United States
Securities and Exchange Commission
Washington, D. C. 20547
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 3, 1999.
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: 0-22048
STARCRAFT CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 34-1817634
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Post Office Box 1903, 2703 College Avenue, Goshen, Indiana 46527-1903
(Address of Principal Executive Offices)
Registrant's telephone number including area code: (219) 533-1105
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Common Share Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 21, 1999, was $18,627,648.
The number of shares of the Registrant's Common stock, without par value,
outstanding as of December 22, 1999, was 4,199,928 shares.
1 of 22
<PAGE>
STARCRAFT CORPORATION
Form 10-K
Index
PART 1
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on form 8-K.
Signatures
2 of 22
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Starcraft Corporation (the "Company"), an Indiana corporation founded in 1990,
is a manufacturer of second-stage, custom vehicles including conversion
vehicles, commercial buses and OEM Automotive Supply.
BACKGROUND
Starcraft traces its history to 1903 when Star Tank Company was founded in
Goshen, Indiana as a maker of metal farm equipment. Over the course of the
century the Company's predecessor became a leading manufacturer of aluminum
boats and recreational vehicles and, in the late 1970's, led the automotive
conversion industry by producing luxury van conversions for middle and upper
income consumers. In 1987, the predecessor's management completed a leveraged
buyout and, in 1988, sold the boat manufacturing business. On January 18, 1991,
the Company purchased the assets of the automotive and recreational vehicle
divisions, and simultaneously sold the recreational vehicle division to a third
party.
In July 1994, the Company acquired substantially all of the assets of Imperial
Industries, Inc., another conversion vehicle manufacturer. In February 1997, the
Company purchased the assets of National Mobility Corporation in Elkhart,
Indiana, a manufacturer of vehicles for the mobility impaired. In October 1997,
the Company started an OEM automotive supply business with a partner. The
primary purpose of this business is to supply conversion vehicles directly to
the Big 3 automakers. In February 1998, the Company started manufacturing and
marketing commercial shuttle buses.
The Company became a public company in July 1993 and its shares are currently
trading on the NASDAQ Small Cap Market.
SEGMENTS
The following table sets forth for the three years ended October 3, 1999, the
net sales and operating profit for the Company's operating segments, in
thousands,
Net Sales
-----------------------------------
1999 1998 1997
------- ------- -------
Conversion vehicle products $56,804 $53,092 $72,282
OEM automotive supply 32,700 0 0
------- ------- -------
Total $89,504 $53,092 $72,282
======= ======= =======
Operating Profit*
--------------------------------------
1999 1998 1997
-------- -------- --------
Conversion vehicle products $ 271 $ (3,199) $(11,616)
OEM automotive supply 3,240 (488) 0
-------- -------- --------
Total $ 3,511 $ (3,687) $(11,616)
======== ======== ========
*Amounts are before general corporate expenses and after minority interest.
3 of 22
<PAGE>
CONVERSION VEHICLE PRODUCTS
The Company manufactures conversion vehicles on a variety of GMC Truck,
Chevrolet, Ford and Dodge ("OEM") chassis. Conversion vehicles include
conversion vans, pickup trucks and sport utility vehicles ("Conversion Vans"),
vehicles for the mobility impaired and commercial buses.
The Company receives chassis directly from the OEM's which generally have no
seats, floor covering or other interior components. The Company modifies the
exterior and interior of the chassis by adding seats, carpeting, electronics,
running boards and other items that enhance passenger comfort and safety.
Conversion vehicles are sold and distributed through OEM automobile dealers, or
in the case of commercial buses, through independent commercial bus dealers.
A summary of sales by chassis type follows (000's):
1999 1998 1997
------- ------- -------
Fullsize vans $36,463 $34,442 $41,131
Minivans 8,188 11,951 16,882
Sport utility vehicles 1,528 1,566 2,630
Pickup trucks 103 747 7,341
Commercial buses 6,839 1,199 0
Parts 3,683 3,187 4,298
------- ------- -------
$56,804 $53,092 $72,282
======= ======= =======
Conversion Vans
The Company sells Conversion Vans to approximately 400 automobile dealers
throughout the continental U.S. and internationally. The product is sold through
a network of regional exclusive sales representatives and associate
representatives. Each of its U.S. dealers is an authorized dealer for General
Motors, Ford or Chrysler and most sell and service a full complement of cars,
sport utility vehicles and vans. During the past two years, the geographic areas
of the U.S. where the company's sales have been strongest include the Great
Lakes region (i.e., Illinois, Indiana, Michigan, New York, Ohio, Pennsylvania,
and Wisconsin), and Oklahoma and Texas.
The Company exports Conversion Vans to 17 countries around the world and employs
an international department which is exclusively responsible for the development
of such sales. International sales fluctuate from country to country and over
time depending on import taxes and tariffs and fluctuations in currency exchange
rates as well as local economic conditions. Starcraft's primary overseas markets
are Japan and northern Europe. The increase in the value of U.S. currency and
turmoil in Asian financial markets have negatively impacted the company's
international sales over the last few years.
The Company believes the Starcraft name has a long-standing reputation in the
conversion van industry for high quality and innovation.
The Company maintains two primary brands of Conversion Vans. The Starcraft line
features high-end, luxury custom vehicles while the Imperial brand competes in
the entry level segment of the market. Typical manufacturer suggested retail
price (MSRP) to the retail consumer, including the chassis, from the automotive
dealer generally ranges from $34,000 to $52,000 for the Starcraft line and
$24,000 to $39,000 for the Imperial line. Retail mark-ups vary widely among
automotive dealers and are not within the Company's control.
The Company's Conversion Van sales do not include the cost of the chassis (see
Chassis and Other Suppliers). The Company's average conversion van sales price
to the dealer was $6,930, $6,250, and $6,140 in 1999, 1998 and 1997,
respectively.
According to the recreational Vehicle Industry Association, domestic Van
Conversion products sold by manufacturers during the three preceding fiscal
years are as follows:
1999 1998 1997
------- ------- ---------
Industry unit sales 156,400 148,700 194,800
Change from prior year 5.2% (23.7%) (14.6%)
4 of 22
<PAGE>
RVIA statistics are based on reports of its member manufacturers and its
estimates with respect to non-member manufacturers. The Company believes RVIA
members produce 85% - 90% of conversion vehicles sold in the United States.
The domestic vehicle conversion industry has declined steadily over the last
several years with a stabilization in 1999. The Company believes that the
increased popularity of sport utility vehicles and factory minivans, price
pressure from higher chassis costs, lower levels of conversion inventory being
held on dealer lots and fewer automotive dealers selling conversion products
have adversely impacted the market. The Company believes that the changing level
of dealer support is due to the growing availability of additional vehicle
models to stock on dealer retail lots such as sport utility vehicles and a
general concern by dealers about the future of the conversion van industry.
The United States conversion vehicle market is very competitive with four
principal national manufacturers and numerous local and regional manufacturers,
many of which are relatively small companies serving local dealers. The Company
estimates it has approximately 54 competitors in the Conversion Van business.
The Company believes it is one of the four largest van conversion companies in
the United States. The others are Glaval Inc., Mark III Industries, Inc. and
Explorer Van Company. The Company believes the number of competitors will
decline as increased quality, financial and engineering standards are imposed by
the OEMs.
The Company is the leading exporter of Conversion Vans. Of the Company's 1999
export sales of $8.1 million, 44% and 49% of export sales were to Europe and
Japan, respectively. The Company utilizes various distributors throughout Europe
and one distributor in Japan to sell its products. In international markets, the
Company competes with numerous foreign manufacturers that produce vehicles
comparable to converted vans, although Conversion Vans such as the Company's
tend not to be widely produced within its foreign markets.
The increase in the U.S. dollar currency rate has put significant pressure on
the Company's export sales. In addition, the continuing turmoil in the Asian
financial markets and economies have negatively impacted the demand for the
Company's products. The Company continues to redesign products to maintain
unique products in the marketplace and increase value for price to keep products
competitive internationally. In addition, the Company is targeting several new
international markets to develop, including South America.
The Company will continue to focus on core van conversion products and, through
aggressive marketing and promotion, will seek to expand U.S. sales of conversion
vans. While Starcraft product lines will continue to emphasize upscale custom
van conversions, Imperial will continue a complementary emphasis on mid- and
low-price point conversion packages. The Company will continue to seek to
further differentiate its Starcraft lines from its competition by emphasizing
total value and quality versus unit price. By offering both the Starcraft and
Imperial product lines, the Company is able to offer dealers a full price range
of conversion vehicles from a single manufacturer. In 1997, the Company
established a telemarketing division which has effectively penetrated larger
territories and targeted new dealers.
The Company will continue to focus on innovative product development to enhance
customer appeal and vehicle quality and safety. The Company will continue to
seek to differentiate itself from its competition by virtue of the resources it
devotes to training dealer personnel in selling, product knowledge, service and
compliance. Starcraft utilizes a specially equipped service van, videos,
manuals, other visual aids, as well as classroom instruction at its main
facility and at dealer locations throughout the country. The Company maintains a
strong customer service area which includes warranty claims and approval, parts
ordering and processing and customer information. The Company maintains records
of Starcraft units sold as far back as 1978 and Imperial maintains records back
to 1991, which was the inception of the predecessor company, Imperial
Industries, Inc.
Although the Company's conversions of sport utility vehicles and pickup trucks
have proven to be a popular line of products, the significant increase in the
number of models and the chassis availability of these products at automobile
dealerships have reduced the demand for conversions of these products. Many of
the OEM sport utility models now have options that were historically supplied by
the conversion industry. As a result, the Company believes its overall sales of
sport utility vehicles and pickup truck conversions will continue, but not have
significant growth. The Company will focus on select models and OEMs where it
feels it can continue to offer a unique product at a competitive price point.
The Company historically provided a three-year, 36,000 mile limited warranty on
its conversions. In 1997, the Starcraft products began offering a 5-year, 60,000
mile warranty on certain of its Starcraft products. The OEMs provide their own
standard warranties of the chassis and engine. At the time of sale of its
5 of 22
<PAGE>
product, the Company estimates the costs to be incurred for product warranties
and establishes reserves for warranty claims. The Company believes that such
reserves will adequately cover any such warranty claims. The Company provides
complete owners' manuals to retail customers covering the conversion package as
well as parts, warranty and service manuals for dealers. The Company keeps a
record of the paint, upholstery and styles included in each vehicle conversion
so that, when necessary, it can re-create matching replacement parts.
At October 3, 1999, the Company had a backlog of 396 unit orders compared with a
backlog of 441 unit orders at September 27, 1998. The backlog declined slightly
from prior year levels due to timing of certain international orders. The
Company considers such orders to be reasonably firm. All of the Company's
products are subject to certain seasonal sales influences and sales tend to be
stronger during March through July. The Company uses off-season sales promotions
to market its products with a view to reducing seasonal swings in sales.
The conversion industry is cyclical and is affected by the general trends of the
economy and consumer preferences and consumer confidence and trends of the
automotive and recreational vehicle industries. Consumer preferences for sport
utility vehicles in recent years has adversely affected demand for conversion
products. The level of disposable consumer income affects the Company's sales
because its products are generally considered discretionary expenditures by
consumers. In difficult economic times, consumers tend to spend less of their
income on discretionary items. Other economic factors affecting the demand for
the Company's products include the availability and price of gasoline, the level
of interest rates and the availability of consumer financing. Reduced gasoline
availability could adversely affect the demand for the Company's products. A
significant increase in the price of gasoline could reduce demand for the
Company's products because it would increase the cost of operating these
products. Because many consumers finance their purchase of vehicle conversions,
the availability of financing and level of interest rates can affect a
consumer's purchasing decision. A decline in general economic conditions or
consumer confidence can be expected to affect Starcraft's sales adversely. The
Company is dependent upon the OEMs to supply its requirements for vehicle
chassis. Labor stoppages, supply shortages and a variety of other factors that
influence OEM production can affect the availability or timely delivery of
vehicle chassis to the Company.
Vehicles For The Mobility Impaired
In 1997, the Company purchased National Mobility Corporation which modifies OEM
chassis so that they may be accessed by the mobility impaired. Primary products
are low-floor minivans with ramps and fullsize vans with wheelchair lifts. In
1999, 6.1% of the Company's conversion vehicle products sales were attributable
to this product line.
Currently, National Mobility primarily sells its products to government units
(state and local) and commercial enterprises such as taxi cab and paratransit
companies.
The Company believes the mobility impaired vehicle market is a growing segment.
By utilizing the Company's Conversion Van reputation and distribution systems,
the Company believes it can more effectively penetrate the retail market.
