MLR

Business Context and Reporting Period

Company: Miller Industries, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2002.
Operations: The Company operates in two segments: Towing and Recovery Equipment and Towing Services (RoadOne). The Company recently changed its fiscal year end from April 30 to December 31.

Key Financial Metrics

Note: The 2002 Net Loss includes a non-cash cumulative effect of a change in accounting method of $21.8 million related to the adoption of SFAS No. 142 (Goodwill).

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 8.4% year-over-year. Towing and Recovery Equipment sales fell 9.3% due to customer cost pressures, while Towing Services sales dropped 5.9% due to post-9/11 transportation impacts and asset divestitures.
• Accounting Change Impact: The adoption of SFAS No. 142 resulted in a $21.8 million write-off of goodwill ($2.9 million in Equipment, $18.9 million in Services), recorded as a cumulative effect of accounting change, significantly impacting the Net Loss.
• Discontinued Operations: The Company classified underperforming Towing Services markets as "discontinued operations." Losses from these operations were $1.7 million for the six months ended June 30, 2002, compared to $2.8 million in the prior year.
• Debt Reduction: Total debt decreased by approximately $8.5 million compared to the prior year, driven by asset sales and a $4.2 million tax refund used to pay down the RoadOne revolver.

Outlook, Risks, and Management Commentary

Liquidity and Debt Covenants

The Company faces significant liquidity risks. On April 15, 2002, the Company amended its credit facility to waive defaults. Key terms include:

• Mandatory Debt Reductions: The RoadOne revolving commitment must be reduced from $36.0 million to $30.0 million by October 12, 2002, with further quarterly reductions of $3.0 million until June 2005.
• Penalty Interest Rates: Failure to meet reduction targets will trigger interest rate escalations from Prime + 4.50% to Prime + 14.00% by April 2005.
• Default Risk: Failure to comply with covenants or mandatory repayments could result in an event of default, acceleration of debt, and potential foreclosure on assets.

Management Strategy

Management is focusing on cost reduction, expense control, and the disposal of underperforming RoadOne assets to improve cash flow and meet debt service requirements. The Company is investigating financial alternatives for the Towing Services segment.

Risks

• Continued economic pressure on customers reducing equipment demand.
• Inability to refinance debt or sell assets on acceptable terms.
• Compliance with strict financial covenants and mandatory debt paydowns.

Investor Verification Checklist

• Debt Compliance: Verify the Company's ability to meet the mandatory RoadOne revolver reduction to $30.0 million by October 12, 2002, to avoid penalty interest rates.
• Cash Flow Sufficiency: Assess if operating cash flows and asset sales will be sufficient to fund operations and debt service without requiring additional waivers or refinancing.
• Asset Valuation: Review the valuation of reconditioned inventory, as the Company is currently in discussions with lenders regarding its classification as "eligible inventory" for borrowing base calculations.
• Discontinued Operations: Monitor the progress of the disposal plan for underperforming Towing Services markets to ensure projected losses are realized and assets are sold at acceptable terms.
• Goodwill Impairment: Confirm that the $21.8 million goodwill write-off fully addresses impairment issues under the new SFAS No. 142 standard.