FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1998.
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 1-7160
COACHMEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1101097
(State of incorporation (IRS Employer Identification No.)
or organization)
601 E. Beardsley Ave., Elkhart, Indiana 46514
(Address of principal executive offices) (Zip Code)
(219) 262-0123
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Without Par Value New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes _ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment hereto. X
While it is difficult to determine the number of shares owned by
non-affiliates (within the meaning of such term under the applicable
regulations of the Securities and Exchange Commission), the registrant
estimates that the aggregate market value of the registrant's Common Stock on
March 16, 1999 held by non-affiliates was $293.08 million (based upon the
closing price on the New York Stock Exchange and an estimate that 90.3% of
such shares are owned by non-affiliates).
As of March 16, 1999, 16,644,454 shares of the registrant's
Common Stock were outstanding.
<PAGE>
Documents Incorporated by Reference
Parts of Form 10-K into which
Document the Document is Incorporated
Portions of the Proxy Statement for
the Annual Meeting of Shareholders
to be held on April 29, 1999 Part III
<PAGE>
Part I.
Item 1. Business
Coachmen Industries, Inc. (the "Company" or the "Registrant") was
incorporated under the laws of the State of Indiana on December 31, 1964, as
the successor to a proprietorship established earlier that year. All
references to the Company include its wholly owned subsidiaries and divisions.
The Company is one of the largest full-line producers of recreational
vehicles ("RVs") and is the largest builder of modular homes in the country.
The Company's RVs are marketed under various brand names including Coachmen,
Shasta, and Viking through approximately 1,300 independent dealers located in
49 states and internationally and through eight Company-owned dealerships.
Modular homes are manufactured by the Company's All American Homes operation
which sells homes through approximately 300 builders.
The Company maintains approximately 59 trademarks, which are up for renewal
from 1999 through 2008, and approximately 8 patents due to expire between
2001 and 2015. There are no material licenses, franchises, or concessions
and no material foreign operations.
The Company operates primarily in two business segments, vehicles and
housing. The vehicle segment consists of the manufacture and distribution of
Class A and Class C motorhomes, travel trailers, fifth wheel trailers,
camping trailers, truck campers, van campers, van and truck conversions and
related parts and supplies. The housing segment consists of factory produced
modular homes.
The table below sets forth the composition of the Company's net sales for
each of the last three years (dollar amounts in thousands):
1998 1997 1996
Amount % Amount % Amount %
Vehicles:
Motorhomes $400,953 53 $346,435 52 $327,802 54
Travel Trailers 150,632 20 134,045 20 119,268 20
Camping Trailers 25,686 3 22,527 4 19,013 3
Truck Campers 3,673 1 4,593 1 2,306 1
Parts and Supplies 44,804 6 39,941 6 39,327 6
Total Vehicles 625,748 83 547,541 83 507,716 84
Housing 130,282 17 114,050 17 98,758 16
Total $756,030 100 $661,591 100 $606,474 100
Note: See Note 2 of Notes to Consolidated Financial Statements
regarding segment information on page 27.
<PAGE> 1
Vehicle Segment
The Vehicle Segment consists of recreational vehicles and parts and supplies.
The recreational vehicles consists of five divisions: Coachmen Recreational
Vehicle Company, Georgie Boy Mfg., Inc., Shasta Industries, Coachmen
Automotive and Viking Recreational Vehicles, Inc. Recreational vehicles are
either driven or towed and serve as temporary living quarters for camping,
travel and other leisure activities. Recreational vehicles may be
categorized as motorhomes, travel trailers, camping trailers or truck campers.
A motorhome is a self-powered mobile dwelling built on a special heavy-duty
chassis. A travel trailer is a mobile dwelling designed to be towed behind
another vehicle. Camping trailers are smaller towed units constructed with
sidewalls that may be raised up and folded out. Truck campers are designed
to be mounted on the bed of a pickup truck.
The Company's principal brand names for its recreational vehicles are
Coachmen, Shasta, Viking, Sportscoach, Santara, Catalina, Travelmaster,
Cruise Air, Encounter, Cruise Master, Swinger, Pursuit, Custom Swinger,
Starflyte, Dearborn, Jimmy, Greenbriar and Saratoga. Other brand names
the Company has protected and used and anticipates using in the future
include Normandy, Cross Country, Pathfinder and Frolic.
Parts and Supply consists of Viking Formed Products and The Lux Company, Inc.
("Lux") which provide a variety of products to the recreational vehicle and
automotive industries, as well as other industries. Viking Formed Products
is a diversified manufacturer of fiberglass and thermoplastic parts,
including fiberglass van camper tops, raised roofs for van conversions and
ground effects produced at its Prodesign operations. Additional products
produced include plastic and fiberglass flared fenders, running boards and
lower front and rear moldings. Lux manufactures seating products for the
recreational vehicle, office and healthcare industries. The largest portion
of Lux's sales are in the recreational vehicle seating category, including
sofa beds, convertible pit groups, swivel chairs and ergonomic pilot seats.
Lux also manufactures managerial, conference, guest and high-back executive
chairs. Lux healthcare products encompass end-opening sofas and task chairs
for laboratory and emergency care workers.
The Company currently produces recreational vehicles on an assembly line
basis in Indiana, Michigan, Georgia and Oregon. Components used in the
manufacture of recreational vehicles are primarily purchased from outside
sources. However, in some cases (such as cushions, fiberglass products and
furniture) where it is profitable for the Company to do so, or where the
Company has experienced shortages of supplies, the Company has undertaken to
manufacture its own supplies. The Company depends on the availability of
chassis from a limited number of manufacturers. Occasionally, chassis
availability has limited the Company's production. (See Note 11 of Notes to
Consolidated Financial Statements on page 35 for information concerning the
use of converter pool agreements to purchase vehicle chassis.)
The Company considers itself as being customer driven. Sales and service
representatives regularly visit dealers in their regions, and respond quickly
to questions and suggestions. Divisions host dealer advisory groups and
conduct informative dealer seminars and specialized training classes in areas
such as sales and service. Open forum meetings with owners are held at
campouts, providing ongoing focus group feedback for product improvements.
Engineers and product development team members are encouraged to travel and
vacation in Company RVs to
<PAGE> 2
gain a complete understanding and appreciation for the products.
The Company believes it has the ability to respond promptly to changes in
market conditions. Most of the manufacturing facilities can be changed over
to the assembly of other existing products in two to six weeks. In addition,
these facilities may be used for other types of light manufacturing or
assembly operations. This flexibility enables the Company to adjust its
manufacturing capabilities in response to changes in demand for its products.
Recreational vehicles are generally manufactured against orders received from
the Company's dealers. Sales are seasonal with the highest level of sales
occurring during the spring and summer months. Agreements with most of its
dealers are cancelable on short notice, provide for minimum inventory levels
and establish sales territories. No dealer accounts for more than 5% of the
Company's net sales.
Most dealers' purchases of RVs from the Company are financed through "floor
plan" arrangements. Under these arrangements, a bank or other financial
institution agrees to lend the dealer all or most of the purchase price of
its RV inventory, collateralized by a lien on such inventory. The Company
generally executes repurchase agreements at the request of the financing
institution. These agreements provide that, for up to twelve months after a
unit is financed, the Company will repurchase a unit which has been
repossessed by the financing institution for the amount then due to the
financing institution, which is usually less than 100% of the dealer's cost.
Risk of loss resulting from these agreements is spread over the Company's
numerous dealers and is further reduced by the resale value of the products
repurchased. (See Note 11 of Notes to Consolidated Financial Statements on
page 35.) In 1998 the Company terminated its arrangement to guarantee
certain obligations of dealers to a financial institution for purchases of
the Company's products and no such guarantees exist at December 31, 1998.
Over the past three years, the Company has not reported any significant
losses from the repurchase agreements or the guarantee arrangement. The
Company does not finance retail consumer purchases of its products, nor does
it generally guarantee consumer financing.
Housing Segment
The Company's principal brand name in its housing segment is All American
Homes. This segment is the largest producer of modular homes in the country
and is composed of five All American Homes ("All American") operations
strategically located in Indiana, Iowa, North Carolina, Ohio and Tennessee.
Together these plants serve approximately 300 builders in 19 states.
All American's modular homes are built to the same local building codes as
site-built homes by skilled craftsmen in a factory environment unaffected by
weather conditions. Nearly complete when they leave the plant, modular homes
are delivered to their final location, typically in two to five sections, and
are crane set onto a waiting basement or crawl space foundation. Production
takes place on an assembly line, with components moving from workstation to
workstation for framing, electrical, plumbing, drywall, roofing, and cabinet
setting, among other operations. An average two-module home can be produced
in just a few days.
<PAGE> 3
All American regularly conducts builder meetings to review the latest in new
design options and component upgrades. These meetings provide an opportunity
for valuable builder input and suggestions from their customers at the
planning stage.
Business Factors
Many RVs produced by the Company require gasoline for their operation.
Gasoline has, at various times in the past, been difficult to obtain, and
there can be no assurance that the supply of gasoline will continue
uninterrupted, that rationing will not be imposed or that the price of, or
tax on, gasoline will not significantly increase in the future. Shortages of
gasoline and significant increases in gasoline prices have had a substantial
adverse effect on the demand for RV's in the past and could have a material
adverse effect on demand in the future.
The vehicle and housing businesses are dependent upon the availability of and
terms of the financing used by dealers and retail purchasers. Consequently,
increases in interest rates and the tightening of credit through governmental
action or other means have adversely affected the Company's business in the
past and could do so in the future.
Competition and Regulation
The RV and housing industries are highly competitive, and the Company has
numerous competitors and potential competitors in each of its classes of
products, some of whom have greater financial and other resources. Initial
capital requirements for entry into the manufacture of recreational vehicles
or housing are comparatively small; however, codes, standards, and safety
requirements introduced in recent years may deter potential competitors.
Recreational vehicles, the largest portion of the Company's business,
generally compete in the lower to mid-price range markets. The Company
believes it is a leader in the RV industry in its focus on quality. A
quality product and a strong commitment to competitive pricing are emphasized
by the Company in the markets it serves. The Company estimates that its
current share of the recreational vehicle market is in excess of nine percent.
