filed January 18, 2001 (6) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2001 (7) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2001 (8) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 2001 (9) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2002 (10) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2002 (11) Incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 2002 (12) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2003 (13) Incorporated by reference to the Registrant's registration statement Form S-3 (Registration No. 333-109375) filed on October 1, 2003 (14) Incorporated by reference to the Registrant's Form 8-K filed on September 29, 2003 (15) Incorporated by reference to the Registrant's Form 10-K/A Amendment No. 3 for the year ended December 31, 2003 (16) Incorporated by reference to the Registrant's Form 10-Q filed on August 9, 2004 (17) Incorporated by reference to the Registrant's Form 10-Q filed on October 27, 2004 (18) Incorporated by reference to the Registrant's Form 8-K filed on January 5, 2005 (19) Filed herewith 56SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. WABASH NATIONAL CORPORATIONMarch 3, 2005 By: /s/ Robert J. Smith ------------------------------------------ Robert J. Smith Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of the registrant inthe capacities and on the date indicated.Date Signature and Title---- ------------------- March 3, 2005 By: /s/ William P. Greubel ------------------------------------------ William P. Greubel President and Chief Executive Officer and Director (Principal Executive Officer)March 3, 2005 By: /s/ Robert J. Smith ------------------------------------------ Robert J. Smith Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)March 3, 2005 By: /s/ John T. Hackett ------------------------------------------ John T. Hackett Chairman of the Board of DirectorsMarch 3, 2005 By: /s/ David C. Burdakin ------------------------------------------ David C. Burdakin DirectorMarch 3, 2005 By: /s/ Ludvik F. Koci ------------------------------------------ Ludvik F. Koci DirectorMarch 3, 2005 By: /s/ Martin C. Jischke ------------------------------------------ Dr. Martin C. Jischke DirectorMarch 3, 2005 By: /s/ Stephanie K. Kushner ------------------------------------------ Stephanie K. Kushner DirectorMarch 3, 2005 By: /s/ Ronald L. Stewart ------------------------------------------ Ronald L. Stewart Director March 3, 2005 By: /s/ Larry J. Magee ------------------------------------------ Larry J. Magee Director 57 . . . EXHIBIT 21.00 SUBSIDIARIES OF THE COMPANY AND OWNERSHIP OF SUBSIDIARY STOCK NAME OF STATE/COUNTRY OF % OF SHARES OWNED SUBSIDIARY INCORPORATION BY THE CORPORATION* ---------- ---------------- ------------------- Wabash National GmbH Germany 100% Wabash National Trailer Centers, Inc Delaware 100% WNC Cloud Merger Sub, Inc Arkansas 100% Cloud Oak Flooring Company, Inc Arkansas 100% Wabash National L.P. Delaware 100% Apex Trailer Leasing & Rentals, L.P. Delaware 100% Wabash National Services L.P. Delaware 100% Wabash Financing LLC Delaware 100% RoadRailer Mercosul, Ltda Brazil 50%RoadRailer Technology Development Company, Ltd. China 81% National Trailer Funding LLC Delaware 100% Continental Transit Corporation Indiana 100% FTSI Canada, Ltd. Canada 100% Wabash Receivables, LLC Delaware 100% WNC Receivables Management Corp. Delaware 100% FTSI Distribution Company, L.P. Delaware 100%* Includes both direct and indirect ownership by the parent, Wabash National Corporation EXHIBIT 23.01 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following RegistrationStatements:(1) Registration Statement (Form S-3 No. 333-102350) of Wabash National Corporation(2) Registration Statement (Form S-8 No. 333-54714) pertaining to the 2000 Stock Option and Incentive Plan of Wabash National Corporation(3) Registration Statement (Form S-8 No. 333-29309) pertaining to the 1992 Stock Option Plan and Stock Bonus Plan of Wabash National Corporation(4) Registration Statement (Form S-8 No. 33-49256) pertaining to the 1992 Stock Option Plan of Wabash National Corporation(5) Registration Statement (Form S-8 No. 33-65698) pertaining to the 1993 Employee Stock Purchase Plan of Wabash National Corporation(6) Registration Statement (Form S-8 No. 33-90826) pertaining to the Directors and Executives Deferred Compensation Plan of Wabash National Corporation(7) Registration Statement (Form S-8 No. 333-115682) pertaining to the 2004 Stock Incentive Plan of Wabash National Corporationof our reports dated February 28, 2005, with respect to the consolidatedfinancial statements of Wabash National Corporation, Wabash National Corporationmanagement's assessment of the effectiveness of internal control over financialreporting, and the effectiveness of internal control over financial reporting ofWabash National Corporation, included in this Annual Report (Form 10-K) for theyear ended December 31, 2004./s/ Ernst & Young LLPIndianapolis, IndianaFebruary 28, 2005 EXHIBIT 31.01 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, William P. Greubel, certify that:1. I have reviewed this annual report on Form 10-K of Wabash NationalCorporation;2. Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;4. The registrant's other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.Date: March 3, 2005 /s/ William P. Greubel ---------------------------------------- William P. Greubel President and Chief Executive Officer (Principal Executive Officer) 58 EXHIBIT 31.02 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Robert J. Smith, certify that:1. I have reviewed this annual report on Form 10-K of Wabash NationalCorporation;2. Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;4. The registrant's other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.Date: March 3, 2005 /s/ Robert J. Smith ---------------------------------------- Robert J. Smith Senior Vice President and Chief Financial Officer (Principal Financial Officer) 59 EXHIBIT 32.01 WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)The undersigned, the Chief Executive Officer and the Senior Vice President,Chief Financial Officer of Wabash National Corporation (the "Company"), eachhereby certifies that, to his knowledge, on March 3, 2005:(a) the Form 10K Annual Report of the Company for the year ended December 31, 2004 filed on March 3, 2005, with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934; and(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ William P. Greubel ---------------------------------------- William P. Greubel Chief Executive Officer March 3, 2005 /s/ Robert J. Smith ---------------------------------------- Robert J. Smith Senior Vice President, Chief Financial Officer March 3, 2005 60