Commercial Buses
In 1998 the Company began manufacturing shuttle buses ranging in length from 20
to 28 feet with seating capacity for 14 to 29 passengers. Buses are offered with
a choice of interior and exterior storage areas, wheel-chair lifts, diesel and
gasoline engines, and various seat types, arrangements and coverings. The buses
are marketed under the Starcraft trade name and are primarily marketed to
churches, nursing homes and hotel resorts through independent commercial bus
dealers.
The market for the Company's shuttle buses is highly competitive. The other
competitors in the bus industry are substantially larger than the Company. The
Company's products are a very small percentage of the bus market. The Company
will continue to position its product as an exceptional quality, high value
product targeting the high end user niche market. There can be no assurance that
the Company will be able to maintain or improve its competitive position in the
bus market.
6 of 22
<PAGE>
Chassis and Other Suppliers
Approximately 47%, 24% and 29% of the Company's domestic Conversion Vehicle
units in 1999 were manufactured on General Motors, Dodge and Ford ("OEM")
chassis, respectively. All of the Company's export sales are currently
associated with General Motors product.
The OEMs supply incomplete chassis to Starcraft or other manufacturers or
dealers for restricted use. The Company obtains substantially all of its chassis
acquired for domestic sale from the OEMs pursuant to consignment or restricted
sale contracts. Under these contracts each OEM maintains strict control over the
disposition of chassis delivered to the Company for modification and the Company
is prohibited from delivering a converted chassis provided by the OEM to any
person except an authorized dealer for that OEM. All of the Company's
consignment and restricted sale contracts with chassis suppliers are terminable
by either party on short notice without cause.
Under restricted sale contracts with the OEMs, the OEM retains the certificate
of origin and the Company has no right to obtain it or any other evidence of
title. These contracts state that vehicle title technically passes to the
Company upon acceptance of a chassis and the Company pays state property taxes
on chassis, but the Company can only sell the chassis back to the OEM for resale
to an authorized dealer. Except for demonstration vehicles, the Company is
prohibited from making modifications to chassis under these contracts until it
matches them with a dealer order. In the past, the Company has obtained waivers
of this limitation to permit accumulation of GMC or Chevrolet inventory in
connection with model year changes or other periods of anticipated increasing
demand. Prior to matching a chassis to a dealer order, the Company finances the
chassis through the OEM's financing affiliates at nominal rates. Once the
Company notifies the OEM that it has matched a chassis with a dealer, the OEM
"repurchases" the chassis, crediting the Company's account with the OEM's
financing affiliate and invoicing its dealer (the Company's customer) for the
price of the chassis. Upon receiving the converted vehicle, the dealer is
obligated to pay the Company for the improvements the Company has made. If the
Company fails to match a chassis with a dealer order within 90 days, the finance
charge the Company must pay increases. The past 90-day finance charge is
currently the prime rate plus 1%.
Historically, the Company's international conversion sales have been primarily
manufactured on General Motors chassis. Generally, the foreign purchaser is an
authorized dealer for General Motors and Starcraft. The dealer submits an order
to General Motors' overseas sales affiliate (the "GM Export Affiliate") for the
chassis together with specifications for a Starcraft conversion. The GM Export
Affiliate purchases the chassis from General Motors and forwards it to Starcraft
for second stage manufacturing. Starcraft invoices the GM Export Affiliate for
the completed conversion, and the GM Export Affiliate arranges for shipment of
the unit, at the GM Export Affiliate's expense, from Starcraft to the foreign
dealer.
Starting in 1997, General Motors changed its chassis system for the Company's
sales to Europe. Under this program, the Company is the "Manufacturer of Record"
for units imported into Europe and is required to arrange and be responsible for
all U.S. export and shipping requirements. The Company is required to purchase
its chassis and the OEM assists in the financing of such purchases. The Company
continues to sell only to authorized General Motors dealers.
A variety of factors govern chassis ordering and availability. Chassis are
ordered from the OEM based on the Company's annual sales plan. The plan is
broken down by OEM and vehicle model. Vehicle specifications are determined on
the basis of historical trend analysis and analysis of the backlog of orders.
The Company's chassis order forecast is shared with each OEM to determine
chassis availability. The OEMs confirm chassis availability and timing on an
annual basis. After confirmation by the OEM, the Company orders a 90-day supply
prioritized through a central computerized system. On a weekly basis, the
Company releases the actual orders it requires and the OEMs schedule delivery
dates for the orders. Chassis allocation to the Company from the OEMs is based
on credit lines, prior usage and wholesale and retail sales rates.
7 of 22
<PAGE>
The following table sets forth for the periods indicated the number of chassis
received by the Company under its restricted sales contracts with the OEM's and
the dollar value thereof, and, as of the end of such periods, the number of
chassis held over 90 days and the dollar value thereof.
<TABLE>
<CAPTION>
Year Ended
(Dollars in thousands)
Oct. 3, 1999 Sept. 27, 1998 Sept. 28, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chassis Received 7,060 7,132 10,687
Value of Chassis Received $141,200 $142,640 $213,740
Chassis Over 90 Days at period end 97 148 433
Value of Chassis Held Over 90 Days $ 1,940 $ 2,960 $ 8,660
</TABLE>
The conversion process begins after a chassis is inspected and accepted and the
Company has received a confirmed order from an authorized dealer that is
compatible with the chassis. Generally, the order is scheduled for production
typically four to five days before work on the vehicle commences to allow for
completion of components to be installed in the chassis and the purchase of
necessary assembly material. The Company completes the conversion process in an
average of seven to eight days from the date that the vehicle is first scheduled
for production.
The Company is dependent upon the OEMs to supply its requirements for vehicle
chassis. Labor stoppages, supply shortages and a variety of other factors that
influence OEM production can affect the availability or timely delivery of
vehicle chassis to the Company. In 1998 chassis availability was adversely
impacted late in the fiscal year due to a labor stoppage at General Motors. The
Company estimates that sales were adversely impacted by $1.5 million due to
chassis shortages in 1998. Chassis availability was generally good in 1999.
If vehicle chassis are unavailable, or if the Company must accept delivery
earlier or later than it otherwise would prefer, sales could be adversely
affected and financing expenses could increase. The Company must also comply
with its consignment and restricted sale contracts with the OEMs pursuant to
which the OEMs impose certain specifications for the Company's vehicle
conversions, including gross vehicle weight standards. Such contracts also
restrict the Company's ability to dispose of completed chassis and prohibit the
transfer of chassis to unauthorized U.S. and foreign dealers. All of the
Company's consignment and restricted sale contracts with chassis suppliers are
terminable by either party on short notice without cause. The availability of
the OEM financing rates is dependent upon the Company's compliance with its OEM
contracts and its ability to maintain satisfactory credit relationships with the
OEM's finance subsidiaries. Adverse changes in the Company's financial condition
or results of operations could cause such financing subsidiaries to seek to
adversely change the Company's financing terms or to terminate such financing
arrangements. Such a change or termination could have a material adverse effect
on the Company's financial condition and results of operations.
Vehicle converters can be penalized by the OEM for manufacturing overweight
vehicles and the National Highway Traffic Safety Administration ("NHTSA") could
require overweight vehicles to be recalled. See "Safety and Regulation." Such
standards are imposed by the OEMs in part to help assure that vehicle weight
does not exceed the capacity of the OEM's braking system.
The export of completed vehicles to unauthorized foreign dealers has been a
significant issue in the conversion industry in recent years. In the past, some
automotive dealers have sold vehicles to brokers who, in turn, have sold them to
unauthorized dealers overseas. The OEM financing subsidiaries have indicated an
intention to penalize or terminate financing arrangements with any firm deemed
responsible for unauthorized exports. The Company makes an effort to assure
itself that none of its vehicles are exported in an unauthorized manner
including obtaining written assurances from certain dealers. The Company has no
control over the eventual disposition of its vehicles by dealers, however, so it
cannot eliminate the possibility of unauthorized export.
8 of 22
<PAGE>
These efforts nevertheless should help assure that the Company will not be
deemed responsible for any unauthorized export.
The shuttle bus operation utilizes bailment or consignment arrangements with the
OEM's, but must purchase the chassis prior to the start of manufacturing. The
shuttle bus operation is subject to the same risk factors of chassis
availability as the Company's vehicle conversion business.
Supplies for the components and materials the Company utilizes in its vehicle
conversions are generally available from several sources. From time to time the
Company experiences delays in delivery of certain components or materials from
suppliers. In 1998, the availability of certain hardwood components adversely
impacted the Company's production.
Manufacturing
All Conversion Vehicle products are manufactured in the Goshen, Indiana plant.
Primary components of the vehicle are purchased from outside suppliers, except
seats which are assembled in the Goshen facility. The principal raw materials
used in the manufacturing process are fabric, fiberglass, steel, aluminum,
plywood and plastic. The Company's products are generally produced to firm
orders and are designed and engineered by the company.
As the Van Conversion market declined over the last several years, the Company
consolidated its existing manufacturing facilities.
In November 1999, the Company relocated its Emma seating manufacturing operation
into the Goshen facility.
In June 1997 the Company closed its McGregor, Texas manufacturing facility and
sold certain assets of the business. The Company recorded a $260,000 net
restructure charge in the third quarter of fiscal year 1997. The Company
realized savings from the closure of the Texas facility which lost $1.3 million
pretax in 1997. The consolidation efforts were a result of the Company's belief
that the conversion industry will remain at current lower levels and the
elimination of excess production capacity was critical to returning to
profitability. In December 1996 the Company consolidated its Imperial Automotive
Group manufacturing operation into Starcraft Automotive Group's manufacturing
complex in Goshen, Indiana. The consolidation was designed to reduce excess
production capacity, personnel count and fixed overhead expenses. The Company
recorded a $750,000 restructure charge in the first quarter of fiscal year 1997.
All restructuring charges were utilized in 1998 and 1997. No restructuring
charges were reversed into income. The Company estimates it realized annual
overhead expense reductions of approximately $1.0 million from reduced facility
and personnel costs during 1998 relative to 1997.
Patents and Trademarks
IBS. In 1996, the Company received a U.S. patent on IBS, which is designed to
reduce significantly the risk of seat back collapse in the event of a rear-end
collision by restraining the seat back. A new seat belt integrated with the
conventional seat belt system is anchored to the vehicle roof or wall and
traverses the seat back. In the event of collision, the seat back is secured in
place.
Trademarks. The Company's Predecessor manufactured boats, motor homes and other
recreational vehicles under the name "Starcraft." The boat manufacturing
business was sold by the Predecessor to Brunswick Corporation in 1988 which
subsequently sold the business. The Company initially acquired the recreational
vehicle business in the Predecessor's 1991 reorganization proceeding, but
immediately sold it to an RV company. The Predecessor's Canadian conversion
business was acquired by a Canadian firm. A corporation in the boating industry
has independently registered and owns the "Starcraft" and related trademarks for
use with boats and marine products and thus the Company has no control over the
quality of boats produced and sold under the "Starcraft" mark. The Company
retains ownership of "Starcraft" and related registered marks for use with
automotive and recreational vehicle products. It licenses the owners of the
Predecessor's RV business and Canadian van conversion business to use these
trademarks. While it has some control over the quality of its licensees'
products, it does not control all aspects of their businesses. The Canadian
entity is required to pay a royalty to the Company and to purchase its
components from the Company (or from others with the Company's approval). The
Company is not permitted to export to Canada and its Canadian licensee does not
export to the United States.
9 of 22
<PAGE>
OEM AUTOMOTIVE SUPPLY
In 1998, the Company started a new operation with a partner (the "LLC") to
supply conversion vehicle type products directly to OEM automotive customers as
a Tier 1 automotive supplier. The Company currently owns 50% of this enterprise
and controls the operation. All of the LLC's OEM automotive supply sales in 1999
were to one OEM.
Manufacturing facilities have been established in Louisiana and Texas which are
located near OEM assembly plants. The LLC also has an engineering operation in
Detroit.
The LLC receives vehicle chassis from the OEM and add certain appearance items
such as ground effects, wheels and badging. The vehicles are placed back into
the normal OEM distribution stream. The vehicles carry the full OEM warranty and
are marketed directly by the OEM.
The LLC engineers and validates the products to OEM standards. Programs range
from two to four year and are backed by contractual agreements.
The major domestic market for the LLC's products are highly competitive.
Competition is based primarily on price, product engineering and performance,
technology, quality and overall customer service, with the relative importance
of such factors varying among products. The LLC's global competitors include a
large number of other well-established independent manufacturers. Although a
number of companies of varying size compete with the LLC, no single competitor
is in substantial competition with the LLC.
All components for the vehicles are purchased. The primary raw material used in
the components is plastic which the Company believes is readily available from
several sources.