The Company continues to recognize its obligations to protect the environment
insofar as its operations are concerned. To date, the Company has not
experienced any material adverse effect from existing federal, state, or
local environmental regulations.
Employees
At December 31, 1998, Coachmen employed 4,690 persons, of whom 887 were
employed in office and administrative capacities. The Company provides group
life, dental, vision service, hospitalization, and major medical plans under
which the employee pays a portion of the cost. In addition, employees can
participate in a stock purchase plan and certain employees can participate in
the stock award and stock option plans. The Company considers its relations
with employees to be good.
Research and Development
During 1998, the Company spent approximately $4,076,000 on research related
to the development of new products and improvement of existing products. The
amounts spent in 1997 and 1996 were approximately $3,521,000 and $2,721,000,
respectively.
<PAGE> 4
Item 2. Properties
The Registrant owns or leases 3,164,399 square feet of plant and office
space, located on 1,178 acres, of which 2,246,853 square feet are used for
manufacturing, 340,320 square feet are used for warehousing and distribution,
46,024 square feet are used for research and development, 69,644 square feet
are used for customer service and 168,941 square feet are offices. 134,334
square feet are leased to others and 158,283 square feet are available for
sale or lease. The Registrant believes that its present facilities,
consisting primarily of steel clad, steel frame or wood frame construction
and the machinery and equipment contained therein, are well maintained and in
good condition.
The following table indicates the location, number and size of the
Registrant's properties by segment as of December 31, 1998:
No. of Building Area
Location Acreage Buildings (Sq. Ft.)
Properties Owned and Used by Registrant:
Vehicles
Elkhart, Indiana 93.7 18 551,645
Middlebury, Indiana 518.6 33 763,230
Fitzgerald, Georgia 17.0 3 67,070
Centreville, Michigan 105.0 4 84,865
Edwardsburg, Michigan 83.0 12 303,254
Colfax, North Carolina 4.0 2 14,000
Stuart, Florida 4.4 1 26,216
Goshen, Indiana 18.0 1 80,000
Lake Park, Georgia 8.0 1 11,720
Melbourne, Florida 8.1 1 32,000
Grants Pass, Oregon 24.5 1 62,563
Marietta, Georgia 5.2 1 17,400
Subtotal 889.5 78 2,013,963
Housing
Decatur, Indiana 43.3 4 286,500
Dyersville, Iowa 20.0 1 141,902
Springfield, Tennessee 45.0 1 131,453
Rutherfordton, North Carolina 37.8 1 131,497
Zanesville, Ohio 23.0 1 129,753
Subtotal 169.1 8 821,105
Total owned 1,058.6 86 2,835,068
<PAGE> 5
Properties (continued)
Properties Leased and Used by Registrant:
Vehicles
Elkhart, Indiana 1.6 1 8,000
Wildwood, Florida 10.0 1 14,414
Banning, California 3.0 1 2,700
Ft. Myers, Florida 3.1 1 10,400
Colfax, North Carolina 1.5 1 1,200
Grants Pass, Oregon 9.4 - -
Subtotal 28.6 5 36,714
Properties Owned by Registrant and Leased to Others:
Vehicles
Winter Garden, Florida 5.0 1 42,176
Crooksville, Ohio 10.0 2 39,310
Grapevine, Texas 5.0 4 52,848
Subtotal 20.0 7 134,334
Properties Owned by Registrant and Available for Sale or Lease:
Vehicles
Perris, California 15.5 - -
Grapevine, Texas 4.0 - -
Longview, Texas 9.2 - -
Subtotal 28.7 - -
Housing
Montezuma, Georgia 42.6 2 158,283
Subtotal 71.3 2 158,283
Total 1,178.4 100 3,164,399
<PAGE> 6
Item 3. Legal Proceedings
From time to time, the Company is involved in certain litigation arising out
of its operations in the normal course of business. The Company believes
that there are no claims or litigation pending, the outcome of which will
have a material adverse effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the quarter ended December 31, 1998 to a
vote of security holders.
Executive Officers of the Registrant
The following table sets forth the executive officers of the Company, as of
December 31, 1998:
Name Position
*Claire C. Skinner....Chairman of the Board and Chief Executive Officer
*Keith D. Corson......President and Chief Operating Officer and Director
**Gary L. Groom........Executive Vice President, Finance, Secretary and
Director
*Gene E. Stout........Executive Vice President, Corporate Development
* Member of Finance Committee
** Resigned effective March 22, 1999
Claire C. Skinner (age 44) has served as Chairman of the Board and Chief
Executive Officer since August 1997. Before that, Vice Chairman of the
Company since May 1995, and served as Executive Vice President from 1990 to
1995. From 1987 through July 1997, Ms. Skinner served as the President of
Coachmen RV, the Company's largest division. Prior to that, she held several
management positions in operations and marketing since 1983.
Keith D. Corson (age 63) has served as President and Chief Operating Officer
of the Company since November 1991. From June 1991 to November 1991 he
served in the position of Office of the President after rejoining the
Company. Mr. Corson was owner and President of Koszegi Products, a soft case
manufacturer for the eight years prior to June 1991. He was a co-founder of
the Company in 1964, and served in several senior management positions from
1964 until 1982, including President of the Company from 1978 until 1982.
Gene E. Stout (age 65) has served as Executive Vice President, Corporate
Development of the Company since May 1983. From April 1982 to May 1983 he was
Senior Vice President Corporate Planning and Industry Relations. Between
1971 and 1982 he held various management positions with the Company.
<PAGE> 7
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
The following table discloses the high and low closing prices for Coachmen's
common stock during the past two years as reported on the New York Stock
Exchange, along with information on dividends paid per share during the same
periods.
High & Low Closing Prices Dividends Paid
1998 1997 1998 1997
1st Quarter $28.75 - $20.375 $29.875 -$18.25 $.05 $.05
2nd Quarter 30.00 - 23.4375 19.625 - 15.50 .05 .05
3rd Quarter 27.9375 - 17.3125 19.625 - 16.625 .05 .05
4th Quarter 26.250 - 16.00 22.625 - 19.00 .05 .05
The Company's common stock is traded on the New York Stock Exchange.
The number of shareholders of record as of January 31, 1999 was 1,718.
Item 6. Selected Financial Data
Five-Year Summary of Selected Financial Data
-Year Ended December 31-
1998 1997 1996 1995 1994
Net sales $756,029,526 $661,591,185 $606,474,128 $515,862,065 $394,023,774
Net income 33,062,608 24,762,624 29,630,813* 17,549,400 14,784,094
Net income per share:
Basic 1.93 1.44 1.94* 1.18 1.00
Diluted 1.92 1.42 1.91* 1.17 1.00
Cash dividends
per share .20 .20 .185 .14 .12
At year end:
Total
assets 268,476,286 259,062,026 227,447,572 150,248,757 125,021,282
Long-term
debt 10,191,476 12,591,144 14,841,262 12,117,756 7,023,394
*Net income and net income per share for 1996 includes $2,293,893 and $.15,
respectively, for the cumulative effect of an accounting change (see Note 2
of Notes to Consolidated Financial Statements).
<PAGE> 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements.
OVERVIEW
The Company was founded in 1964 as a manufacturer of RVs and began
manufacturing modular homes in 1982. Since that time, the Company has
evolved into a market leader in both business segments through a combination
of internal growth and strategic acquisitions.
The Company's new plant openings have been an important component of its
internal growth strategy. In May 1995, the Company opened a new modular
housing plant in Tennessee and in May 1996, the Company expanded its modular
housing production capacity with the construction of a new facility for the
North Carolina housing operation. The construction of a new modular housing
facility in Ohio, which began in late 1997, became fully operational in
July 1998. Increases in production capacity in 1998 also included an addition
to the modular housing plant in Iowa. In March 1996, the Company increased
its RV production capacity by opening a new fifth wheel and conventional
travel trailer plant in Oregon. Additional travel trailer plants in Indiana
became operational in December 1996 and May 1997. These additional plants
helped capitalize on the growing market share of value-priced travel trailers.
Construction began in 1998 for a new manufacturing facility in Indiana for
Class A motorhomes. This new facility is expected to be operational in
May 1999.
The Company's business segments are cyclical and subject to certain seasonal
demand cycles and changes in general economic and political conditions.
Demand in the RV and modular housing industries generally declines during the
winter season, while sales and profits are generally highest during the
spring and summer months. Inflation and changing prices have had minimal
direct impact on the Company in the past in that selling prices and material
costs have generally followed the rate of inflation.
RESULTS OF OPERATIONS
Comparison of 1998 to 1997
Consolidated net sales for 1998 were $756.0 million, an increase of 14.3%
over the $661.6 million reported in 1997. The Company's vehicle segment,
which includes the parts and supply businesses, experienced a sales increase
of 14.3%, while the modular housing segment increased by 14.2%. Sales
increases in the vehicle segment are attributed to improvements in capacity
utilization, as well as, additions to capacity and overall growth in the
recreational vehicle market. Increased capacity in the Company's housing
segment also resulted in continued sales growth. The Company's RV and
housing segments experienced increases in both the number of units sold and
the average sales price per unit. Historically, the Company's first and
fourth quarters are the slowest for sales in both segments. See Note 12 of
Notes to Consolidated Financial Statements for unaudited interim financial
information.
<PAGE> 9
Gross profit for the year increased to $109.9 million, or 14.5% of net sales,
from $92.8 million, or 14.0% of net sales in 1997. The increase in gross
profit for 1998 was primarily attributable to the increase in net sales. The
increase in the gross profit percentage represents higher gross margins from
improvements in 1998 over the higher expenses associated with capacity start-
up costs incurred in the vehicle segment and costs associated with the
implementation of a 7-day work week production schedule at the Company's
largest housing facility in 1997.