Chassis are provided by the OEM on a consignment basis and are not included in
the sales of the Company.
The LLC provides a limited warranty of its products to the OEM. The LLC warranty
is substantially the same as the OEM warranty provided to its retail customers.
At October 3, 1999, the LLC's backlog of firm orders was $5.7 million. The LLC
utilizes an independent manufacturer representative to market and sell its
services.
SAFETY AND REGULATION
The manufacture, distribution and sale of the Company's products are subject to
governmental regulations in the United States at the federal, state and local
levels. The most extensive regulations are promulgated under the National
Traffic and Motor Vehicle Safety Act which, among other things, empowers the
National Traffic and Motor Vehicle Safety Administration ("NHTSA") to require a
manufacturer to remedy vehicles containing "defects related to motor vehicle
safety" or vehicles which fail to conform to all applicable federal motor
vehicle safety standards.
Federal Motor Vehicle Safety Standards are promulgated by the NHTSA. Many of the
Company's conversion components were affected by these standards. Starcraft
engaged a testing company, which also performs testing for NHTSA, to test the
company's components. The Company's components subject to the new standards were
determined to meet or exceed them. Promulgation of additional safety standards
in the future could require the Company to incur additional testing and
engineering expenses which could adversely affect the Company's results of
operations. NHTSA can require automotive manufacturers to recall products. The
Company has not experienced any material recalls.
The Company's international sales are subject to foreign tariffs and taxes,
changes in which are difficult to predict and which can adversely affect
Starcraft sales. Starcraft's products must also comply with government safety
standards imposed in its foreign markets.
10 of 22
<PAGE>
Both federal and state authorities have various environmental control standards
relating to air, water and noise pollution that affect the business and
operations of the Company. In particular, the Company generates paint, varnish
and other finishing wastes that it is required to dispose of in compliance with
environmental regulations. The Company believes that it has complied in all
material respects with applicable environmental regulations and standards and
does not currently expect that any failure of compliance will have any material
adverse effect on the Company.
Like other automotive manufacturers, the Company may be subject to claims that
its products caused or contributed to damage or injury sustained in vehicle
accidents or may be required to recall products deemed unsafe. Any such claims
in excess of the Company's insurance coverage or material product recall
expenses could adversely affect the Company's financial condition and results of
operations.
EMPLOYEES
As of October 3, 1999, the Company employed 597 people. Of these, 458 were
production line associates and 139 were salaried sales, engineering and
administrative staff. During peak production periods, the Company may increase
its work force. Historically, the available labor force has been adequate to
meet such periodic requirements. The Company considers its relationships with
its personnel to be satisfactory.
11 of 22
<PAGE>
ITEM 2. PROPERTIES
The following table summarizes the Company's properties as of October 3, 1999:
<TABLE>
<CAPTION>
Size of Owned
Location Facility or Leased Type of Operation
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goshen, Indiana 454,400 s.f. Owned Executive Offices (20,420
s.f.); Manufacturing and
Assembly, Conversion Vehicle
Segment
Goshen, Indiana 10,000 s.f. Owned Chassis Storage (40 acres),
Conversion Vehicle Segment
Emma, Indiana 42,700 s.f. Owned Sewing and Upholstery
Manufacturing
Elkhart, Indiana 56,000 s.f. Leased Offices (2,600 s.f.);
(National Mobility) Manufacturing and Assembly,
Conversion Vehicle Segment
Manufacturing and Assembly,
Shreveport, Louisiana 38,000 s.f. Leased OEM Automotive Supply Segment
Manufacturing and Assembly,
Grand Prairie, Texas 100,000 s.f. Leased OEM Automotive Supply Segment
</TABLE>
The Goshen and Emma production facilities were constructed in the 1960's. They
have been maintained and improved upon from time to time and are presently in
satisfactory condition and sufficient for the Company's current requirements.
The Emma and Elkhart facilities are no longer being utilized by the Company. The
Company is currently attempting to sell the Emma facility. The lease on the
Elkhart facility expires in February 2000 with a monthly rental amount of
$14,000.
The Shreveport and Grand Prairie leases have terms that parallel the length of
the vehicle contracts at the respective plants.
ITEM 3. LEGAL PROCEEDINGS
The Company does not anticipate that any pending legal proceeding to which it is
party will have any material adverse effect on its financial conditions or
results of operations. The Company maintains product liability insurance which
it currently considers adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12 of 22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock is quoted on the NASDAQ Small Cap Market, under the symbol "STCRC."
As of December 22, 1999, there were 75 shareholders of record of Starcraft's
Common Stock.
On June 23, 1999, the Company was placed on a conditional listing for the Nasdaq
Small Cap Market as it continued to work to meet the Market's net tangible asset
requirements. The terms of the conditional listing establish dates by which the
Company must achieve certain tangible asset or profitability levels and by which
reports establishing compliance with the exception must be provided to Nasdaq
and filed with the SEC. The first such report was provided to Nasdaq by July 21,
1999 and the latest report on November 15, 1999. The conditional listing will
expire on December 31, 1999. The Company meets the terms of the conditional
listing as of the date of this report. If the Company meets the Nasdaq listing
requirements, it will continue to be listed on the Nasdaq Small Cap Market. The
Company expects that it will meet these conditions.
The following table sets forth the high and low closing prices per share of
Common Stock for the quarters ended as quoted in the NASDAQ Stock Market Report.
Quarter Ended
High Low
December 28, 1997 $ 3.000 $ 2.000
March 29, 1998 2.750 1.750
June 28, 1998 2.875 2.125
September 27, 1998 2.313 1.000
December 27, 1998 2.625 1.250
March 28, 1999 4.000 2.438
June 27, 1999 4.500 2.875
October 3, 1999 6.250 3.875
Dividend Policy. The Company has paid no cash dividends since its initial public
offering. The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
cash dividends on Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, any
financing agreement covenants and the financial condition of the Company.
Stock Repurchase. In March 1995, the Company's Board of Directors approved the
repurchase of up to 500,000 shares of the Company's outstanding shares of common
stock, of which 153,000 shares were acquired in 1996. No shares have been
repurchased since.
Anti-Takeover Provisions. Indiana law and the Company's Articles of
Incorporation and Code of By-laws contain provisions that restrict the
acquisition of control of the Company. Such provisions can affect the rights of
shareholders acquiring substantial interests in the Company's shares. For
example, a shareholder who acquires more than 10% of the Company's shares
without prior board approval will be limited in the timing and terms of any
transaction it may enter into with the Company and will be subject to related
provisions. Any shareholder who effects an acquisition after which such
shareholder holds more than 20% of the Company's outstanding shares will have no
voting rights in the shares acquired in such acquisition, unless such rights are
conferred by the disinterested shareholders at the next annual meeting (or
earlier special meeting).
13 of 22
<PAGE>
SHAREHOLDER RIGHTS PLAN
In August 1997 the Company adopted a shareholders Rights Plan issuing one right
for each outstanding share. Each right entitles the registered holder to
purchase from the Company one share of common stock at $15 per share, subject to
adjustment. The rights become exercisable if a person or group (other than
certain related persons) acquires or announces a tender offer for prescribed
percentages of the Company's shares or is declared an "adverse person" by the
Company's Board of Directors. In these events, each right holder may purchase
shares with a value equal to twice the exercise price. Furthermore, if the
Company engages in certain mergers or similar business combinations a right
holder may purchase shares of the acquiring company with a value of two times
the purchase price of the right. The rights expire on August 12, 2007.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousand, except per share data) Year Ended
- -----------------------------------------------------------------------------------------------
Income Statement Data Oct. 3, Sept. 27, Sept. 28, Sept. 29, Oct. 1,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales:
Domestic $ 81,397 $ 42,857 $ 57,235 $ 73,317 $ 91,652
Export 8,107 10,235 15,047 25,648 21,408
Total Net Sales 89,504 53,092 72,282 98,965 113,060
Cost of Goods Sold 74,548 49,590 66,342 83,669 92,692
Gross Profit 14,956 3,502 5,940 15,296 20,368
Operating Expenses 10,922 9,548 13,924 15,049 15,864
Restructuring and Goodwill
Impairment Charges -- -- 5,926 -- --
Operating Income (loss) 4,034 (6,046) (13,910) 247 4,504
Interest Expense (1,230) (892) (400) (293) (208)
Other Income, Net 115 100 194 176 214
Income (loss) Before 2,919 (6,838) (14,116) 130 4,510
Minority Interest and Taxes
Minority Interest (2,448) -- -- -- --
Income Taxes (expense) Credit 51 79 2,814 (20) (1,753)
Net Income (Loss) 522 (6,759) (11,302) 110 2,757
Weighted Average Common 4,159 4,134 4,127 4,142 4,261
Shares Outstanding
Earnings (loss) Per Share $ 0.13 $ (1.63) $ (2.74) $ 0.03 $ 0.65
Earnings (loss) Per Share 0.12 (1.63) (2.74) 0.03 0.65
Assuming Dilution
Balance Sheet Data
- ------------------------------------------------------------------------------------------------
Working Capital $ 10,192 $ 5,402 $ 7,011 $ 8,476 $ 8,693
Total Assets 43,781 29,015 27,779 36,524 34,213
Long-term Debt 13,506 10,777 5,696 0 323
Shareholders' Equity 4,186 3,536 10,295 21,552 21,688
Book Value per Share 1.00 0.86 2.49 5.23 5.20
</TABLE>
14 of 22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The consolidated statements of income summarize operating results for the last
three years. This section of Management's Discussion highlights the main factors
affecting the changes in operating results during the three-year period.
1999 VERSUS 1998
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 to
1999
1999 1998 Change
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 89,504 100.0% $ 53,092 100.0% 68.6%
Cost of goods sold 74,548 83.3% 49,590 93.4% 50.3%
-------- ----- -------- ----- -----
Gross profit 14,956 16.7% 3,502 6.6% 327.1%
Selling and promotion expenses 4,638 5.2% 4,484 8.4% 3.4%
General and administrative expenses 6,284 7.0% 5,064 9.6% 24.1%
-------- ----- -------- ----- -----
Operating income (loss) 4,034 4.5% (6,046) (11.4%) --
Interest expense (1,230) (1.3%) (892) (1.7%) 37.9%
Other income 115 0.1% 100 0.2% 15.0%
-------- ----- -------- ----- -----
Income (loss) before taxes
and minority interest 2,919 3.3% (6,838) (12.9%) --
Minority interest (2,448) (2.7%) -- -- --
Income tax credit 51 0.0% 79 (0.2%) (35.4%)
-------- ----- -------- ----- -----
NET INCOME (LOSS) $ 522 0.6% ($ 6,759) (12.7%) --
======== ===== ======== ===== =====
</TABLE>
The OEM Automotive Supply segment accounted for $32.7 million of the $36.4
million sales growth in 1999. OEM Automotive Supply benefitted from the start-up
of a second plant as a result of a new customer contract and a full years
production from a prior year plant start-up. Conversion Vehicle segment sales
increased $3.7 million primarily from growth in commercial bus product sales.
The incremental OEM Automotive Supply sales generated $8.2 of additional gross
profit in 1999. The Conversion Vehicle segment improved its gross margin
primarily due to reduced labor and overhead costs from plant consolidations.
General and administrative expenses increased $1.6 million in the OEM Automotive
Supply segment in order to support the growth in this business, partially offset
by a $400,000 decrease in the Conversion Vehicle segment from personnel
reductions.
Interest expense from the OEM Automotive Supply segment increased $153,000 due
to higher borrowing levels to fund the segment's growth. Conversion Vehicle
segment interest expense increased due to higher interest rates and a slightly
higher average borrowing level. Minority interest in 1999 results from the
Company owning only 50% of the OEM Automotive Supply segment. The Company does
not have income tax expense in 1999 due to existing tax credit carry forwards
generated from prior year losses. The income tax credit recorded in 1999 is due
to deferred tax changes. The minimal income tax credit in 1998 is due to the
Company's tax carry-back being fully utilized.
15 of 22
<PAGE>
1998 VERSUS 1997
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 to
1998
1998 1997 Change
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 53,092 100.0% $ 72,282 100.0% (26.5%)
Cost of goods sold 49,590 93.4% 66,342 91.8% (25.3%)
-------- ----- -------- ----- -----
Gross profit 3,502 6.6% 5,940 8.2% (41.0%)
Selling and promotion expenses 4,484 8.4% 7,243 10.0% (38.1%)
General and administrative expenses 5,064 9.6% 6,681 9.2% (24.2%)
Restructuring charges 0 0.0% 1,010 1.4% --
Goodwill impairment loss 0 0.0% 4,916 6.8% --
-------- ----- -------- ----- -----
Operating loss (6,046) (11.4%) (13,910) (19.2%) (56.5%)
Interest expense (892) (1.7%) (400) (0.6%) 123.0%
Other income 100 0.2% 194 0.3% (48.5%)
-------- ----- -------- ----- -----
Loss before taxes (6,838) (12.9%) (14,116) (19.5%) (51.6%)
Income tax credit 79 0.2% 2,814 3.9% (97.2%)
-------- ----- -------- ----- -----
NET LOSS ($ 6,759) (12.7%) ($11,302) (15.6%) (40.2%)
======== ===== ======== ===== =====
</TABLE>
Net Sales for 1998 decreased 26.5% to $53.1 million from $72.3 million in 1997.