Operating expenses, which include selling, delivery, general and
administrative expenses, were $64.0 million, or 8.5% of net sales in 1998,
compared with $57.5 million, or 8.7% of net sales in 1997. Selling and
delivery expenses were $36.0 million, or 4.8% of net sales, in 1998
compared with $31.6 million, and 4.8% in 1997. As a percentage of net sales,
both selling and delivery expenses remained relatively unchanged. The
increase in the cost dollars of selling and delivery expense is substantially
due to increased sales. General and administrative expenses were $28.0
million, or 3.7% of net sales in 1998, compared with $25.9 million, or 3.9%
of net sales in 1997. The administrative cost percentage decrease is
primarily the result of increasing the Company's bad debt expense in 1997 by
approximately $1.5 million to reflect a slowdown in the overall van conversion
industry. The higher administrative cost dollars for 1998 are associated with
three acquired dealerships and to the ongoing implementation of an enterprise
computer system.
Operating income was $45.9 million in 1998 compared with $35.3 million in
1997, an increase of 30.3%. This increase is consistent with the overall
increase in gross profit of $17.2 million which was partially offset by the
$6.5 million increase in operating expenses. The Company's vehicle segment
produced operating income of $36.1 million, or 5.8% of vehicle net sales,
compared with operating income of $26.7 million, or 4.9% of vehicle net sales
in 1997. The modular housing segment generated operating income of $11.4
million in 1998 and $9.7 million in 1997, or 8.7% and 8.5%, respectively, of
housing net sales.
Interest expense decreased in 1998 to $1.7 million from $2.5 million in 1997.
Investment income decreased to $4.8 million from $5.0 million in 1997. The
decrease in interest expense is substantially due to the settlement of
examinations by the Internal Revenue Service during 1997. Interest expense
varies with the amount of long-term debt and the increase in cash surrender
value of life insurance contracts. These life insurance contracts, which
were purchased a number of years ago, fund obligations under deferred
compensation agreements with executives and other key employees. The interest
costs associated with deferred compensation obligations and with the
borrowings against the cash surrender value of the insurance policies are
partially offset by increases in cash surrender values. The slight decrease
in investment income was partially due to interest income from the favorable
settlement of open state income tax examinations in 1997. The balance of the
decrease in investment income is due to decreased cash and temporary cash
investments which were used in investing activities throughout 1998 and the
open market purchase of common shares for the treasury.
The net gain on the sales of properties decreased to $46,302 in 1998 from
$137,246 in 1997. The variance reflects the result of the amount of gain or
loss recognized upon the disposition of various small properties. Assets are
continually analyzed and every effort is made to sell or dispose of properties
that are determined to be unproductive.
<PAGE> 10
Pretax income was $50.3 million in 1998 compared with $38.8 million in 1997,
an increase of 29.5%. The Company's vehicle segment produced pretax income
of $36.2 million, or 5.8% of vehicle net sales, compared with pretax income of
$26.5 million, or 4.8% of vehicle net sales in 1997. The modular housing
segment generated pretax income of $11.2 million in 1998 and $9.3 million in
1997, or 8.6% and 8.2%, respectively, of housing net sales (see Note 2 of
Notes to Consolidated Financial Statements).
The provision for income taxes was $17.2 million for 1998 and $14.1 million
for 1997, representing an effective tax rate of 34.3%, and 36.2%,
respectively. The lower effective rate in 1998 resulted from a large amount
of preferred stock dividend income subject to partial exclusion from taxation
and an increase in nontaxable Company-owned life insurance proceeds. The
Company's effective tax rate also fluctuates based upon the states where
sales occur and also with the level of export sales.
Net income for the year ended December 31, 1998 was $33.1 million compared
with $24.8 million for the prior year.
Comparison of 1997 to 1996
Consolidated net sales increased $55.1 million, or 9.1% to $661.6 million in
1997 from $606.5 million in 1996. The Company's vehicle segment, which
includes the parts and supply group of companies, experienced a net sales
increase of 7.8% while the housing segment had a net sales increase of 15.5%.
Sales increases in the vehicle segment reflected continued market share gains
in all product categories. The increased capacity in the Company's housing
segment also resulted in continued sales growth, as well as, gains in market
share. Both vehicles and housing experienced increases in unit sales and in
the average sales price per unit during 1997.
Gross profit was $92.8 million and was 14.0% of net sales in 1997 compared to
$88.5 million and 14.6% reported for 1996. The increase in gross profit for
1997 was primarily due to the increase in net sales. The decrease in the
gross profit percentage represented lower gross margins associated with the
housing segment from the Tennessee plant and the North Carolina expansion, as
well as, implementation of a 7-day workweek at the housing operation in
Indiana.
Operating expenses, consisting of selling, delivery, general and
administrative expenses, were $57.5 million and $48.8 million, or as a
percentage of net sales, 8.7% and 8.1% for 1997 and 1996, respectively.
Selling and delivery expenses were $31.6 million in 1997, or 4.8% of net
sales, compared with $27.7 million, or 4.6% in 1996. The slight increase in
selling expense was primarily due to increased dealer volume sales incentives
attributable to increased sales in the housing segment. As a percentage of
net sales, delivery expenses remained relatively unchanged. General and
administrative expenses were $25.9 million in 1997, or 3.9% of net sales,
compared with $21.1 million or 3.5% of net sales in 1996. In 1997, general
and administrative expenses included a $1.5 million increase in the bad debt
expense reflecting the downturn in the van conversion industry. The Company's
parts and supply group primarily supplies componets to this industry.
Operating income was $35.3 million in 1997 compared with $39.7 million in
1996, a decrease of 11.1%. This decrease was consistent with the
<PAGE> 11
$4.2 million increase in gross profit and the overall increase of $8.7
million in operating expenses. The Company's vehicle segment produced
operating income of $26.7 million, or 4.9% of vehicle net sales, compared
with operating income of $29.9 million, or 5.9% of vehicle net sales in 1996.
The modular housing segment generated 1997 operating income of $9.7 million
in both 1997 and 1996, or 8.5% and 9.8%, respectively, of housing net sales.
Interest expense for 1997 increased to $2.5 million, or .4% of net sales,
from $1.6 million, or .3% of net sales in 1996. Investment income for 1997
increased to $5.0 million from $1.6 million in 1996. The increase in
interest expense was substantially due to the settlement of examinations by
the Internal Revenue Service during the year, and was mostly offset with an
increase in investment income from the favorable settlement of state income
tax examinations. The balance of the increase in investment income was
basically due to increased cash and short-term investments which were
generated by operating activities throughout 1997 and the sale of 2,070,000
shares of common stock in November 1996.
The gain on sale of properties decreased to $137,000 for 1997 from $726,000
for 1996.
Pretax income for the year ended 1997 was $38.8 million compared with $41.5
million for 1996. The Company's vehicle segment produced $26.5 million and
$30.3 million of pretax income in 1997 and 1996, respectively. The housing
segment produced pretax income of $9.3 million in 1997 and $9.5 million in
1996 (see Note 2 of Notes to Consolidated Financial Statements).
The provision for income taxes was $14.1 million for both 1997 and 1996,
representing an effective tax rate of 36.2% and 34.1%, respectively. The
lower effective tax rate in 1996 was due to the reversals of federal and
state income tax accruals of $250,000 and $550,000, respectively, resulting
from favorable settlements of tax examinations.
Net income for the year ended December 31, 1997 was $24.8 million compared to
$29.6 million for 1996. The prior year was favorably impacted by a $2.3
million cumulative effect of an accounting change for Company-owned life
insurance. See Note 10 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Company generally relies on funds from operations as its primary source
of working capital and liquidity. In addition, the Company maintains an
unsecured committed line of credit, which totaled $30 million at December 31,
1998, to meet its seasonal working capital needs. There were no borrowings
against this line of credit during 1998, 1997 and 1996. The Company's
operating activities and the sale of common stock in 1996 have been the
principal source of cash flows in each of the last three years. Operating
cash flows were $14.0 million, for each of these years, net income,
adjusted by certain noncash items such as depreciation, was a significant
factor in generating operating cash flows. In 1998, net income and
depreciation were significantly offset by an $18.8 million increase in
inventories. This increase in inventories was directly related to the 14.3%
increase in annual sales, including an 11.0% increase in fourth quarter sales
volume, as well as,
<PAGE> 12
the acquisition of three dealerships during 1998. In 1997, an increase in
accounts payable and other current liabilities was basically offset by
increases in receivables. In 1996, net income was utilized to fund the
increased inventory levels associated with higher sales and production.
Investing activities used cash of $42.1 million, $27.1 million and $15.7
million in 1998, 1997 and 1996, respectively. In 1998 and 1997, purchases of
marketable securities, net of sales, used $16.3 million and $15.5 million of
cash flows. Acquisitions of businesses consumed cash of $9.0 million in 1998
(see Note 9 of Notes to Consolidated Financial Statements). Otherwise the
principal use of cash for investing activities in each of the last three
years has been property, plant and equipment acquisitions. Major capital
expenditures during 1998 included acquisitions, construction of and additions
to production facilities for both the vehicle and housing segments, as well
as the capitalized cost of hardware and software associated with the ongoing
implementation of an enterprise computer system. Major capital expenditures
during 1997 were acquisitions of production facilities for the vehicle
segment, including properties previously leased, and initiating the
construction of a new facility in Ohio for the housing segment. Major capital
expenditures during 1996 included an expansion in North Carolina (financed in
part by a $5.0 million industrial revenue bond) for the housing segment and a
plant opening in Oregon for the vehicle segment. In 1998, the principal use
of cash flows from financing activities was the $16.8 million used to
purchase common shares under the Company's share repurchase programs. Other
financing activities, which used cash in each of the years, were payments of
long-term debt and cash dividends. These negative cash flows were partially
offset by the issuance of common shares under stock option and stock purchase
plans. Financing cash flows for 1996 included $48 million of proceeds from a
public sale of the Company's common shares and $5 million of proceeds from
the industrial revenue bond mentioned above. For a more detailed analysis of
the Company's cash flows for each of the last three years, see the
Consolidated Statements of Cash Flows. The Company's cash and temporary cash
investments at December 31, 1998 were $23.0 million, or a decrease of $48.4
million from 1997. The Company anticipates that available funds, together
with anticipated cash flows generated from future operations and amounts
available under its line of credit will be sufficient to fund the Company's
planned capital expenditures and other operating cash requirements through
the end of 1999. In addition, the Company has $31.3 million of marketable
securities, which are invested in public utility preferred stocks under a
dividend capture program. These marketable securities can be converted to
cash in a short time period.
In 1998, working capital decreased $.6 million, from $140.3 million to $139.7
million. The $4.5 million decrease in current assets at December 31, 1998
versus December 31, 1997 was primarily due to the decrease in cash. The $4.0
million decrease in current liabilities is substantially due to decreases in
trade payables.
Year 2000
The Year 2000 issue relates to the way computer systems, software and some
equipment define calendar dates; they could fail or make miscalculations due
to interpreting a date including "00" to mean 1900, not 2000. In 1997, the
Company determined that certain of its computer software was originally
programmed using two digits rather than four to define the applicable year.
As a result, this software could have been unable to process transactions
beyond December 31, 1999. If correction
<PAGE> 13
or replacement of the software was not completed in a timely manner, the Year
2000 issue could have a material impact on the Company's operations and could
result in an interruption in, or failure of, certain normal business
activities or operations.
The assessment phase of the Company's software, systems and equipment began
in 1997. It was initially determined that the systems most likely to be
affected by the Year 2000 issue were the general accounting systems and
payroll. To remedy the Year 2000 issue with regard to these areas, the
Company began devoting significant resources to replace the affected software
with a new enterprise computer system. It was decided that this enterprise
computer system should also be implemented for the manufacturing processes.
The Company estimates the implementation status of general accounting systems
and payroll to be 100% complete for the testing phase and approximately 95%
complete for the implementation phase at December 31, 1998. As of this date,
the implementation status for manufacturing processes is estimated to be
approximately 70% complete for the vehicle segment and approximately 50%
complete for the housing segment. Full testing and implementation of the new
computer system for all divisions of the Company is occurring on an ongoing
basis throughout 1999 and is expected to be complete in adequate time to
enable proper processing of transactions throughout the Company before
January 1, 2000.
The Company also initiated a senior management focus team in 1998 to identify
and review other possible business system failures that could occur and to
assess the need for contingency plans. The focus team is in the process of
determining if the Company's equipment with embedded systems is Year 2000
compliant. The focus team does not believe the Company's equipment is, for
the most part, calendar-date sensitive. Nonetheless, it has initiated an
inventory of all such equipment, including telecommunications equipment and
facilities. Those business systems considered most critical to continued
operations are being given the highest priority.
The Company believes the key risk factors associated with Year 2000 are those
from outside the Company that it cannot directly control, such as the
readiness of its key material suppliers, dealers, customers, financial
institutions and public infrastructure suppliers. The Company relies on third
parties to provide goods and services necessary for the manufacture and
distribution of its products. The focus team is in the process of
identifying and communicating with third-party suppliers about the status of
their compliance with Year 2000. As of December 31, 1998, the Company has not
received sufficient response from its thrid-party suppliers to determine the
status of their readiness. The Company sells its products to numerous
independent dealers. Management believes the risk associated with Year 2000
compliance by the dealers is minimized since the risk is spread among the
dealers. Due to the uncertainty of the Year 2000 readiness of third parties,
the Company is currently unable to determine whether the consequences of
Year 2000 failures of third parties will have a material impact on the
Company's operations. While the Company is working diligently to obtain
assurance from its mission critical third parties that they will be
compliant, there can be no assurance that the systems of any third party on
which the Company's operations rely will be timely compliant. Nevertheless,
the Company does not anticipate a material impact on its operations from
direct interfaces with third parties. The focus team is in the process of
assessing the risk and the need to develop contingency plans to address
potential disruptions that could be caused by third parties.
<PAGE> 14
The Company believes the worst case scenario for Year 2000 issues would be
the disruption or unavailability of utility services. This could hinder or
stop the performance of normal business functions, such as manufacturing and
selling, and might disrupt retail demand. However, due to the multiple
business locations of the Company, its manufacturing facilities, and its
owned and independent retail outlets, normal business functions could
continue at those locations where utility disruptions or unavailability did
not occur. If they do occur, it is expected they will be temporary, and
some utility services may be available from remote locations, as through
electric grids. The focus team is in the process of determining whether a
contingency plan is feasible to mitigate worst case disruptions.
The worst case scenario could include halting of production due to the
inability of a single source supplier to deliver a critical product or
component. The Company is implementing a contingency plan to identify
replacement suppliers if a key supplier is unable to adequately assure the
Company that it will be compliant, and to closely monitor inventory levels of
critical components. The largest exposure appears to be the Company's
interface with chassis manufacturers for order processing. The Company
believes these order processing systems to be Year 2000 compliant based on
statements from representatives of the companies involved. The chassis
suppliers have also advised the Company that the chassis are Year 2000
compliant.
Based on a review of its products by segment, vehicles and housing, the
Company has determined that the products it has sold and will continue to
sell should not require remediation to be Year 2000 compliant. Accordingly,
the Company does not believe that the Year 2000 presents a material exposure
as it relates to the Company's products.
The objective of the Company and each of its operating subsidiaries is to
have all of their significant business systems, including those that affect
facilities and manufacturing activities, functioning properly with respect to
Year 2000, before January 1, 2000. The total cost is currently estimated to
be in excess of $5.0 million, of which approximately $3.4 million has been
incurred as of December 31, 1998. Of the amount incurred, $.8 million has
been expensed and $2.6 million has been capitalized for new systems and
equipment. All costs are being funded through operating cash flows. These
costs do not include any costs associated with the implementation of
contingency plans. If determined to be feasible, the Company intends to
create its contingency plans by September 1999.
Forward Looking Statements
This annual report contains certain statements that are "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward looking statements involve risks and uncertainties, and are dependent
on factors which may include, but are not limited to, the availability of
gasoline, which can impact sales of recreational vehicles; availability of
chassis, which are used in the production of many of the Company's
recreational vehicle products; interest rates, which affect the affordability
of the Company's products; and also on the state of the recreational vehicle
and modular housing industries in the United States. Other factors affecting
forward-looking statements include competition in these industries and
<PAGE> 15
the Company's ability to maintain or increase gross margins which are
critical to the profitability whether there are or are not increased sales;
and the Company's ability to make its software and equipment year 2000
compliant.
At times, the Company's actual performance differs materially from its
projections and estimates regarding the economy, the recreational vehicle and
housing industries and other key performance indicators. Readers of this
Report are cautioned that reliance on any forward-looking statements involves
risks and uncertainties. Although the Company believes that the assumptions
on which the forward-looking statements contained herein are reasonable, any
of those assumptions could prove to be inaccurate given the inherent
uncertainties as to the occurrence or nonoccurrence of future events. There
can be no assurance that the forward-looking statements contained in this
Report will prove to be accurate. The inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company
that the Company's objectives will be achieved.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company are exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing and investing yields. The Company has not utilized its line of
credit facilities during the past three years and, accordingly, changes in
interest rates would only impact the Company's long-term debt. At
December 31, 1998, the Company had $12.3 million of long-term debt,
consisting of industrial development revenue bonds and promissory notes, all
of which have variable or floating rates. The Company's marketable securities
consist of public utilities preferred stocks which pay quarterly fixed rate
dividends. These financial instruments are subject to market risk in that
changes in interest rates would impact the market value of the preferred
stocks. As discussed in Note 1 of the Notes to Consolidated Financial
Statements, the Company utilizes U.S. Treasury bond future options as a
protection against the impact of increases in interest rates on the fair value
of the Company's investments in these fixed rate preferred stocks.
Outstanding options are marked to market with market value changes
recognized in current earnings. The U.S. Treasury bond futures options
generally have terms ranging from 90 to 180 days. Based on the Company's
overall interest rate exposure at December 31, 1998, including variable or
floating rate debt and derivatives used to hedge the fair value of fixed
rate preferred stocks, a hypothetical 10 percent change in interest rates
applied to the fair value of the financial instruments as of December 31,
1998, would have no material impact on earnings, cash flows or fair values of
interest rate risk sensitive instruments over a one-year period.
<PAGE> 16
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Page
Financial Statements:
Report of Independent Accountants 17
Consolidated Balance Sheets at December 31, 1998 and 1997 18-19
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 21-22
Notes to Consolidated Financial Statements 23-36
Financial Statement Schedule:
II - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997 and 1996 37
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Coachmen Industries, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Coachmen Industries, Inc. and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 10 to the consolidated financial statements, effective
January 1, 1996 the Company changed its method of accounting for its
investments in life insurance contracts.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
South Bend, Indiana
January 29, 1999
<PAGE> 17
Coachmen Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
CURRENT ASSETS
Cash and temporary cash investments $ 23,009,502 $ 71,427,918
Marketable securities 31,279,433 15,852,718
Trade receivables, less allowance for
doubtful receivables 1998 - $768,000
and 1997 - $1,354,000 27,584,551 25,212,595
Other receivables 1,838,171 2,980,257
Refundable income taxes 3,741,000 1,761,000
Inventories 93,349,453 68,416,006
Prepaid expenses and other 1,341,175 1,247,973
Deferred income taxes 3,268,000 3,040,000
Total current assets 185,411,285 189,938,467
PROPERTY AND EQUIPMENT, at cost
Land and improvements 11,016,684 9,041,817
Buildings and improvements 53,761,414 39,950,161
Machinery and equipment 19,712,798 16,874,788
Transportation equipment 11,175,667 10,159,168
Office furniture and fixtures 8,850,146 5,712,961
104,516,709 81,738,895
Less, Accumulated depreciation 41,444,585 35,137,268
63,072,124 46,601,627
OTHER ASSETS
Real estate held for sale 2,622,218 4,188,063
Rental properties 1,371,915 2,000,218
Intangibles, less accumulated amortization
1998 - $516,913 and 1997 - $516,469 4,553,105 4,927,807
Deferred income taxes 579,000 569,000
Other 10,866,639 10,836,844
19,992,877 22,521,932
TOTAL ASSETS $268,476,286 $259,062,026
The accompanying notes are a part of the consolidated financial statements.