Vehicle conversion sales declined 27.2%, comprised of a 28.2% decline in
domestic and 32.0% decline in export. The start-up of the commercial bus
business generated $1.2 million in sales in 1998. The Company's domestic sales
declined consistent with the decline in the overall conversion market of 23.7%
as reported by the Recreational Vehicle Industry Association. In addition, the
Company's sales were adversely impacted by production constraints in the third
quarter from shortages of key raw material parts, primarily hardwood components.
The Company estimates that the production issues negatively impacted the year's
sales by approximately $7 million. Export sales declined due to price pressures
from the stronger U.S. dollar and reduced demand in Japan and Korea caused by
the economic turmoil in Asia.
Gross profit margin for 1998 was 6.6% of sales compared to 8.2% in 1997. The
decrease in gross margin as a percent of sales is primarily attributable to the
impact of fixed plant overhead costs on the lower sales volume. Selling and
promotion expense for 1998 decreased 38.1% to $4.5 million primarily due to the
lower domestic sales volume. The decrease in selling and promotion expense as a
percentage of sales in 1998 is due to cost reductions from fixed salesmen
salaries and the elimination of the Texas operation. General and administrative
expense in 1998 was $5.1 million, a 24.2% decrease from 1997. The decrease is
primarily attributable to reductions in personnel, partially offset by $487,000
of start-up expense from the OEM automotive supply segment.
In December 1996 the Company consolidated its Imperial Automotive Group
manufacturing operation and its Texas manufacturing facility into Starcraft
Automotive Group's manufacturing complex in Goshen, Indiana. The Company
recorded a $1.0 million restructure charge in fiscal 1997. Operating losses at
Imperial, together with a strategic review of the conversion industry, resulted
in an evaluation of the goodwill related to the acquisition of Imperial
Industries, Inc. In 1997. As a result of the change in the domestic market,
abandonment of the original strategic operating plan for Imperial, cumulative
operating losses and continued weakness in the domestic vehicle conversion
market, an impairment loss of $4.9 million was recorded in 1997 to write-off the
remaining goodwill associated with this acquisition.
The Company recorded a minimal income tax credit in 1998 as the tax carry-back
is fully utilized. The 1997 income tax credit was recorded at a 19.9% effective
rate primarily due to the impact of a $2.5 million valuation allowance for
deferred income taxes.
SEASONALITY AND TRENDS
The Company's sales and profits are dependent on the automotive markets in the
United States and overseas, primarily Japan and northern Europe, and the OEM's
ability to supply vehicle chassis. The business tends to be seasonal with
stronger sales in March through July and is influenced by a number of factors
including atypical weather for any sales region and OEM programs affecting the
price, supply and delivery of vehicle chassis.
16 of 22
<PAGE>
The Company eliminated much excess production capacity and reduced overhead in
the last several years to address the decline in revenue. In 1997 the Company
began a plan to diversify both its product base and target markets as it
acquired National Mobility Corporation. In 1998 the Company continued to pursue
its cost reduction and diversification strategy with the introduction of the
shuttle bus product and the start-up of the OEM automotive supply business. The
Company plans to continue to develop these new products and to increase its
product offerings in the vehicle conversion commercial market.
The OEM automotive supply segment is dependent upon long-term contract business.
The business' current contracts are through 2003.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $2.6 million during 1999 compared to using
cash of $4.6 million in the prior year. The use of cash resulted primarily from
funding working capital for the sales growth. Receivables, inventory and
accounts payable increased significantly in 1999 primarily due to the growth in
the OEM Automotive Supply Segment.
The Company invested $1 million in property and equipment during the year of
which $844, 000 was for new plant start-ups.
The Company acquired National Mobility Corporation of Elkhart, Indiana in
February 1997 for $1.2 million in cash, assumption of certain bank debt, and
15,000 shares of the Company's Common Stock.
The Company's use of cash for operations and investing activities was financed
by bank debt. As of October 3, 1999, bank debt was $14.6 million.
On October 30, 1998, the Company entered into a $14 million credit agreement
with a lending institution. The agreement is subject to renewal in November
2001. Revolving advances under the agreement are limited to specified
percentages of eligible receivables and inventories and are subject to a maximum
limit of $9.2 million. The credit agreement also includes a $4.8 million term
loan which is payable in monthly principal installments of $57,000 beginning
December 1, 1998. The revolving borrowings bear interest of either 1/2% over
prime or 3% over the Eurodollar rate. The term loan bears interest at either
3/4% over prime or 3.5% over the Eurodollar rate. The borrowings are secured by
substantially all of the Company's assets. There is a fee of .25% of the average
unused portion of the maximum borrowing amount. The agreement is also subject to
various covenants of which the Company is in compliance as of October 3, 1999.
On November 23, 1998, the Company entered into an amended credit agreement with
its former primary lender. The agreement called for all borrowings over $3
million to be paid with proceeds from the $14 million refinancing described
above. The remaining $3 million is payable in monthly principal installments of
$36,000 beginning December 1, 1998. The note matures in November 2001 at which
time any remaining principal balance is due. The note bears interest at 2% over
the bank's prime rate and is subordinate to the $14 million credit agreement
described above. The note is partially guaranteed by two individuals, one of
whom is a director and officer of the Company and the other is currently an
outside director. As incentive for their guarantees, the Company issued to the
individuals warrants to purchase a total of 400,000 shares of Common Stock for
$2.20 per share. The warrants have a five year term and are exercisable at the
date of the grant.
On January 12, 1998, the Company entered into an amended credit agreement with
its former primary lender which was effective as of December 31, 1997.
Borrowings were limited to specified percentages of eligible receivables,
inventories and property and equipment, and were subject to maximum limits of
$15 million through March 30, 1998, $12 million from March 31, 1998 through June
29, 1998 and $10 million thereafter. Borrowings under this agreement bore
interest at 1% over the bank's prime rate were secured by substantially all of
the Company's assets.
In addition to the availability of bank financing, the Company has restricted
sales agreements with General Motors Acceptance Corporation, Chrysler Financial
Corporation and Ford Motor Credit Company. Pursuant to these agreements, the
Company obtains vehicle chassis from the OEM's for 90 days at nominal rates. If
the Company fails to match a chassis with a dealer order within 90 days after
delivery of the chassis to the Company, carrying charges increase to prime rate
plus 1%.
The Company believes that future cash flows from operations, funds available
under its revolving credit agreement, and the continued use of OEM financing
arrangements to manage its chassis inventory will be sufficient to satisfy its
anticipated operating needs and capital improvements for 2000.
17 of 22
<PAGE>
OTHER MATTERS
The Company was formerly dependent on a centralized computer which provided data
in support of vital company-wide operational and accounting functions. Many of
the computer processes used to generate this data were programmed in-house
following the common practice of using only two digits to designate a year.
Other software purchased by the Company was written using the same convention.
As the year 2000 approaches, programs with such date-related logic will not be
able to distinguish between the years 1900 and 2000, potentially causing
software and hardware to fail, generate erroneous calculations or present
information in an unusable form beyond December 31, 1999. In 1997, the Company
began devoting significant resources to replace its current system with a new,
year 2000-compliant enterprise computer system. The new system is currently
operational. The total cost of the project, including hardware, software and
consulting costs, was approximately $1.1 million.
The Company has reviewed year 2000 readiness of third-party suppliers, customers
and financial institutions through questionnaires and direct discussion. The
Company's major suppliers have indicated that they are year 2000 compliant. The
Company believes because of the nature of its raw materials and the multiple
suppliers of raw materials, the Company will not have a problem obtaining raw
materials to build its products. The Company also believes there is not
significant risk from the failure of its customers to become year 2000 compliant
because of the large number of active accounts. The Company's largest customer
is a public company which has stated it is year 2000 compliant. It is
anticipated that the Company's year 2000 project reduced the risk of significant
business interruptions, but there is no assurance that this outcome will be
achieved. Failure to detect and correct all internal instances of non-compliance
or the inability of third parties to achieve timely compliance could result in
the interruption of normal business operations which could, depending on its
duration, have a material adverse effect on the Company's financial condition or
results of operations.
DISCUSSION OF FORWARD-LOOKING INFORMATION
The discussion above includes forward-looking statements respecting
restructuring cost estimates, future personnel and facility expense reductions,
anticipated tax refunds, domestic and international market and economic trends,
the Company's product and target market diversification plans, anticipated
capital expenditures, the adequacy of capital resources and other matters. From
time to time, Starcraft may make oral or written forward-looking statements
regarding its anticipated sales, costs, expenses, earnings and matters affecting
its condition and operations. All such forward-looking statements are subject to
a number of material factors which could cause the statements or projections
contained therein to be materially inaccurate. Such factors include, without
limitation, the following:
General Operating Contingencies. The Company may not be able to attract and
retain employees with sufficient skills to conduct its operations efficiently
and may from time to time be subject to work slow-downs or stoppages. The
Company may be adversely affected by delay or unavailability of supply of
numerous component parts. The Company will not always be able to satisfy its
capital requirements with internally generated funds and may, from time to time,
need to rely on bank financing and other third party capital resources. There is
no assurance that such resources will always be available to the Company or as
to the terms that will apply to any financing, or as the Company's ability to
continue to comply with such terms over time.
Acquisitions and Diversification. The Company may be engaged in negotiations
from time to time regarding prospective acquisitions of van conversion or
related businesses. Such acquisitions could be material to the Company and, if
effected, could have a material effect on the Company's financial condition or
results of operations. There is no assurance as to when or whether the Company
will be able to effect acquisitions, whether it will be able to generate
requisite funding to effect such acquisitions, or as to the terms on which such
acquisitions may be effected. A significant aspect of the Company's strategy is
to diversify its product offerings into new product lines, such as taxis and
shuttle buses. The Company has less experience manufacturing and marketing such
products than it has in its core conversion vehicle business. There is no
assurance that such new product lines will be profitable.
Economic Conditions. The van conversion industry is cyclical and is affected by
the general trends of the economy and consumer preferences and consumer
confidence and trends of the automotive and recreational vehicle industries both
domestically and in international markets. The level of disposable consumer
income affects the Company's sales because its products are generally considered
discretionary expenditures by consumers. In difficult economic times, consumers
tend to spend less of their income on discretionary items. Other economic
factors affecting the demand for the Company's products include the availability
and price of gasoline, the level of interest rates and the availability of
consumer financing. A decline in general economic conditions or consumer
confidence can be expected to affect Starcraft's sales adversely.
18 of 22
<PAGE>
Supply and Financing of Vehicle Chassis. The Company is dependent upon the OEMs
to supply its requirements for vehicle chassis. Labor stoppages, supply
shortages and a variety of other factors that influence OEM production can
affect the availability or timely delivery of vehicle chassis to the Company. If
vehicle chassis are unavailable, or if the Company must accept delivery earlier
or later than it otherwise would prefer, sales could be adversely affected and
financing expenses could increase. The Company must also comply with its
consignment and restricted sale contracts with the OEMs pursuant to which the
OEMs impose certain specifications for the Company's vehicle conversions,
including gross vehicle weight standards. Such contracts also restrict the
Company's ability to dispose of completed chassis and prohibit the transfer of
chassis to unauthorized U.S. and foreign dealers. All of the Company's
consignment and restricted sale contracts with chassis suppliers are terminable
by either party on short notice without cause. The availability of the OEM
financing rates is dependent upon the Company's compliance with its OEM
contracts and its ability to maintain satisfactory credit relationships with the
OEM's finance subsidiaries. Adverse changes in the Company's financial condition
or results of operations could cause such financing subsidiaries to seek to
change adversely the Company's financing terms or to terminate such financing
arrangements. Such a change or termination could have a material adverse effect
on the Company's financial condition and results of operations.