<PAGE> 18
Liabilities and Shareholders' Equity
1998 1997
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,125,175 $ 2,258,519
Accounts payable, trade 18,997,193 22,818,303
Accrued wages, salaries and commissions 4,357,878 4,876,790
Accrued dealer incentives 3,783,628 3,226,255
Accrued warranty expense 6,138,081 6,013,528
Accrued income taxes 1,509,429 1,529,543
Accrued insurance 1,862,811 2,319,518
Other accrued liabilities 6,943,999 6,633,762
Total current liabilities 45,718,194 49,676,218
LONG-TERM DEBT 10,191,476 12,591,144
OTHER 7,108,956 6,658,872
Total liabilities 63,018,626 68,926,234
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY
Common shares, without par value: authorized
60,000,000 shares; issued 1998 - 20,842,568
shares and 1997 - 20,689,214 shares 89,105,324 87,519,740
Additional paid-in capital 3,866,398 3,012,596
Retained earnings 145,613,994 115,984,289
Treasury shares, at cost, 1998 - 4,257,985
shares and 1997 - 3,387,648 shares (33,128,056) (16,380,833)
Total shareholders' equity 205,457,660 190,135,792
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $268,476,286 $259,062,026
<PAGE> 19
Coachmen Industries, Inc. and Subsidiaries
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Net sales $756,029,526 $661,591,185 $606,474,128
Cost of goods sold 646,118,708 568,836,172 517,966,127
Gross profit 109,910,818 92,755,013 88,508,001
Operating expenses:
Selling and delivery 35,973,828 31,605,666 27,719,131
General and administrative 28,009,137 25,889,028 21,116,814
63,982,965 57,494,694 48,835,945
Operating income 45,927,853 35,260,319 39,672,056
Nonoperating income (expense):
Interest expense (1,738,608) (2,544,021) (1,572,092)
Investment income 4,831,102 4,975,360 1,615,442
Gain on sale of properties, net 46,302 137,246 726,023
Other income, net 1,223,959 996,720 1,041,401
4,362,755 3,565,305 1,810,774
Income before income taxes
and cumulative effect
of accounting change 50,290,608 38,825,624 41,482,830
Income taxes 17,228,000 14,063,000 14,146,000
Income before cumulative effect
of accounting change 33,062,608 24,762,624 27,336,830
Cumulative effect of accounting
change for Company-owned life
insurance policies - - 2,293,983
Net income 33,062,608 24,762,624 29,630,813
Retained earnings,
beginning of year 115,984,289 94,670,593 67,824,816
Cash dividends (per common share:
1998 - $.20, 1997 - $.20 and
1996 - $.185) (3,432,903) (3,448,928) (2,785,036)
Retained earnings, end of year $145,613,994 $115,984,289 $ 94,670,593
Earnings per common share:
Income before cumulative
effect of accounting change:
Basic $ 1.93 $ 1.44 $ 1.79
Diluted 1.92 1.42 1.76
Net income:
Basic 1.93 1.44 1.94
Diluted 1.92 1.42 1.91
The accompanying notes are a part of the consolidated financial statements.
<PAGE> 20
Coachmen Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 33,062,608 $ 24,762,624 $ 29,630,813
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 7,573,730 6,696,517 5,487,528
Amortization and write-off of
intangibles 374,702 136,106 135,592
Provision for (recovery of)
doubtful receivables (175,085) 1,616,801 158,024
Net realized and unrealized
losses on marketable
securities and derivatives 902,073 194,663 -
Gain on sale of properties, net (46,302) (137,246) (726,023)
Gain on insurance settlement - - (393,014)
Cumulative effect of
accounting change - - (2,293,983)
Increase in cash surrender value
of life insurance policies (955,983) (1,017,007) (1,087,678)
Deferred income taxes (238,000) 171,000 (240,000)
Other (202,691) 236,388 113,666
Changes in certain assets and
liabilities, net of effect
of acquisitions:
Receivables, excluding
current portion of notes (1,545,151) (7,280,485) (875,253)
Inventories (18,847,990) 394,046 (11,077,327)
Prepaid expenses and other (93,202) (317,729) 640,248
Accounts payable, trade (3,821,110) 8,285,355 (3,902,614)
Income taxes - accrued
and refundable (2,000,114) 1,005,492 (1,711,749)
Other current liabilities 16,544 1,987,375 1,447,503
Net cash provided by
operating activities 14,004,029 36,733,900 15,305,733
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of marketable securities 152,125,749 36,534,842 -
Sale of properties 4,103,886 1,644,501 925,452
Insurance settlement - - 2,821,014
Acquisitions of:
Marketable securities (168,454,538) (52,082,223) -
Property and equipment (22,196,199) (14,202,539) (14,919,168)
Real estate held for sale and
rental properties - - (1,861,458)
Businesses (9,001,812) - (1,852,596)
Collections (advances) on notes
receivable, net 97,906 553,399 (1,136,340)
Other 1,232,961 417,304 305,732
Net cash (used in)
investing activities (42,092,047) (27,134,716) (15,717,364)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt - - 5,000,000
Payments of long-term debt (2,533,012) (2,270,118) (2,092,447)
Sale of common stock, net of
offering expenses - - 47,970,779
Issuance of common shares under
stock option and stock
purchase plans 1,585,584 1,271,698 1,126,061
Tax benefit from stock
options exercised 814,175 654,681 620,431
Cash dividends paid (3,432,903) (3,448,928) (2,785,036)
Purchases of common shares
for treasury (16,764,242) (827,500) -
Net cash provided by
(used in) financing
activities (20,330,398) (4,620,167) 49,839,788
<PAGE> 21
Consolidated Statements of Cash Flows (Concluded)
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Increase (decrease) in cash and
temporary cash investments (48,418,416) 4,979,017 49,428,157
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of year 71,427,918 66,448,901 17,020,744
End of year $23,009,502 $ 71,427,918 $ 66,448,901
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 1,708,500 $ 1,272,000 $ 2,018,000
Income taxes 19,070,700 13,142,000 15,628,000
The accompanying notes are a part of the consolidated financial statements.
<PAGE> 22
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES.
Nature of Operations - Coachmen Industries, Inc. and its subsidiaries (the
"Company") manufacture a full line of recreational vehicles and van
conversions through seven divisions with manufacturing facilities located in
Indiana, Georgia, Michigan and Oregon. These products are marketed through a
nationwide dealer network. The Company's housing segment, with locations in
Indiana, Iowa, North Carolina, Ohio and Tennessee, supply modular housing to
builder/dealers in nineteen adjoining states.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Coachmen Industries, Inc. and its
subsidiaries, all of which are wholly owned.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition - Sales are recognized as revenue upon shipment.
Cash Flows and Noncash Activities - For purposes of the consolidated
statements of cash flows, cash and temporary cash investments include cash,
cash investments and any highly liquid investments purchased with original
maturities of three months or less. In connection with business acquisitions
in 1998, the Company assumed $800,000 of liabilities of the sellers (see
Note 9). For each of the three years in the period ended December 31, 1998,
the Company issued common shares with a market value of $56,646, $67,276 and
$55,665, respectively, in lieu of cash compensation. The Company recognizes a
tax benefit in additional paid-in capital from exercise of stock options (see
Note 6).
Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to credit risk consist primarily of cash and temporary
cash investments and trade receivables.
At December 31, 1998 and 1997, cash and temporary cash investments include
approximately $11.5 million and $42.8 million, respectively, invested in
variable rate demand notes with a seven-day put option. In addition, cash and
temporary cash investments include $9.6 million and $28.1 million invested in
a money market mutual fund at December 31, 1998 and 1997, respectively.
The Company has a concentration of credit risk in the recreational vehicle
industry, although there is no geographic concentration of credit risk. The
Company performs ongoing credit evaluations of its customers' financial
condition and sales to its recreational vehicle dealers are generally subject
to preapproved dealer floor plan financing whereby the Company is paid upon
delivery or shortly thereafter. The Company generally requires no collateral
from its customers. Future credit losses are provided for currently through
the allowance for doubtful receivables and actual credit losses are charged
to the allowance when incurred.
<PAGE> 23
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.
Marketable Securities - Marketable securities consist of public utility
preferred stocks which pay quarterly cash dividends. The preferred stocks are
part of a dividend capture program whereby preferred stocks are bought and
held for the purpose of capturing the quarterly preferred dividend. The
securities are then sold and the proceeds reinvested again in preferred
stocks. The Company's dividend capture program is a tax planning strategy to
maximize dividend income which is 70% excludable from taxable income under
the Internal Revenue Code and related state tax provisions. As a result, a
dividend recapture program generally provides a higher after-tax return than
other short-term investment alternatives. The Company accounts for its
marketable securities under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," which requires certain securities to be categorized as either
trading, available-for-sale or held-to-maturity. The Company's marketable
securities at December 31, 1998 and 1997 are classified as availabale-for-
sale and, accordingly, are carried at fair value with net unrealized
appreciation (depreciation) recorded as a separate component of shareholders'
equity. At December 31, 1998 and 1997, the cost of marketable securities
approximated their fair value and, accordingly, the Company recognized no
unrealized appreciation (depreciation). The cost of securities sold is
determined by the specific identification method.
The Company utilizes U.S. Treasury bond futures options as protection against
the impact of increases in interest rates on the fair value of the Company's
investments in marketable securities (fixed rate preferred stocks). The
options are marked to market with market value changes recognized in the
statements of income in the period of change.
Investment income consists of the following:
1998 1997 1996
Interest income $3,184,394 $4,602,030 $1,615,442
Dividend income on
preferred stocks 2,548,781 567,993 -
Net realized gains (losses)
on sale of preferred stocks (119,806) 206,569 -
Net realized losses on closed U.S.
Treasury bond futures options (596,691) (401,232) -
Unrealized losses on open U.S.
Treasury bond futures options (185,576) - -
Total $4,831,102 $4,975,360 $1,615,442
Fair Value of Financial Instruments - The carrying amounts of cash and
temporary cash investments, receivables and accounts payable approximated
fair value as of December 31, 1998 and 1997, because of the relatively short
maturities of these instruments. The carrying amount of long-term debt,
including current maturities, approximated fair value as of December 31, 1998
and 1997, based upon terms and conditions currently available to the Company
in comparison to terms and conditions of the existing long-term debt. The
Company has investments in life insurance contracts to fund obligations under
deferred compensation agreements (see Note 7). At December 31, 1998 and 1997,
the carrying amount of these policies, which equaled their fair value, was
$10.6 million and $9.9 million, respectively (cash surrender values of $24.3
million and $22.6 million, net of $13.7 million and $12.7 million of policy
loans, respectively).
<PAGE> 24
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.
At December 31, 1998, the carrying amounts of U.S. Treasury bond futures
options, which aggregated $131,485, represented fair value since these
futures options are marked to market at the end of each reporting period.
Inventories - Inventories are valued at the lower of cost (first-in, first-
out method) or market.
Property and Equipment - Depreciation is computed by the straight-line method
on the costs of the assets, at rates based on their estimated useful lives as
follows: land improvements 3-15 years; buildings and improvements 10-30
years; machinery and equipment 3-10 years; transportation equipment 2-7
years; and office furniture and fixtures 2-10 years. Upon sale or retirement
of property and equipment, including real estate held for sale and rental
properties, the asset cost and related accumulated depreciation is removed
from the accounts and any resulting gain or loss is included in income.
Real Estate Held For Sale - Real estate held for sale represents real
properties which are carried at the lower of estimated realizable value or
cost less accumulated depreciation. As of December 31, 1998 and 1997, the
carrying value of real estate held for sale (and the related accumulated
depreciation) aggregated $2,742,169 ($119,951) and $4,451,596 ($263,533),
respectively.
Rental Properties - Rental properties represent owned facilities which are
currently leased to others under lease agreements with expiring terms through
August 31, 2002. Certain of the lease agreements contain options for the
lessee to renew the lease or purchase the facilities. Lease income for the
years ended December 31, 1998, 1997 and 1996 aggregated $239,103, $302,931
and $256,855, respectively. Future minimum annual lease income under these
lease agreements is as follows: 1999 - $337,250, 2000 - $186,000, 2001 -
$186,000 and 2002 - $124,000. The rental properties are carried at cost less
accumulated depreciation, which is not in excess of net realizable value.
The rental properties are depreciated by the straight-line method over the
estimated useful lives of the assets (15 - 20 years). At December 31, 1998
and 1997, the cost of rental properties (and the related accumulated
depreciation) aggregated $2,259,991 ($888,076) and $2,859,991 ($859,773),
respectively.
Intangibles - Intangibles represent the excess of cost over the fair value of
net assets of businesses acquired ("goodwill"), and are being amortized over
a 40-year period by the straight-line method.
Evaluation of Impairment of Long-Lived Assets - In accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," the Company evaluates the carrying value of long-
lived assets whenever significant events or changes in circumstances indicate
the carrying value of these assets may be impaired. The Company evaluates
potential impairment of long-lived assets by comparing the carrying value of
the assets to the expected net future cash inflows resulting from use of the
assets. During the year ended December 31, 1998, the Company determined
because of recurring losses and a forecast of negative undiscounted future
cash flows that the carrying value of goodwill of one of its Company-owned
dealerships was impaired. Accordingly, the Company charged-off the $238,596
of remaining unamortized goodwill.
<PAGE> 25
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Concluded.
Income Taxes - The provision for income taxes is based on income recognized
for financial statement purposes and includes the effects of temporary
differences between such income and that recognized for tax return purposes.
Deferred tax assets and liabilities are established for the expected future
tax consequences of events that have been included in the financial
statements or tax returns using enacted tax rates in effect for the years in
which the differences are expected to reverse.
Research and Development Expenses - Research and development expenses charged
to operations were approximately $4,706,000, $3,521,000 and $2,721,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Warranty Expense - The Company accrues an estimated warranty liability at the
time the warranted products are sold.
Stock-Based Compensation - The Company has adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and,
accordingly, accounts for its stock option plan under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Comprehensive Income - The Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," effective January 1, 1998. The adoption of
SFAS No. 130 had no impact on the Company's consolidated financial statements
since there are no components of comprehensive income that are not already
included in net income.
Business Segments - In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and changes how segments are defined for disclosure purposes to
reflect the way internal information is used by management to make operating
decisions and assess performance of the enterprise's reportable segments. The
adoption of SFAS No. 131 did not affect results of the operations or
finanacial position but did affect the disclosure of segment information (see
Note 2).
New Accounting Pronouncement - On June 15, 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company).
SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company utilizes U.S.
Treasury bond futures options, which are derivative instruments, and changes
in market value are recognized in current earnings. Accordingly, management
of the Company anticipates that, due to its limited use of derivative
instruments and the fact that changes in fair value are currently recognized
in earnings, that the adoption of SFAS No. 133 will not have a significant
effect on the Company's financial statements.
<PAGE> 26
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
2. SEGMENT INFORMATION.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Company has determined that its
reportable segments are those that are based on the Company's method of
internal reporting, which disaggregates its business by product category. The
Company's two reportable segments are: Vehicles (recreational, vans and
specialized), including related parts and supplies, and Housing (modular).
The Company evaluates the performance of its segments and allocates resources
to them based on pretax income. The accounting policies of the segments are
the same as those described in Note 1 and there are no inter-segment revenues.
Differences between reported segment amounts and corresponding consolidated
totals represent corporate expenses for administrative functions and costs
or expenses relating to property and equipment that are not allocated to
segments.
The table below presents information about segments used by the chief
operating decision maker of the Company for the years ended December 31:
1998 1997 1996
Net sales:
Vehicles $625,747,168 $547,540,761 $507,715,622
Housing 130,282,358 114,050,424 98,758,506
Consolidated total $756,029,526 $661,591,185 $606,474,128
Pretax income:
Vehicles $ 36,155,968 $ 26,489,637 $ 30,315,135
Housing 11,163,896 9,332,259 9,475,743
Other reconciling items 2,970,744 3,003,728 1,691,952
Consolidated total $ 50,290,608 $ 38,825,624 $ 41,482,830
Total assets:
Vehicles $141,657,538 $114,171,173 $109,701,864
Housing 38,948,016 30,161,106 31,406,963
Other reconciling items 87,870,732 114,729,747 86,338,745
Consolidated total $268,476,286 $259,062,026 $227,447,572
The following specified amounts are included in the measure of segment pretax
income or loss reviewed by the chief operating decision maker:
1998 1997 1996
Interest expense:
Vehicles $ 474,377 $ 554,739 $ 569,491
Housing 354,564 423,641 259,928
Other reconciling items 909,667 1,565,641 742,673
Consolidated total $ 1,738,608 $ 2,544,021 $ 1,572,092
Depreciation:
Vehicles $ 4,216,336 $ 3,657,050 $ 2,931,270
Housing 2,582,548 2,477,634 2,140,587
Other reconciling items 774,846 561,833 415,671
Consolidated total $ 7,573,730 $ 6,696,517 $ 5,487,528
<PAGE> 27
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
3. INVENTORIES.
Inventories consist of the following:
1998 1997
Raw materials $29,691,805 $ 19,437,977
Work in process 11,511,459 9,327,308
Finished goods 52,146,189 39,650,721
Total $93,349,453 $ 68,416,006
4. SHORT-TERM BORROWINGS.
At December 31, 1998 and 1997, the Company has an unsecured bank line of
credit aggregating $30 million with interest on outstanding borrowings
payable monthly at a rate of LIBOR plus a margin of .50% to .75%. There were
no outstanding borrowings under this bank line of credit during 1998, 1997
and 1996.
5: LONG-TERM DEBT.
Long-term debt consists of the following:
1998 1997
Obligations under industrial development
revenue bonds, variable rates, with
various maturities through 2011 $ 8,500,000 $ 9,807,836
Promissory notes payable, issued or
assumed in the acquisition of a business,
principal payable in annual installments
through January 2001, interest payable
monthly at the prime rate (7.75% at
December 31, 1998), unsecured 3,816,651 5,041,827
Total 12,316,651 14,849,663
Less, Current maturities 2,125,175 2,258,519
Long-term debt $10,191,476 $12,591,144
Aggregate maturities of long-term debt for each of the next five years ending
December 31 are as follows: 1999 - $2,125,175; 2000 - $1,825,174; 2001 -
$1,766,302; 2002 - $400,000 and 2003 - $400,000.
In connection with four of its industrial development revenue bond
obligations, the Company obtained, as a credit enhancement for the
bondholders, irrevocable letters of credit in favor of the bond trustees.
The agreements relating to these letters of credit contain, among other
provisions, certain covenants relating to required amounts of working capital
and net worth and the maintenance of certain required financial ratios.
6. COMMON STOCK MATTERS AND EARNINGS PER SHARE.
Stock Offering
In November 1996, the Company completed a public stock offering consisting of
2,070,000 shares of its common stock at $24.50 per share. Net of underwriting
fees and offering expenses, proceeds to the Company aggregated $48 million.
<PAGE> 28
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. COMMON STOCK MATTERS AND EARNINGS PER SHARE, Continued.
Stock Award Program
On October 19, 1998, the Board of Directors approved a Stock Award Program
which provides for the awarding to key employees of up to 109,000 shares of
common stock from shares reserved under the Company's stock option plan. On
December 1, 1998, the Company awarded 63,600 shares to certain employees,
subject to the terms, conditions and restrictions of the award program.
The shares are issuable in four annual installments of 25% beginning one year
from the date of grant. The Company will recognize compensation expense over
the term of the awards.
Stock Option Plan
The Company's stock option plan provides for the granting of options to
eligible key employees to purchase common shares. Under terms of the plan,
the Company may grant incentive stock options or non-qualified stock options.
The option price for options granted to key employees is an amount per share
of not less than the fair market value per share on the date of granting the
option. No such options may be exercised during the first year after grant,
and are exercisable cumulatively in four installments of 25% each year
thereafter.