Regulation. The Company is subject to various foreign, federal, state and local
regulations. In particular, van conversion components produced by the Company
are required to comply with Federal Motor Vehicle Safety Standards and similar
safety standards imposed in its foreign markets. Promulgation of additional
safety standards in the future could require the Company to incur additional
testing and engineering expenses which could adversely affect the Company's
results of operations. The Company's international sales can be adversely
affected by changes in foreign import tariffs and taxes and fluctuations in
exchange rates. The Company must comply with certain Federal and state
regulations relating to the disposition of hazardous wastes generated in its
production processes. The Company's failure to comply with applicable
regulations or changes in current regulations, including the adoption of new
safety or environmental standards, could have material adverse effect on the
Company's results of operations.
Competition. The United States vehicle conversion industry is very competitive
with several principal nationwide manufacturers and numerous local and regional
competitors. The OEM Automotive Supply business is also highly competitive with
several large companies competing in this market. There is no assurance the
Company will be able to maintain its current competitive position in these
markets.
Potential Product Liability. Like other automotive manufacturers, the Company
may be subject to claims that its products caused or contributed to damage or
injury sustained in vehicle accidents or may be required to recall products
deemed unsafe. Any such claims in excess of the Company's insurance coverage or
material product recall expenses could adversely affect the Company's financial
condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Starcraft Corporation and Subsidiaries
Goshen, Indiana
We have audited the accompanying consolidated balance sheets of Starcraft
Corporation and Subsidiaries as of October 3, 1999 and September 27, 1998 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of Starcraft Corporation and Subsidiaries for
the year ended September 28, 1997 were audited by other auditors whose report
dated January 12, 1998 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Starcraft Corporation and Subsidiaries as of October 3, 1999 and September 27,
1998 and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Elkhart, Indiana
November 18, 1999
<PAGE>
Report of Independent Auditors
To the Board of Directors
Starcraft Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash floss for the year ended September 28, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibilities is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Starcraft Corporation and Subsidiaries for the year ended
September 28, 1997 in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
January 12, 1998
Fort Wayne, Indiana
<PAGE>
- --------------------------------------------------------------------------------
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 3, 1999 and September 27, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
(in thousands)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 600 $ 1,369
Trade receivables, less allowance for
doubtful accounts of $40 16,608 6,160
Manufacturers' rebates receivable 468 569
Recoverable income taxes - 417
Inventories 16,377 10,857
Other 530 401
------------ ------------
Total current assets 34,583 19,773
Property and equipment
Land, buildings and improvements 6,355 5,927
Machinery and equipment 6,677 6,224
------------ ------------
13,032 12,151
Less accumulated depreciation 5,168 4,305
------------ ------------
7,864 7,846
Goodwill, at amortized cost 1,258 1,355
Other assets 76 41
------------ ------------
$ 43,781 $ 29,015
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
October 3, 1999 and September 27, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
<S> <C> <C>
Current maturities of long-term debt $ 1,057 $ 1,023
Accounts payable, trade 18,496 8,244
Accrued expenses
Warranty 1,972 1,766
Compensation and related expenses 384 322
Taxes 1,014 971
Other 1,468 2,045
------------ ------------
Total current liabilities 24,391 14,371
Long-term debt 13,506 10,777
Deferred income taxes - 331
Minority interest in subsidiary 1,698 -
Shareholders' equity
Preferred stock, no par value: 2,000,000 shares
authorized but unissued - -
Common stock, no par value:
Authorized shares - 10,000,000 shares
issued and outstanding shares -
1999 - 4,176,928;
1998 - 4,133,600 14,144 14,016
Additional paid-in capital 1,008 1,008
Accumulated deficit (10,966) (11,488)
------------ ------------
4,186 3,536
------------ ------------
$ 43,781 $ 29,015
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended October 3, 1999,
September 27, 1998 and September 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales
Domestic $ 81,397 $ 42,857 $ 57,235
Export 8,107 10,235 15,047
------------ ------------ ------------
89,504 53,092 72,282
Cost of goods sold 74,548 49,590 66,342
------------ ------------ ------------
Gross profit 14,956 3,502 5,940
Operating expenses
Selling and promotion 4,638 4,484 7,243
General and administrative 6,284 5,064 6,681
Restructuring charges - - 1,010
Goodwill impairment loss - - 4,916
------------ ------------ ------------
Operating income (loss) 4,034 (6,046) (13,910)
Nonoperating (expense) income
Interest, net (1,230) (892) (400)
Other income, net 115 100 194
------------ ------------ ------------
(1,115) (792) (206)
------------ ------------ ------------
Income (loss) before minority interest
and income taxes 2,919 (6,838) (14,116)
Minority interest in income of subsidiary 2,448 - -
Federal and state income taxes (benefit) (51) (79) (2,814)
------------ ------------ ------------
Net income (loss) $ 522 $ (6,759) $ (11,302)
============ ============ ============
Earnings (loss) per share $ 0.13 $ (1.63) $ (2.74)
Earnings (loss) per share assuming dilution $ 0.12 $ (1.63) $ (2.74)
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended October 3, 1999,
September 27, 1998 and September 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 522 $ (6,759) $(11,302)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 1,065 1,018 1,199
Noncash restructuring charges -- -- 611
Goodwill impairment loss -- -- 4,916
Deferred income taxes (331) (177) 583
Minority interest 1,698 -- --
Change in operating assets and liabilities
Receivables (9,930) 823 2,465
Inventories (5,520) (1,587) 4,494
Accounts payable 10,252 1,890 (3,369)
Accrued expenses (266) 178 (2,512)
Other (65) 30 (113)
-------- -------- --------
Net cash from operating activities (2,575) (4,584) (3,028)
Cash flows from investing activities
Purchase of property and equipment (1,024) (785) (1,407)
Purchase assets of National Mobility Corporation -- -- (1,756)
Proceeds from sale of property and equipment 67 26 60
-------- -------- --------
Net cash from investing activities (957) (759) (3,103)
Cash flows from financing activities
Proceeds from revolving credit agreement 8,664 11,604 12,200
Payments of revolving credit agreement (4,915) (5,500) (6,504)
Payments of long-term installment debt (986) -- (323)
-------- -------- --------
Net cash from financing activities 2,763 6,104 5,373
-------- -------- --------
Net change in cash and cash equivalents (769) 761 (758)
Cash and cash equivalents at beginning of year 1,369 608 1,366
-------- -------- --------
Cash and cash equivalents at end of year $ 600 $ 1,369 $ 608
======== ======== ========
Supplemental disclosure of cash flow information
Interest paid $ 1,411 $ 770 $ 376
Income taxes paid (refunded) (360) 10 140
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STARCRAFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY
For the years ended October 3, 1999, September 27, 1998
and September 28, 1997
<TABLE>
<CAPTION>
Outstanding Additional Retained
Common Common Paid-In Earnings
Shares Stock Capital (Deficit) Total
------ ----- ------- --------- -----
-------------------(in thousands)--------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 4,118,600 $ 13,971 $ 1,008 $ 6,573 $ 21,552
Net loss - - - (11,302) (11,302)
Issuance of 15,000 shares
of common stock 15,000 45 - - 45
-------------- ---------- ---------- ---------- ----------
Balance, September 28, 1997 4,133,600 14,016 1,008 (4,729) 10,295
Net loss - - - (6,759) (6,759)
-------------- ---------- ---------- ---------- ----------
Balance, September 27, 1998 4,133,600 14,016 1,008 (11,488) 3,536
Net income - - - 522 522
Issuance of 43,328 shares of
common stock 43,328 128 - - 128
-------------- ---------- ---------- ---------- ----------
Balance, October 3, 1999 4,176,928 $ 14,144 $ 1,008 $ (10,966) $ 4,186
============== ========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Consolidation: Starcraft Corporation and
Subsidiaries (Company) are second stage manufacturers of custom van, pickup
truck and sport utility vehicle conversions, shuttle buses and direct OEM
automotive supply. The consolidated financial statements include the accounts of
Starcraft Corporation and its wholly owned subsidiaries: Starcraft Automotive
Group, Inc., Imperial Automotive Group, Inc. (Imperial), Starcraft Southwest,
Inc., and National Mobility Corporation. The Company has a 50% ownership
interest in Tecstar, L.L.C. (Tecstar) which is an original equipment
manufacturer (OEM) automotive supplier. The accounts of Tecstar are also
included in these consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company's customers operate in the automotive industry. The Company's
conversion vehicle products segment (see Note 15) sells product throughout the
United States, and export sales are principally to locations in Japan and
northern Europe. The OEM automotive supply segment sales are to a customer in
the United States. Credit is extended to customers based on an evaluation of the
customer's financial condition, and when credit is extended collateral generally
is not required.
Statements of Cash Flows: During 1999, the Company issued 29,926 shares of
common stock with a value of $90 to its 401(k) plan and issued 13,402 shares of
common stock with a value of $38 under the directors share plan.
Cash Equivalents and Concentrations: Cash equivalents include all highly liquid
investments with a maturity when purchased of three months or less. The first
$100,000 of deposits in each financial institution are insured by an agency of
the U.S. Government.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for certain inventories
($11,380 and $10,081 at October 3, 1999 and September 27, 1998, respectively)
and by the first-in, first-out (FIFO) method for all other inventories.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed principally by the straight-line method over the estimated useful
lives of the assets. The Company is depreciating buildings over periods of 15 to
50 years, building improvements over periods of 5 to 20 years, and equipment
over periods of 3 to 12 years.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Goodwill: Goodwill is amortized by the straight-line method over a period of 15
years and is stated net of accumulated amortization of $252 and $155 at October
3, 1999 and September 27, 1998, respectively. The Company evaluates the
recoverability based on undiscounted projected operating cash flows when factors
indicate that an impairment may exist. For the year ended September 28, 1997, an
impairment loss of $4,916 was recorded. No impairment loss was recorded for the
two years ended October 3, 1999.
Warranties: The Company follows the policy of accruing an estimated liability
for warranties at the time the warranted products are sold.
Revenue Recognition: The Company generally manufactures products based on
specific orders from customers. Shipments are generally made by common carrier
after receiving authorization from the customer, and revenue is recognized upon
shipment. Net sales do not include the cost of consigned chassis (see Note 10).
Stock Based Compensation: The Company periodically grants stock options for a
fixed number of shares to employees. The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
Use of Estimates: Preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Management
makes estimates for warranty and contingency reserves, allowance for doubtful
accounts, impairment of goodwill, and depreciation expense.
Earnings Per Common Share: Basic and diluted earnings per common share are
computed under an accounting standard effective beginning with the quarter ended
December 28, 1997. All prior earnings per common share amounts have been
restated to be comparable. Basic earnings per common share is based on net
income available to common shareholders divided by the weighted average number
of common shares considered to be outstanding during the period. The weighted
average number of common shares outstanding were 4,158,651, 4,133,600 and
4,127,350 for the years ended October 3, 1999, September 27, 1998 and September
28, 1997, respectively. Diluted earnings per common share shows the dilutive
effect of any additional potential common shares issuable under stock options
and warrants.
Seasonality: The Company's business is seasonal. Sales are generally higher
during the spring and summer months of the year.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fiscal Year: The Company's fiscal year ends on the Sunday closest to September
30. The year ended October 3, 1999 consists of 53 weeks, whereas the years ended
September 27, 1998 and September 28, 1997 each contain 52 weeks.
Recently Enacted Accounting Standards: In 1998, the American Institute of
Certified Public Accountants (AICPA) issued SOP No. 98-5, "Reporting on the
Costs of Start-Up Activities." This statement provides guidance on the
accounting for start-up costs and organization costs and is effective for years
beginning after December 15, 1998. Also in 1998, the AICPA issued SFAS
(Statement of Financial Accounting Standards) Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement was amended by
SFAS No. 137 which, deferred the effective date until years beginning after June
15, 2000. This statement requires all derivative instruments to be recorded in
the balance sheet at their fair value. Changes in the fair value of derivatives
are required to be recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is designated as part
of a hedge transaction. Management does not expect the effects of adoption to be
significant.
Fair Value of Financial Instruments: The Company's carrying amount for its
financial instruments, which include cash, accounts receivable, accounts payable
and long-term debt, approximates fair value.
NOTE 2 - INVENTORIES
The composition of inventories at October 3, 1999 and September 27, 1998 is as
follows:
1999 1998
------------ ------------
Raw materials $ 10,844 $ 4,631
Chassis 1,918 2,006
Work-in-process 1,940 2,584
Finished goods 1,675 1,636
------------ ------------
$ 16,377 $ 10,857
============ ============
The use of the LIFO method of determining the cost of inventories did not have a
material effect on inventories at October 3, 1999 and September 27, 1998.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 3 - DEBT ARRANGEMENTS
On October 30, 1998, the Company entered into a $14,000 credit agreement with a
lending institution. The agreement is subject to renewal in November 2001.
Revolving advances under the agreement are limited to specified percentages of
eligible receivables and inventories and are subject to a maximum limit of
$9,200. At October 3, 1999, the outstanding balance on the revolver is $7,749.