The following table summarizes stock option activity:
Weighted-
Average
Number Exercise
of Shares Price
Outstanding, January 1, 1996 574,900 $ 6.95
Granted 251,800 12.61
Canceled (14,100) 7.65
Exercised (165,500) 5.88
Outstanding, December 31, 1996 647,100 9.36
Granted 222,550 19.53
Canceled (47,700) 11.81
Exercised (147,425) 6.94
Outstanding, December 31, 1997 674,525 13.07
Granted 176,900 24.46
Canceled (51,875) 11.05
Exercised (138,412) 9.19
Outstanding, December 31, 1998 661,138 16.77
Options outstanding at December 31, 1998 are exercisable at prices ranging
from $6.44 to $27.13 per share and have a weighted average remaining
contractual life of 2.74 years. The following table summarizes information
about stock options outstanding at December 31, 1998.
<PAGE> 29
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. COMMON STOCK MATTERS AND EARNINGS PER SHARE, Continued.
Options Outstanding Options Exercisable
Weighted-
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Price 1998 Life Price 1998 Price
$ 6.44 - 9.00 138,700 .9 $ 8.01 114,600 $ 8.01
9.01 - 15.00 120,975 2.1 11.03 60,488 11.03
15.01 - 25.00 237,763 3.2 19.40 67,578 19.35
25.01 - 27.13 163,700 4.1 24.62 250 27.13
661,138 242,916
At December 31, 1997 and 1996, there were exercisable options to purchase
209,181 and 178,638 shares at weighted-average exercise prices of $8.97 and
$6.62, respectively. The weighted-average grant-date fair value of options
granted during the years ended December 31, 1998, 1997 and 1996 was $6.99,
$4.81 and $3.08, respectively. As of December 31, 1998, 423,625 shares were
reserved for the granting of future stock options and awards, compared with
612,250 shares at December 31, 1997.
Had the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per share
would have been:
1998 1997 1996
Pro forma net income $32,656,000 $24,533,000 $29,512,000
Pro forma net income per share:
Basic 1.91 1.42 1.93
Diluted 1.89 1.41 1.90
The pro forma amounts and the weighted-average grant-date fair-value of
options granted were estimated using the Black-Scholes option-pricing model
with the following assumptions:
1998 1997 1996
Risk free interest rate 5.04% 6.00% 6.00%
Expected life 2.75 years 2.75 years 2.75 years
Expected volatility 37.9% 30.7% 30.7%
Expected dividends 1.0% 1.2% 1.2%
Stock Purchase Plan
The Company has an employee stock purchase plan under which a total of
547,141 shares of the Company's common stock are reserved for purchase by
full-time employees through payroll deductions, cash payments, or a
combination of both at a price equal to 90% of the market price of the
Company's common stock on the purchase date. As of December 31, 1998, there
were 317 employees actively participating in the plan. Since its inception, a
total of 252,859 shares have been purchased by employees under the plan.
Certain restrictions in the plan limit the amount of payroll deductions and
cash payments an employee may make in any one quarter. There are also
limitations as to the amount of ownership in the Company an employee may
acquire under the plan.
<PAGE> 30
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. COMMON STOCK MATTERS AND EARNINGS PER SHARE, Continued.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding plus the dilutive effect
of stock options and stock awards. The number of shares used in the
computation of basic and diluted earnings per share are as follows:
1998 1997 1996
Basic 17,131,846 17,238,353 15,280,578
Diluted 17,260,768 17,401,402 15,494,731
Changes in Common Shares, Additional Paid-In Capital and Treasury Shares
Additional
Common Paid-in Treasury
Shares Capital Shares
Balance, January 1, 1996 $37,151,202 $ 1,664,889 $(15,603,679)
Sale of 2,070,000 common shares,
net of offering expenses 47,970,779 - -
Issuance of 9,472 common
shares under employee
stock purchase plan 152,646 - -
Issuance of 4,008 common
shares from treasury - 28,423 27,242
Issuance of 165,500 common
shares upon the exercise
of stock options 973,415 - -
Tax benefit from exercise
of stock options - 620,431 -
Balance, December 31, 1996 86,248,042 2,313,743 (15,576,437)
Issuance of 14,145 common
shares under employee
stock purchase plan 249,144 - -
Issuance of 3,348 common
shares from treasury - 44,172 23,104
Issuance of 147,425 common
shares upon the exercise
of stock options 1,022,554 - -
Acquisition of 50,000 common
shares for treasury - - (827,500)
Tax benefit from exercise
of stock options - 654,681 -
Balance, December 31, 1997 87,519,740 3,012,596 (16,380,833)
<PAGE> 31
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. COMMON STOCK MATTERS AND EARNINGS PER SHARE, Concluded.
Additional
Common Paid-in Treasury
Shares Capital Shares
Issuance of 14,942 common
shares under employee
stock purchase plan 312,949 - -
Issuance of 2,491 common
shares from treasury - 39,627 17,019
Issuance of 138,412 common
shares upon the exercise
of stock options 1,272,635 - -
Acquisition of 872,828 common
shares for treasury - - (16,764,242)
Tax benefit from exercise
of stock options - 814,175 -
Balance, December 31, 1998 $89,105,324 $ 3,866,398 $(33,128,056)
Shareholder Rights Plan
On January 19, 1990, the Board of Directors adopted a shareholder rights plan
and declared a dividend distribution of one common share purchase right on
each outstanding common share. Such rights only become exercisable, or
transferable apart from the common shares, (i) ten days after a person or
group of persons ("Acquiring Person") acquires or obtains the right to
acquire beneficial ownership of 20% or more of the Company's common shares or
(ii) ten business days (or such later date established by the Board) following
the commencement of a tender offer or exchange offer for 20% or more of the
Company's common shares. Upon the occurence of certain events and after the
rights become exercisable, each right would, subject to certain adjustments
and alternatives, entitle the rightholder to purchase the number of common
shares of the Company or the acquiring company having a market value of twice
the $15 exercise price of the right (except that the Acquiring Person would
not be able to purchase common shares of the Company on these terms). The
rights are nonvoting, may be redeemed by the Company at a price of $.005 per
right at any time prior to the date on which an Aquiring Person acquires 20%
or more of the Company's common shares and expire February 15, 2000.
7. INCENTIVE AND DEFERRED COMPENSATION PLANS.
The Company has incentive compensation plans for its officers and other key
management personnel. The amounts charged to expense for the years ended
December 31, 1998, 1997 and 1996 aggregated $3,345,719, $2,870,270 and
$2,662,668, respectively.
The Company has established a deferred compensation plan for executives and
other key employees. The plan provides for benefit payments upon termination
of employment, retirement, disability, or death. The Company recognizes the
cost of this plan over the projected service lives of the participating
employees based on the present value of the estimated future payments to be
<PAGE> 32
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
7. INCENTIVE AND DEFERRED COMPENSATION PLANS, Concluded.
made. The plan is funded by insurance contracts on the lives of the
participants, and investments in insurance contracts (included in other
assets) aggregated $10.6 million and $9.9 million as of December 31, 1998 and
1997, respectively. The deferred compensation obligations, which aggregated
$7,323,221 and $6,913,896 as of December 31, 1998 and 1997, respectively, are
included in other non-current liabilities, with the current portion
($335,351 and $341,514 at December 31, 1998 and 1997, respectively) included
in other accrued liabilities.
All full-time employees of the Company (subject to certain eligibility
restrictions) are eligible to participate in the Coachmen Assisted Retirement
For Employees (C.A.R.E.) program which provides a mechanism for each eligible
employee to establish an individual retirement account and receive matching
contributions from the Company based on the amount contributed by the
employee, the employee's years of service and the profitability of the
Company. Company matching contributions charged to expense under the C.A.R.E.
program aggregated $856,689, $724,541 and $704,173 for the years ended
December 31, 1998, 1997 and 1996, respectively.
8. INCOME TAXES.
Income taxes are summarized as follows:
1998 1997 1996
Federal:
Current $16,040,000 $12,765,000 $13,553,000
Deferred (209,000) 150,000 (210,000)
15,831,000 12,915,000 13,343,000
State:
Current 1,426,000 1,127,000 833,000
Deferred (29,000) 21,000 (30,000)
1,397,000 1,148,000 803,000
Total $17,228,000 $14,063,000 $14,146,000
The following is a reconciliation of the provision for income taxes
computed at the federal statutory rate (35%) to the reported provision
for income taxes:
1998 1997 1996
Computed federal income tax
at federal statutory rate $17,602,000 $13,589,000 $14,519,000
Changes resulting from:
Increase in cash surrender
value of life insurance
contracts (245,000) (356,000) (381,000)
Foreign Sales Corporation
subject to lower tax rate (315,000) (396,000) (310,000)
State income taxes, net of
federal income tax benefit 908,000 746,000 522,000
Preferred stock dividend
exclusion (548,000) (139,000) -
Other, net (174,000) 619,000 (204,000)
Total $17,228,000 $14,063,000 $14,146,000
<PAGE> 33
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
8. INCOME TAXES, Concluded.
The components of the net deferred tax assets are as follows:
1998 1997
Current deferred tax asset (liability):
Accrued warranty expense $2,495,000 $2,455,000
Receivables 138,000 (126,000)
Other 635,000 711,000
Net current deferred
tax asset $3,268,000 $3,040,000
Noncurrent deferred tax
asset (liability):
Receivables $ (335,000) $ -
Deferred compensation 2,929,000 2,765,000
Property and equipment (1,347,000) (1,584,000)
Intangible assets (668,000) (612,000)
Net noncurrent deferred
tax asset $ 579,000 $ 569,000
9. ACQUISITIONS.
On February 3, 1998, the Company acquired certain assets and the operations
of three retail recreational vehicle dealerships, two located in Florida and
one in Georgia. The assets acquired consisted of new and used unit
inventories, parts inventories, real and personal property and other
miscellaneous assets. The purchase price, which aggregated $9.8 million and
approximated the fair value of the acquired assets, consisted of $9.0 million
in cash and the assumption of certain liabilities of the sellers. The
acquisitions were accounted for as a purchase and the operating results of
the acquired businesses are included in the Company's consolidated financial
statements from the date of acquisition. Pro forma financial information has
not been presented as it is not materially different from the Company's
historical results.
In September 1996, the Company acquired a recreational vehicle dealership for
$1.9 million cash, which approximated the fair value of the acquired assets.
The acquisition, which has been accounted for as a purchase, was immaterial
to the Company's consolidated financial statements.