The credit agreement also includes a $4,800 term loan which is payable in
monthly principal installments of $57 which began December 1, 1998. At October
3, 1999, the outstanding balance on the term loan is $4,171. The note matures in
November 2001 at which time any remaining principal balance is due The revolving
borrowings bear interest of either 1/2% over prime or 3% over the Eurodollar
rate. The term note bears interest at either 3/4% over prime or 3.5% over the
Eurodollar rate. The borrowings are secured by substantially all of the
Company's assets. There is a fee of .25% of the average unused portion of the
maximum borrowing amount. Pursuant to the agreement, the Company must, among
other things, maintain a minimum level of tangible net worth and must meet
predetermined levels of earnings before income taxes, depreciation and
amortization (EBITDA). If these minimum levels are not maintained, any
outstanding balances become payable upon demand of the lending institution. At
October 3, 1999, the Company is in compliance with all covenants.
On November 23, 1998, the Company entered into an amended credit agreement with
its former primary lender. The agreement called for all borrowings over $3,000
to be paid with proceeds from the $14,000 refinancing described above. The
remaining $3,000 is payable in monthly principal installments of $36 which began
December 1, 1998. At October 3, 1999, the outstanding balance on this term note
is $2,643. The note matures in November 2001 at which time any remaining
principal balance is due. The note bears interest at 2% over the bank's prime
rate and is subordinate to the $14,000 credit agreement described above. The
note is partially guaranteed by two individuals, both whom are currently
directors and one of whom is an officer of the Company. (See Note 13)
The current and long-term notes payable on the September 27, 1998 balance sheet
reflect the above modifications. The carrying amount of the Company's long-term
debt approximates fair value.
Interest expense was approximately $1,230, $892 and $403 in 1999, 1998 and 1997,
respectively.
Long-term debt is due as follows:
Fiscal Year Ending
------------------
2000 $ 1,057
2001 1,114
2002 12,392
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
Federal and state income taxes (benefit), all of which were domestic, consist of
the following:
1999 1998 1997
---- ---- ----
Current
Federal $ - $ (61) $ (2,770)
State 280 159 (627)
------------ ------------ ------------
280 98 (3,397)
Deferred
Federal (289) (154) 508
State (42) (23) 75
------------ ------------ ------------
(331) (177) 583
------------ ------------ ------------
$ (51) $ (79) $ (2,814)
============ ============ ============
The provisions for income taxes are different from amounts that would otherwise
be computed by applying a federal statutory rate of 34% to income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rate applied to pretax income (loss) $ 160 $ (2,325) $ (4,799)
State taxes - net 24 (196) (701)
Foreign sales corporation - - (36)
Net operating loss for which no
benefit was recognized 474 2,231 -
Change in valuation allowance (747) 254 2,544
Other, net 38 (43) 178
------------ ------------ ------------
$ (51) $ (79) $ (2,814)
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES (Continued)
The composition of the deferred tax assets and liabilities at October 3, 1999
and September 27, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities
Accelerated depreciation $ (522) $ (460)
Inventory basis difference (331) (331)
------------ ------------
(853) (791)
Deferred tax assets
Inventory 181 275
Nondeductible accruals
Warranty 652 689
Other 301 487
Goodwill 1,441 1,587
Alternative minimum tax credit carryforward 220 220
Net operating loss carryforward 2,814 2,231
------------ ------------
Total deferred tax assets 5,609 5,489
Valuation allowance (4,756) (5,029)
------------ ------------
853 460
------------ ------------
Net deferred tax asset (liability) $ - $ (331)
============ ============
</TABLE>
The alternative minimum tax carryforward of $220 has no expiration date. The net
operating loss carryforward expires as follows: $2,340 in 2018 and $474 in 2019.
NOTE 5 - COMPENSATION PLANS
The Company sponsors a qualified profit-sharing plan, more commonly known as a
401(k) plan, for all of its employees with over six months of service. The plan
provides for a discretionary matching contribution by the Company of the
employee's salary deduction, up to 6% of compensation. Also, the plan provides
for an additional discretionary contribution annually as determined by the Board
of Directors. The amounts charged to expense for this plan were approximately
$90, $(250) and $361 in 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLANS
The Company maintains two stock incentive plans under which stock options are
granted to key employees and directors. The plans authorize the granting of
stock options for up to 630,000 shares of the Company's common stock. The
options in these two plans have five year terms and become fully exercisable
after six months. The Company also sponsors a qualified stock option plan with
40,000 shares of common stock reserved for options to certain sales
representatives who are not employees of the Company. These options have five
year terms.
Under the three plans, options may not be granted at prices below 85% of the
current market value of the stock at the date of grant. All options awarded
through October 3, 1999 have been at fair market value on the date of grant. For
the years in the period ended September 27, 1998 and September 28, 1997, the
effect of the stock options in computing earnings per common share was
antidilutive.
A summary of the Company's stock option activity and related information for the
years ended October 3, 1999, September 27, 1998 and September 28, 1997 follows:
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 452,849 $ 3.97 407,349 $ 5.65 375,349 $ 6.24
Granted 162,500 2.04 188,849 1.85 124,500 3.40
Canceled (31,500) 3.72 (85,000) 4.41 (92,500) 5.02
Expired (14,000) 8.33 (58,349) 8.15 - -
----------- ------- ----------- -------- ----------- --------
Outstanding at
end of year 569,849 $ 3.33 452,849 $ 3.97 407,349 $ 5.65
=========== ======= =========== ======== =========== =======
Exercisable at end of year 559,849 $ 3.32 383,515 $ 4.22 302,149 $ 6.46
=========== ======= =========== ======== =========== =======
</TABLE>
As of October 3, 1999, there were 309,849 options outstanding with exercise
prices which ranged from $1.50 to $3.00. The weighted-average exercise price of
these options is $1.77, and the weighted-average remaining contractual life is
3.7 years. As of October 3, 1999, there were 260,000 options outstanding with
exercise prices which ranged from $3.125 to $7.75. The weighted-average exercise
price of these options is $5.19, and the weighted-average remaining contractual
life is 1.8 years.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLANS (Continued)
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25 no compensation expense
has been recognized because the exercise price of the Company's stock options
has equaled the market price of the underlying stock on the date of grant.
Proforma information regarding net income and earnings per share is required by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123")
and has been determined as if the Company had accounted for its stock options
issued in 1999 and 1998 under the fair value method of FAS 123. The fair value
was estimated as of the date of grant using a Black-Sholes option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 4.43% - 5.86% 4.52% - 5.63% 6.04% - 6.77%
Dividend yield 0% 0% 0%
Volatility factor 62.4% - 70.9% 54.8% - 59.8% 40.9% - 48.8%
Expected option life 4 years 4 years 4 years
</TABLE>
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's proforma
information follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proforma net income (loss) $ 311 $ (6,912) $ (11,469)
Proforma net income (loss) per share $ .08 $ (1.67) $ (2.78)
</TABLE>
NOTE 7 - SHAREHOLDER RIGHTS PLAN
In August 1997 the Company adopted a Shareholders Rights Plan issuing one right
for each outstanding share. Each right entitles the registered holder to
purchase from the Company one share of common stock at $15 per share, subject to
adjustment. The rights become exercisable if a person or group (other than
certain related persons) acquires or announces a tender offer for prescribed
percentages of the Company's shares or is declared an "adverse person" by the
Company's Board of Directors. In these events, each right holder may purchase
shares with a value equal to twice the exercise price. Furthermore, if the
Company engages in certain mergers or similar business combinations a right
holder may purchase shares of the acquiring company with a value to two times
the purchase price of the right. The rights expire on August 12, 2007.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 8 - RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT
In December 1996, the Company consolidated its Imperial manufacturing operation
located in Elkhart, Indiana into the Company's facility in Goshen, Indiana. In
June 1997, the Company closed its McGregor, Texas plant and sold the assets of
that plant. The Company recorded $1,010 of restructuring charges related to such
activities primarily for employee termination and other costs ($179), leasehold
asset write-offs ($326) and the recognition of remaining contractual lease
obligations ($505). The contractual lease obligations primarily pertained to
remaining rent and associated contractual costs at the former Imperial location.
The remaining liability for contractual lease obligations at September 27, 1997
was paid during fiscal 1998.
Operating losses at Imperial, together with a strategic review of the conversion
industry, resulted in an evaluation of the goodwill related to the acquisition
of Imperial Industries, Inc. The July 1994 acquisition of Imperial Industries,
Inc. was viewed at that time as a strategic expansion of the Company's
production capacity, conversion products lines, and sales and dealer network.
The operating strategy was to allow Imperial to remain an independent
manufacturing and operating subsidiary focused exclusively on the price
sensitive, entry level domestic conversion market. However, subsequent to the
acquisition, the domestic market has contracted, gross margins have
deteriorated, and Imperial has experienced operating losses. In 1997, the
manufacturing operations of Imperial were consolidated into the Starcraft
manufacturing facility to reduce excess capacity. Further integration of the
manufacturing operations, as well as integration and reduction of the sales,
dealer and general and administration functions, have occurred since this
consolidation.
As a result of the change in the domestic market, abandonment of the original
strategic operating plan for Imperial, cumulative operating losses and continued
weakness in the domestic vehicle conversion market, it was determined that the
goodwill was not recoverable, and therefore, a goodwill impairment loss of
$4,916 was recorded in the fourth quarter of 1997 to write off the remaining
goodwill associated with this acquisition.
NOTE 9 - BUSINESS COMBINATION
On February 28, 1997, the Company acquired the assets and assumed certain
liabilities of National Mobility Corporation, a manufacturer of conversion
vehicles for the physically challenged. The purchase price of the acquired
assets was $1,200 in cash, assumption of certain bank debt, and issuance of
15,000 shares of the Company's common stock. The excess of the total acquisition
cost over the fair value of the net assets acquired was recorded as goodwill and
is being amortized over 15 years using the straight-line method.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 9 - BUSINESS COMBINATION (Continued)
The acquisition was recorded using the purchase method of accounting, and
accordingly, the results of operations of National Mobility Corporation for the
years ended October 3, 1999 and September 27, 1998 and for the seven months
ended September 27, 1997 are included in the consolidated financial statements.
The purchase price has been allocated to assets acquired and liabilities assumed
based on their respective fair values at the date of acquisition. The allocation
of the purchase price is summarized as follows:
Current assets $ 2,448
Property and equipment 200
Goodwill 1,510
Current liabilities (2,357)
------------
$ 1,801
============
On the basis of a proforma consolidation of the results of operations as if the
acquisition had taken place at the beginning of 1996, consolidated net sales
would have been $102,978 for 1996 and $73,771 for 1997. Consolidated proforma
income (loss) and earnings (loss) per share would not have been materially
different from the reported amounts for 1998 and 1997. The proforma information
is not necessarily indicative of what the actual consolidated results of
operations might have been if the acquisition had been effective at the
beginning of 1996.
NOTE 10 - CONSIGNMENT ARRANGEMENTS
The Company obtains vehicle chassis for modification from major vehicle
manufacturers (OEMs) under consignment and restricted sales agreements. These
agreements generally provide that (i) the Company may not obtain certificates of
origin or other evidence of ownership of chassis, (ii) modification must conform
to standards specified by OEMs, and (iii) modifications generally are performed
only after a sale has been negotiated with an OEM approved dealer. The Company
generally ships converted chassis only after dealer acceptance has been approved
by the OEM. The OEMs bill the dealer and provide warranty for the chassis.
Consistent with the practice in the industry, the Company accounts for chassis
as consignment inventory. Accordingly, the Company records chassis inventory and
related obligations only in the event they are required to purchase chassis from
the OEM. Provisions for decline in chassis value are recognized when, in
management's estimation, such provisions are necessary. Provisions for decline
in chassis value, chassis inventory, and chassis sales are not material to the
accompanying financial statements.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 10 - CONSIGNMENT ARRANGEMENTS (Continued)
At October 3, 1999, the Company has possession of chassis in the aggregate
amount of $14,140 (of which $1,940 related to chassis on consignment for periods
exceeding 90 days) and has total chassis line availability of $28,300. Carrying
charges on consignment chassis, which are presented in cost of goods sold, were
approximately $819, $1,030 and $2,740 in 1999, 1998 and 1997, respectively. The
OEMs have also instituted marketing incentive rebates to second-stage
manufacturers based on the number of chassis delivered to dealers. Those
incentives reduced cost of goods sold by approximately $476, $731 and $751 in
1999, 1998 and 1997, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment. The total rental
expense for 1999, 1998 and 1997 is $667, $270 and $688, respectively. Rental
commitments at October 3, 1999 for long-term noncancelable operating leases are
as follows:
2000 $ 446
2001 319
2002 219
2003 217
2004 1
------------
$ 1,202
============
The Company is subject to various legal proceedings and claims with respect to
such matters as product liabilities and other actions which arise out of the
normal course of its business. Management and its legal counsel periodically
review the probable outcome of pending proceedings and the costs reasonably
expected to be incurred. The Company accrues for these costs when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated. In the opinion of management, any ultimate cost to the Company in
excess of amounts accrued will not materially affect its consolidated financial
position, cash flows or results of operations.
The Company's commitments with respect to its chassis arrangements are described
in Note 10.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 12 - RESEARCH AND DEVELOPMENT
The Company incurs costs to improve the appeal and safety of its products.
Research and development costs are charged to operations when incurred. Amounts
charged to operations were approximately $490, $520 and $824 in 1999, 1998 and
1997, respectively.
NOTE 13 - WARRANTS
On November 20, 1998 the Company issued warrants to purchase shares of common
stock to two individuals as incentive for their partial guarantee of the
Company's long-term debt (See Note 3). The individuals can each purchase up to
200,000 shares of common stock of the Company for $2.20 per share which was the
ten day average market price preceding the date of grant. The warrants have a
five year term.
NOTE 14 - UNAUDITED FINANCIAL INFORMATION
Presented below is certain unaudited quarterly financial information for 1999
and 1998.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
December 27, March 28, June 27, October 3,
1998 1999 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 12,134 $ 18,639 $ 28,112 $ 30,619
Gross profit 958 3,398 5,727 4,873
Net income (loss) (1,820) 122 1,490 730
Earnings (loss) per share (0.44) 0.03 0.36 0.17
Earnings (loss) per share
assuming dilution (0.44) 0.03 0.33 0.16
Quarter Ended
--------------------------------------------------------------------
December 28, March 29, June 28, September 27,
1997 1998 1998 1998
------------ ------------ ------------ ------------
Net sales $ 13,419 $ 14,464 $ 11,820 $ 13,389
Gross profit (loss) 1,205 1,656 856 (215)
Net loss (1,137) (821) (1,281) (3,520)
Loss per share (0.28) (0.19) (0.31) (0.85)
</TABLE>
Adjustments in the fourth quarter of the fiscal year ended September 27, 1998
included the start up loss related to Tecstar, L.L.C. and certain accruals.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - OPERATING SEGMENT INFORMATION
In 1999, 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 operating segments are conversion vehicle products and OEM
(original equipment manufacturer) automotive supply. The Company evaluates the
performance of its segments and allocates resources to them based on operating
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
operating segment income amounts and consolidated net income represent corporate
expenses for administrative functions that are not allocated to segments,
nonoperating income or expense, and the provision for income taxes. The OEM
automotive parts supplier segment was started during 1998 and did not have any
sales revenue, but did have costs associated with starting the business.
The table below presents information about segments used by the chief operating
decision maker of the Company for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales by geographic region:
Conversion vehicle products
Domestic $ 48,697 $ 42,857 $ 57,235
Export
Japan 3,981 5,579 9,541
Europe 3,574 3,461 3,632
Middle East 302 1,195 1,312
Other 250 - 562
OEM automotive supply
Domestic 32,700 - -
Export - - -
------------ ------------ ------------
$ 89,504 $ 53,092 $ 72,282
============ ============ ============
Operating income (loss):
Conversion vehicle products $ 271 $ (3,199) $ (11,616)
OEM automotive supply 3,240 (488) -
------------ ------------ ------------
$ 3,511 $ (3,687) $ (11,616)
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - SEGMENT INFORMATION (Continued)
1999 1998
---- ----
Total assets:
Conversion vehicle products $ 25,155 $ 28,246
OEM automotive supply 18,626 769
------------ ------------
$ 43,781 $ 29,015
============ ============
The following specified amounts are included in the measure of operating segment
income (loss) reviewed by the chief operating decision maker:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest expense
Conversion vehicle products $ 1,077 $ 892 $ 403
OEM automotive supply 153 - -
------------ ------------ ------------
$ 1,230 $ 892 $ 403
============ ============ ============
Depreciation and amortization expense
Conversion vehicle products $ 978 $ 1,018 $ 1,199
OEM automotive supply 87 - -
------------ ------------ ------------
$ 1,065 $ 1,018 $ 1,199
============ ============ ============
</TABLE>
The information below contains information regarding significant customer
concentrations by segment for sales and accounts receivable. The Company has one
significant customer and this customer is the same for both segments.
Sales by segment for this major customer are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Conversion vehicle products $ 4,283 $ 6,774 $ 10,853
OEM automotive supply 32,700 - -
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - SEGMENT INFORMATION (Continued)
Significant customer concentrations in accounts receivable for the Company's
major customer for 1999 are as follows:
1999
------------
Conversion vehicle products $ 389
OEM automotive supply 12,914
The Company did not have any significant customer concentrations for accounts
receivable for 1998.
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
October 3, 1999, September 27, 1998 and September 28, 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for the years
ended October 3, 1999, September 27, 1998 and September 28, 1997 is presented
below.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Earnings per share
Net income (loss) available to
common shareholders $ 522 $ (6,759) $ (11,302)
============ ============ ============
Weighted average common shares
outstanding 4,159 4,134 4,127
Earnings per share $ 0.13 $ (1.63) $ (2.74)
============ =========== ============
Earnings per share assuming dilution
Net income (loss) available to
common shareholders $ 522 $ (6,759) $ (11,302)
============ ============ ============
Weighted average common shares
outstanding 4,159 4,134 4,127
Add: dilutive effects of assumed
conversions and exercises:
Incentive stock options 156 - -
Warrants 133 - -
Other 2 - -
------------ ------------ ------------
Weighted average common and dilutive
potential common shares outstanding 4,450 4,134 4,127
Earnings per share assuming dilution $ 0.12 $ (1.63) $ (2.74)
============ =========== ============
</TABLE>
Incentive stock options and warrants, were not considered in computing of
earnings per common share for 1998 or 1997 because they were antidilutive. In
addition incentive stock options on 211,500 shares of common stock were not
considered in computing of earnings per share for 1999 because they were
antidilutive.
19 of 22
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously Reported
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission on or before January 7, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission on or before January 7, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission on or before January 7, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Registrant's proxy statement to be filed with
the Securities and Exchange Commission on or before January 7, 2000.
20 of 22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) The following documents are filed as part of the report:
Financial Statements (as of October 3, 1999 and September 27, 1998 and
for the fiscal periods ended October 3, 1999, September 27, 1998, and
September 28, 1997):
Reports of Independent Auditors
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statements of Shareholders' Equity
Notes to Financial Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended October 3, 1999.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index beginning on page E-1.
(d) The following financial statement schedule is filed as part of this
report:
(i) Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
have been omitted.
21 of 22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Starcraft Corporation and Subsidiaries
Goshen, Indiana
We have audited the consolidated financial statements of Starcraft Corporation
and Subsidiaries as of October 3, 1999 and September 27, 1998 and for the years
then ended and have issued our report thereon dated November 18, 1999. Our
audits also included the information for the years ended October 3, 1999 and
September 27, 1998 in the financial statement schedule listed in Item 14 of this
Annual Report. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information as of and for the years
ended October 3, 1999 and September 27, 1998 set forth therein.
/s/ Crowe, Chizek and Company LLP
Elkhart, Indiana
November 18, 1999
<PAGE>
Report of Independent Auditors
To the Board of Directors
Starcraft Corporation
We have audited the consolidated financial statements of Starcraft Corporation
and Subsidiaries for the year ended September 28, 1997 and have issued our
report thereon dated January 12, 1998. Our audit also included the information
of the year ended September 28, 1997 in the financial statement schedule listed
in Item 14 of this Annual Report. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all materials respects the information for the year ended
September 28, 1997 set forth therein.
/s/Ernst & Young LLP
January 12, 1998
Fort Wayne, Indiana
<PAGE>
STARCRAFT CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in Thousands)
Balance at Charged to Deductions from Balance at Close
Beginning of Operations Additions to of Period
Period Reserves (a)
Allowance for doubtful accounts - deducted from accounts receivable, trade, in
the consolidated balance sheets:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
53 weeks ended $ 40 $ -- $ -- $ 40
October 3, 1999
52 weeks ended $ 81 $ -- $ 41 $ 40
September 27, 1998
52 weeks ended $ 51 $ 30 $ -- $ 81
September 28, 1997
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Write-off of bad debts, less recoveries.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
behalf of the undersigned, thereto duly authorized.
STARCRAFT CORPORATION
DATE: December 23, 1999 By: /s/ Kelly L. Rose
------------------------------------
Kelly L. Rose,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 23rd day of December, 1999.
1) Principal Executive Officer:
By: /s/ Kelly L. Rose Chairman, Chief
----------------------------- Executive Officer
Kelly L. Rose
2) Principal Financial/
Accounting Officer:
By: /s/ Michael H. Schoeffler President, Chief Financial
----------------------------- Officer, Treasurer, Secretary
Michael H. Schoeffler
3) The Board of Directors:
By: /s/ Kelly L. Rose Director
-----------------------------
Kelly L. Rose
By: /s/ David J. Matteson Director
-----------------------------
David J. Matteson
By: /s/ Allen H. Neuharth Director
-----------------------------
Allen H. Neuharth
By: /s/ G. Raymond Stults Director
-----------------------------
G. Raymond Stults
By: /s/ Michael H. Schoeffler Director
-----------------------------
Michael H. Schoeffler
22 of 22
<PAGE>
PART IV
EXHIBIT INDEX
Reference to Sequential
Regulation S-K Page
Exhibit Number Document Number
3.1 Registrant's Articles of Incorporation, as
amended. Incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-K for the
year ending October 1, 1995. *
3.2 Registrant's Code of By-Laws, as amended.
Incorporated by reference to Exhibit 3.2 to
the Registrant's Form 10-K for the fiscal
year ending September 29, 1996. *
4.1 Article 6 - "Terms of Shares" and Article 9 -
"Provisions for Certain Business
Combinations" of the Registrant's Articles of
Incorporation, as amended. Incorporated by
reference to Exhibit 3.1 to the Registrant's
Form 10-K for the year ending October 1,
1995. *
4.2 Article III - "Shareholder Meetings", Article
VI - "Certificates for Shares" and Article
VII - "Corporate Books and Records - Section
3" of the Registrant's Code of By-Laws, as
amended. Incorporated by reference to Exhibit
3.2 to the Registrant's Form 10-K for the
fiscal year ending September 29, 1996. *
4.3 Amended and Restated Credit Agreement between
the Registrant and Bank One Indianapolis,
N.A., dated November 30, 1994. Incorporated
by reference to Exhibit 4.6 of the
Registrant's Form 10-K for the fiscal year
ending October 2, 1994. *
4.4 First Amendment to Amended and Restated
Credit Agreement between the Registrant and
Bank One, Indianapolis, N.A. dated March 7,
1995. Incorporated by reference to Exhibit
10(2) to the Registrant's Form 10-Q for the
quarter ending April 2, 1995. *
4.5 Second Amendment to Amended and Restated
Credit Agreement dated April 6, 1996, among
Starcraft Corporation, Starcraft Automotive
Group, Inc. Imperial Automobile Group, Inc.
and Bank One, Indianapolis, N.A. Incorporated
by reference to the Registrant's Form 10-Q
for the Quarter Ended March 31, 1997. *
4.6 Third Amendment to Amended and Restated
Credit Agreement, effective January 31, 1997,
among Starcraft Corporation, Starcraft
Automotive Group, Inc., Imperial Automobile
Group, Inc. and Bank One, Indianapolis, N.A.
Incorporated by reference to the Registrant's
Form 10-Q for the Quarter Ended March 31,
1997. *
4.7 Fourth Amendment to Amended and Restated
Credit Agreement, effective June 29, 1997,
among Starcraft Corporation, Starcraft
Automotive Group, Inc., Imperial Automobile
Group, Inc. and Bank One, Indianapolis, N.A.
Incorporated by reference to Exhibit 4.7 of
the Registrant's Form 10-K for the fiscal
year ending September 28, 1997. *
4.8 Fifth Amendment to Amended and Restated
Credit Agreement, effective December 31,
1997, among Starcraft Corporation, Starcraft
Automotive Group, Inc., Imperial Automobile
Group, Inc. and Bank One, Indianapolis, N.A.
Incorporated by reference to Exhibit 4.8 of
the Registrant's Form 10-K for the fiscal
year ending September 28, 1997. *
<PAGE>
4.9 Seventh Amendment to Amended and Restated
Credit Agreement, dated as of February 27,
1998 , among Starcraft Corporation, Starcraft
Automotive Group, Inc., Imperial Automotive
Group, Inc. and Bank One, Indiana, N.A.