10. ACCOUNTING CHANGE.
Effective January 1, 1996, the Company changed its method of accounting for
its investments in life insurance contracts which were purchased to fund
liabilities under deferred compensation agreements with executives and other
key employees. Prior to January 1, 1996, the Company accounted for its
investments in life insurance contracts by capitalizing premiums under the
ratable charge method (a method of accounting which was acceptable when the
insurance contracts were originally acquired and continued to be acceptable
for contracts acquired prior to November 14, 1985). Effective January 1,
1996, the Company changed to the cash surrender value method of accounting
which is the preferred method under generally accepted accounting principles,
as this method more accurately reflects the economic value of the contracts.
On January 1, 1996, the Company recorded a $2.3 million noncash credit for
the cumulative effect of this accounting change ($.15 per share for both
basic and diluted earnings per share for the year ended December 31, 1996)
<PAGE> 34
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
11: COMMITMENTS AND CONTINGENCIES.
Lease Commitments
The Company leases various manufacturing and office facilities under
noncancelable agreements which expire at various dates through November 2006.
Several of the leases contain renewal options and options to purchase and
require the payment of property taxes, normal maintenance and insurance on the
properties. Certain office and delivery equipment are also leased under
various noncancelable agreements. The above described leases are accounted
for as operating leases.
Future minimum annual lease commitments at December 31, 1998 aggregated
$1,088,000 and are payable as follows: 1999 - $426,000; 2000 - $317,000;
2001 - $128,000; 2002 - $78,000; 2003 - $55,000 and thereafter - $84,000.
Total rental expense for the years ended December 31, 1998, 1997 and 1996
aggregated $1,149,000, $1,472,000 and $1,754,000, respectively.
Obligation to Purchase Consigned Inventories
The Company obtains vehicle chassis for its recreational and specialized
vehicle products directly from automobile manufacturers under converter pool
agreements. The agreements generally provide that the manufacturer will
provide a supply of chassis at the Company's various production facilities
under the terms and conditions as set forth in the agreement. Chassis are
accounted for as consigned inventory until either assigned to a unit in the
production process or 90 days have passed. At the earlier of these dates, the
Company is obligated to purchase the chassis and it is recorded as inventory.
At December 31, 1998 and 1997, chassis inventory, accounted for as consigned
inventory, approximated $9.5 million and $12.6 million, respectively.
Repurchase Agreements
The Company is contingently liable to banks and other financial institutions
on repurchase agreements in connection with financing provided by such
institutions to most of the Company's independent dealers in connection with
their purchase of the Company's recreational vehicle products. These
agreements provide for the Company to repurchase its products from the
financial institution in the event that they have repossessed them upon a
dealer's default. Although the estimated contingent liability approximates
$250 million at December 31,1998 ($190 million at December 31, 1997), the risk
of loss resulting from these agreements is spread over the Company's numerous
dealers and is further reduced by the resale value of the products
repurchased. There have been no significant losses under these agreements in
prior years.
Share Repurchase Programs
On May 1, 1997 the Board of Directors authorized the repurchase of up to one
million shares of the Company's outstanding common stock and on October 19,
1998 the Board of Directors authorized the repurchase of an additional one
million shares. Shares may be purchased from time to time, depending on
market conditions and other factors, on the open market or through privately
negotiated transactions. As of December 31, 1998, the Company has acquired
922,828 shares under the share repurchase programs.
<PAGE> 35
Coachmen Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
11: COMMITMENTS AND CONTINGENCIES, Concluded.
Self-Insurance
The Company is self-insured for a portion of its product liability and
certain other liability exposures. Depending on the nature of the claim and
the date of occurrence, the Company's maximum exposure ranges from $250,000
to $500,000 per claim. The Company accrues an estimated liability based on
various factors, including sales levels and the amount of outstanding claims.
Management believes the liability recorded is adequate to cover the Company's
self-insured risk.
Litigation
The Company is involved in various legal proceedings which are ordinary
routine litigations incidental to the industry and which are covered in whole
or in part by insurance. Management believes that any liability which may
result from these proceedings will not be significant.
12: UNAUDITED INTERIM FINANCIAL INFORMATION.
Certain selected unaudited quarterly financial information for the years
ended December 31, 1998 and 1997 is as follows:
1998
Quarter Ended
March 31 June 30 September 30 December 31
Net sales $175,637,459 $201,069,322 $202,593,063 $176,729,682
Gross profit 23,376,389 30,194,890 31,015,143 25,324,396
Net income 6,299,415 9,323,024 10,186,544 7,253,625
Net income per common
share:
Basic .36 .54 .59 .44
Diluted .36 .53 .59 .43
1997
Quarter Ended
March 31 June 30 September 30 December 31
Net sales $158,105,811 $169,368,233 $174,885,358 $159,231,783
Gross profit 20,335,371 23,239,398 26,423,429 22,756,815
Net income 4,419,034 6,429,629 7,593,252 6,320,709
Net income per
common share:
Basic .26 .37 .44 .37
Diluted .25 .37 .44 .36
The sum of quarterly diluted earnings per share for the four quarters may not
equal annual diluted earnings per share due to changes in the diluted
potential common shares.
<PAGE> 36
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance At Charged Balance
Beginning To Costs Deductions- At End
Description Of Period And Expenses Describe Of Period
Allowance for doubtful
receivables - deducted
from trade receivables
in the consolidated
balance sheets:
For the year ended
December 31, 1998 $1,354,000 $ (175,000)$ (411,000) (A) $ 768,000
For the year ended
December 31, 1997 $ 919,000 $1,617,000 $(1,182,000) (A) $1,354.000
For the year ended
December 31, 1996 $ 844,000 $ 158,000 $ (83,000) (A) $ 919,000
(A) Write-off of bad debts, less recoveries.
<PAGE> 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not Applicable
Part III.
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Information for Item 10(a) is contained on page 3 of the Company's Proxy
Statement dated March 22, 1999 and is incorporated herein by reference.
(b) Executive Officers of the Company
See "Executive Officers of the Registrant" on page 7.
Item 11. Executive Compensation
Information for Item 11 is contained under the heading "Compensation of
Executive Officers and Directors" in the Company's Proxy Statement dated
March 22, 1999 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information for Item 12 is contained on pages 2 and 3 of the Company's Proxy
Statement dated March 22, 1999 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Not Applicable
<PAGE> 38
Part IV.
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K
(a) The following financial statements and financial statement
schedule are included in Item 8 herein.
1. Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at
December 31, 1998 and 1997
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1997 and 1996
3. Exhibits
See Index to Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the last quarter of
the period covered by this report.
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COACHMEN INDUSTRIES, INC.
Date: March 26, 1999 /s/ C. C. Skinner
-----------------------------
C. C. Skinner
(Chief Executive Officer)
/s/ W. M. Angelo
-----------------------------
W. M. Angelo
(Vice President and Chief
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities as of March 26, 1999.
/s/ C. C. Skinner s/s K. D. Corson
- ------------------------------- ------------------------------
C. C. Skinner K. D. Corson
(Director) (Director)
/s/ T. H. Corson /s/ W. P. Johnson
- ------------------------------- ------------------------------
T. H. Corson w. P. Johnson
(Director) (Director)
/s/ R. J. Harring /s/ E. W. Miller
- ------------------------------- ------------------------------
R. J. Harring E. W. Miller
(Director) (Director)
/s/ P. G. Lux /s/ R. J. Deputy
- ------------------------------- ------------------------------
P. G. Lux R. J. Deputy
(Director) (Director)
<PAGE> 40
INDEX TO EXHIBITS
Number Assigned
In Regulation
S-K, Item 601 Description of Exhibit
(3) No exhibit
(4) No exhibit
(9) No exhibit
(10) No exhibit
(12) No exhibit
(13) No exhibit
(16) No exhibit
(18) No exhibit
(21) Registrant and Subsidiaries of the Registrant
(22) No exhibit
(23) Consent of Independent Accountants
(24) No exhibit
(27) Financial Data Schedule (EDGAR filing only)
(99) No exhibit
Exhibit 21
Registrant and Subsidiaries of the Registrant
Percent of Voting
State of Securities Owned
Incorporation By the Registrant
Coachmen Industries, Inc. (Registrant) Indiana
The Lux Co., Inc. Indiana 100%
Michiana Easy Livin' Country, Inc. Indiana 100%
All American Homes, Inc. Indiana 100%
Clarion Motors Corporation Indiana 100%
Coachmen Foreign Sales Corporation U.S. Virgin Islands 100%
Viking Recreational Vehicles, Inc. Michigan 100%
Northwoods RV Country, Inc. Michigan 100%
Georgie Boy Mfg., Inc. Indiana 100%
Coachmen Industries of Texas, Inc. Texas 100%
Coachmen Industries of Oregon, Inc. Oregon 100%
Coachmen Industries of California, Inc. California 100%
Freeway Easy Livin' Country, Inc. California 100%
Gulf Coast Easy Livin' Country, Inc. Florida 100%
VFP Composites, Inc. Florida 100%
Rover, Inc. Ohio 100%
All American Homes of Iowa, Inc. Iowa 100%
Southern Ambulance Builders, Inc. Georgia 100%
Colfax Country RV, Inc. North Carolina 100%
All American Homes of
North Carolina, Inc. North Carolina 100%
All American Homes of Tennessee, Inc. Tennessee 100%
All American Homes of Ohio, Inc. Ohio 100%
Exhibit 23
(Letterhead of PricewaterhouseCoopers LLP)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Coachmen Industries, Inc. on Form S-8 (File No. 33-59251, No. 2-45373,
No. 2-47923, No. 2-56027 and No. 2-64572) and in the related Prospectus of
our report dated January 29, 1999, on our audits of the consolidated
financial statements and financial statement schedule of Coachmen Industries,
Inc. and subsidiaries at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, which report is included
in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
South Bend, Indiana
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of income and consolidated balance sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000021212
<NAME> COACHMEN INDUSTRIES, INC.
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<TOTAL-ASSETS> 268,476
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0
0
<OTHER-SE> 149,480
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<SALES> 756,030
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<OTHER-EXPENSES> (4,363)
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