Incorporated by reference to Exhibit 10.1 of
the Registrant's Form 10-Q for the quarter
ending March 29, 1998. *
4.10 Eighth Amendment to Amended and Restated
Credit Agreement, effective November 23,
1998, among Starcraft Corporation, Starcraft
Automotive Group, Inc., Imperial Automobile
Group, Inc. and Bank One, Indianapolis, N.A.
Incorporated by reference to Exhibit 4.10 of
the Registrant's Form 10-K for the fiscal
year ending September 27, 1998. *
4.11 Rights Agreement, dated as of August 12,
1997, between Registrant and Harris Trust and
Savings Bank, as Rights Agent. Incorporated
by reference to the Registrant's 8-A filed
September 9, 1997. *
4.12 Promissory Note from Starcraft Automotive
Group, Inc. to Bank One, Indiana, N.A. dated
November 23, 1998. Incorporated by reference
to Exhibit 4.12 of the Registrant's Form 10-K
for the fiscal year ending September 27,
1998. *
4.13 Guaranty of Kelly L. Rose to the obligations
of Starcraft Automotive Group, Inc. to Bank
One, Indiana, N.A. dated November 23, 1998.
Incorporated by reference to Exhibit 4.13 of
the Registrant's Form 10-K for the fiscal
year ending September 27, 1998. *
4.14 Guaranty of Gerald R. Stults to the
obligations of Starcraft Automotive Group,
Inc. to Bank One, Indiana, N.A. dated
November 23, 1998. Incorporated by reference
to Exhibit 4.14 of the Registrant's Form 10-K
for the fiscal year ending September 27,
1998. *
4.15 Loan and Security Agreement by and among
Starcraft Automotive Group, Inc., National
Mobility Corporation, Starcraft Corporation,
Imperial Automotive Group, Inc. and Foothill
Capital Corporation, dated October 30, 1998.
Incorporated by reference to Exhibit 4.15 of
the Registrant's Form 10-K for the fiscal
year ending September 27, 1998. *
4.16 Secured Promissory Note from Starcraft
Automotive Group, Inc. and National Mobility
Corporation to Foothill Capital Corporation
dated October 30, 1998. Incorporated by
reference to Exhibit 4.16 of the Registrant's
Form 10-K for the fiscal year ending
September 27, 1998. *
10.1(a) The Starcraft Automotive Corporation Stock
Incentive Plan. **
10.1(b) The Starcraft Corporation 1997 Stock
Incentive Plan. Incorporated by reference to
Exhibit 10.1(b) to the Registrant's From 10-K
for the fiscal year ending September 29,
1996. *
<PAGE>
10.2 Form of Tax indemnification agreement among
the Registrant, Mr. Kash, Mr. Rose, Mr.
Newberry and Mr. Hardin, dated as of July 21,
1993. Incorporated by reference to Exhibit
10.7 of the Registrant's registration
statement on Form S-1, Reg. No. 33- 63760. *
10.3(a) Employment Agreement with Kelly L. Rose dated
December 12, 1996. Incorporated by reference
to Exhibit 10.3(b) to the Registrant's From
10-K for the fiscal year ending September 29,
1996. *
10.3(b) Form of First Addendum to Employment
Agreement with Kelly L. Rose, December 31,
1997. Incorporated by reference to Exhibit
10.1 of the Registrant's Form 10-Q for the
fiscal year ending March 29, 1998. *
10.3(c) Second Addendum to Employment Agreement with
Kelly L. Rose, effective December 15, 1997.
Incorporated by reference to Exhibit 10.3(d)
of the Registrant's Form 10-K for the fiscal
year ending September 27, 1998. *
10.3(d) Consulting Agreement with Allen H. Neuharth
dated September 15, 1993. Incorporated by
reference to Exhibit 10.3(k) of the
Registrant's Form 10-K for the fiscal year
ending October 2, 1994. *
10.3(e) Employment Agreement between the Registrant
and Michael H. Schoeffler dated December 12,
1996. Incorporated by reference to Exhibit
10.3(e) to the Registrant's Form 10-K for the
fiscal year ending September 29, 1996. *
10.4 Inventory Loan and Security Agreement by and
between the Registrant and General Motors
Acceptance Corporation, as amended.
Incorporated by reference to Exhibit 10.13 of
the Registrant's Form S-1. **
10.5 Agreement by and between the Registrant and
General Motors Acceptance Corporation dated
February 7, 1991. Incorporated by reference
to Exhibit 10.14 of the Registrant's Form
S-1. **
<PAGE>
10.6 Authorized Converter Pool Agreement between
the Registrant and Ford Motor Company dated
May 7, 1991 and amended May 7, 1991.
Incorporated by reference to Exhibit 10.17 of
the Registrant's Form S-1. **
10.7 Wholesale Financing and Security Agreement
between the Registrant and Ford Motor Credit
Company dated April 17, 1991. Incorporated by
reference to Exhibit 10.18 of the
Registrant's Form S-1. **
10.8 Intercreditor Agreement between Ford Motor
Credit Company and Bank One, Indianapolis,
N.A. dated July 17, 1992. Incorporated by
reference to Exhibit 10.20 of the
Registrant's Form S-1. **
10.9 Truck Consignment Agreement between the
Registrant and Chrysler Corporation dated
August 29, 1991. Incorporated by reference to
Exhibit 10.21 of the Registrant's Form S-1. **
10.10 License Agreement by and between the
Registrant and AlliedSignal, Inc. dated
February 18, 1993. Incorporated by reference
to Exhibit 10.22 of the Registrant's Form
S-1. **
10.11 Agent Agreement by and between the
Registrant, Mitsui & Co. (U.S.A.), Inc. and
Mitsui & Co., Ltd. dated March 1, 1993.
Incorporated by reference to Exhibit 10.23 of
the Registrant's Form S-1. **
10.12 License Agreement by and between the
Registrant and Starcraft RV, Inc. dated
September 12, 1991. Incorporated by reference
to Exhibit 10.24 of the Registrant's Form
S-1. **
10.13 License Agreement by and between the
Registrant and Starcraft Recreational
Products, Ltd. dated January 18, 1991.
Incorporated by reference to Exhibit 10.25 of
the Registrant's Form S-1. **
<PAGE>
10.14(a) Directors' Share Plan, restated effective
October 1, 1995. Incorporated by reference to
Exhibit 10.16(a) of the Registrant's Form
10-K for the year ending October 1, 1995. *
10.14(b) Directors' Compensation Deferral Plan
effective October 1, 1995. Incorporated by
reference to Exhibit 10.16(b) of the
Registrant's Form 10-K for the year ending
October 1, 1995. *
10.15 Intercreditor Agreement between General
Motors Acceptance Corporation and Bank One
Indianapolis, N.A. dated July 15, 1994.
Incorporated by reference to Exhibit 10.24 of
the Registrant's Form 10-K for the fiscal
year ending October 2, 1994. *
10.16 GMC Truck Special Vehicle Manufacturers
Agreement by and between Starcraft Automotive
Group, Inc. and GMC Truck Division, Truck &
Bus Group, General Motors Corporation dated
February 1, 1995. Incorporated by reference
to Exhibit 10.21 of the Registrant's Form
10-K for the year ending October 1, 1995. *
10.17 Guaranty of Starcraft Automotive Group, Inc.
to the obligations of Starcraft Corporation
to General Motors Acceptance Corporation
dated February 9, 1995. Incorporated by
reference to Exhibit 10.23 of the
Registrant's Form 10-K for the year ending
October 1, 1995. *
10.18 Guaranty of Starcraft Automotive Group, Inc.
to the obligations of Imperial Automotive
Group, Inc.to General Motors Acceptance
Corporation dated February 9, 1995.
Incorporated by reference to Exhibit 10.25 of
the Registrants Form 10-K for the year ending
October 1, 1995. *
10.19 Chevrolet Quality Approved Converters Program
Agreement by and between Starcraft Automotive
Group, Inc. and Chevrolet Motor Division,
General Motors Corporation dated April 10,
1995. Incorporated by reference to Exhibit
10.27 of the Registrant's Form 10-K for the
year ending October 1, 1995. *
<PAGE>
10.20 Agreement between Chrysler Corporation and
Starcraft Automotive Group, Inc. dated July
1, 1995. Incorporated by reference to Exhibit
10.29 of the Registrant's Form 10-K for the
year ending October 1, 1995. *
10.21 Pool Company Wholesale Finance Plan and
Security Agreement between Chrysler Credit
Corporation and Starcraft Automotive Group,
Inc. dated July 1, 1995. Incorporated by
reference to Exhibit 10.30 of the
Registrant's Form 10-K for the year ending
October 1, 1995. *
10.22 Warrant to Purchase 200,000 Shares of Common
Stock of Starcraft Corporation, issued to
Kelly L. Rose, dated November 23, 1998.
Incorporated by reference to Exhibit 10.33 of
the Registrant's Form 10-K for the fiscal
year ending September 27, 1998. *
10.23 Warrant to Purchase 200,000 Shares of Common
Stock of Starcraft Corporation, issued to G.
Ray Stults, dated November 23, 1998.
Incorporated by reference to Exhibit 10.34 of
the Registrant's Form 10-K for the fiscal
year ending September 27, 1998. *
21 Subsidiaries of the Registrant. [ ]
23.1 Consent of Crowe, Chizek and Company LLP. [ ]
23.2 Consent of Ernst & Young LLP. [ ]
27 Financial Data Schedule [ ]
- ---------------
* Incorporated by reference as indicated in the description.
** Incorporated by reference to the exhibit, bearing the corresponding
exhibit number to the Registrant's registration statement on Form S-1,
Reg. No. 33-63760, unless another exhibit number is listed in the above
description.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
1. Starcraft Automotive Group, Inc.
State of Incorporation: Indiana
A. Starcraft FSC, Inc.
Jurisdiction of Incorporation: Barbados
2. Imperial Automotive Group, Inc.
State of Incorporation: Indiana
3. Starcraft Southwest, Inc.
State of Incorporation: Indiana
4. National Mobility Corporation
State of Incorporation: Indiana
5. Tecstar, LLC (50% owned)
State of Organization: Indiana
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Starcraft Corporation and Subsidiaries
Goshen, Indiana
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-73148) pertaining to the Starcraft Automotive Corporation
401(k) Profit Sharing Plan and Trust, in the Registration Statement (Form S-8
No. 33-70030) pertaining to the Starcraft Automotive Corporation Stock Incentive
Plan, and in the Registration Statement (Form S-8 No. 333-28247) pertaining to
the Starcraft Corporation 1998 Stock Incentive Plan of our report dated November
18, 1999, with respect to the consolidated financial statements of Starcraft
Corporation and subsidiaries included in the Annual Report (Form 10-K) for the
years ended October 3, 1999 and September 27, 1998.
/s/ Crowe, Chizek and Company LLP
Elkhart, Indiana
December 23, 1999
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-73148) pertaining to the Starcraft Automotive Corporation 401(k)
Profit Sharing Plan and Trust, in the Registration Statement (Form S-8 No.
33-70030) pertaining to the Starcraft Automotive Corporation Stock Incentive
Plan, and in the Registration Statement (Form S-8 No. 333-28247) pertaining to
the Starcraft Corporation 1997 Stock Incentive Plan of our report dated January
12, 1998, with respect to the consolidated financial statements of Starcraft
Corporation and Subsidiaries included in this Annual Report (Form 10-K) for the
year ended September 28, 1997.
/s/Ernst & Young LLP
Fort Wayne, Indiana
December 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's consolidated financial statements for the twelve months ended
October 3, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000906473
<NAME> STARCRAFT CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-3-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> OCT-3-1999
<EXCHANGE-RATE> 1.000
<CASH> 600
<SECURITIES> 0
<RECEIVABLES> 17,116
<ALLOWANCES> 40
<INVENTORY> 16,377
<CURRENT-ASSETS> 34,583
<PP&E> 13,032
<DEPRECIATION> 5,168
<TOTAL-ASSETS> 43,781
<CURRENT-LIABILITIES> 24,391
<BONDS> 13,506
<COMMON> 14,144
0
0
<OTHER-SE> (9,958)
<TOTAL-LIABILITY-AND-EQUITY> 43,781
<SALES> 89,504
<TOTAL-REVENUES> 89,504
<CGS> 74,548
<TOTAL-COSTS> 74,548
<OTHER-EXPENSES> 10,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,230
<INCOME-PRETAX> 471
<INCOME-TAX> (51)
<INCOME-CONTINUING> 522
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 522
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
