SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 December 31, 1997 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 0-25390
SMC CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0939076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30725 Diamond Hill Road
Harrisburg, Oregon 97446
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (503) 995-8214
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 17, 1998: $19,526,600. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 17, 1998: 6,545,349.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document which incorporated
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Proxy Statement for 1998 Annual
Meeting of Shareholders Part III
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TABLE OF CONTENTS
Item of Form 10-K Page
PART I....................................................................... 1
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 13
Item 3 Legal Proceedings................................................ 14
Item 4 Submission of Matters to a Vote of Security Holders.............. 14
Item 4(a) Executive Officers of the Registrant............................. 14
PART II...................................................................... 16
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters........................... 16
Item 6 Selected Financial Data.......................................... 17
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................................... 19
Item 8 Financial Statements and Supplementary Data...................... 26
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 27
PART III..................................................................... 28
Item 10 Directors and Executive Officers of
the Registrant................................................... 28
Item 11 Executive Compensation........................................... 28
Item 12 Security Ownership of Certain Beneficial
Owners and Management............................................ 28
Item 13 Certain Relationships and Related
Transactions..................................................... 28
PART IV...................................................................... 29
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.......................................... 29
SIGNATURES................................................................... 32
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PART I
ITEM 1. BUSINESS
Introduction
SMC Corporation (SMC or the Company) is one of the largest manufacturers of
high-line motor coaches in the United States. SMC was incorporated in Oregon in
1986 and production operations began in 1987. SMC is headquartered in
Harrisburg, Oregon and has seven operating subsidiaries. The Company's executive
offices are located at 30725 Diamond Hill Road, Harrisburg, Oregon, 97446, and
its telephone number is (541) 995-8214. The subsidiaries of the Company are
Safari Motor Coaches, Inc. (Safari), Magnum Manufacturing, Inc. (Magnum), Beaver
Motor Coaches, Inc. (Beaver), Electronic Design & Assembly, Inc. (ED&A),
Composite Technologies, Inc. (CTI), Harney County Operations, Inc. (HCO), and
SMC Midwest, Inc. (Midwest). Safari and Magnum are located in Harrisburg,
Oregon; Beaver and ED&A are located in Bend, Oregon; CTI and HCO are located in
Hines, Oregon; and Midwest was located in Minneapolis, Kansas, but is no longer
in operations as of the date of this report, although it is still in legal
existence.
General Background
Within the multi-billion dollar recreational vehicle industry, the majority
of SMC's products are positioned among the most expensive. SMC predominately
builds luxury Class A motor coaches - motorized, fully self-contained motorhomes
with features such as solid hardwood cabinetry, powerful diesel engines, and
residential decor that separate these coaches from the rest of the market.
This select segment was targeted from Safari's founding and the Company
rapidly grew to become a leader in the luxury market. Mathew Perlot, SMC's
founder and Chief Executive Officer, considered this market particularly
attractive - anticipating the aging of the "baby boomers" and believing that
this maturing, affluent group would provide growing support for this product.
The initial product included coaches ranging from 30 to 34 feet and retailed for
about $100,000. Over the next several years Safari expanded its product
offerings to both higher and lower price points, to include coaches ranging in
length from 24 to 40 feet, and with retail prices ranging from $70,000 to
$230,000.
Magnum began production of chassis for Safari products in 1993 and has
since expanded operations to provide chassis for seven of the eight model lines
of Safari and Beaver products. By manufacturing chassis specially designed for
applications in the recreational vehicle (RV) industry, the Company believes it
has quality, ride and cost advantages over competitors that do not build their
own chassis.
SMC acquired the Beaver brand names and production facilities in 1994. At
that time the Beaver product ranged in retail price from $180,000 to $350,000.
The line has since been broadened to include a lower-priced coach, the Monterey.
This expansion of product offerings has enabled Beaver to expand distribution of
its products.
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In 1996 the Company began to seek product opportunities in the lower-priced
segment of the recreational vehicle industry when it entered the Class C market
through its acquisition of Honorbuilt Industries, Inc. in Minneapolis, Kansas,
producer of the El Dorado brand Class C motor home. Class C motor coaches are
constructed on a chopped van chassis with the living quarters being added by the
manufacturer, including full bathrooms, separate bedrooms, and full kitchens.
With retail prices ranging from $44,000 to $50,000, SMC's El Dorado brand Class
C motor coaches occupy the middle range of the market. The Company continued its
penetration into the upper range Class C market in 1997 through its operations
at HCO and the introduction of a Safari brand Class C motor coach. This model
has retail prices ranging from $64,000 to $76,000. Although the Company's
primary market focus remains the high-line luxury motor coaches it built its
foundation on, and all sales of its Class C product only represented 5% of
overall sales in 1997, the Company plans to continue to develop this segment of
its business.
Milestones in 1997
In 1997 the Company maintained its core market -- high-line motor coaches
with retail prices typically over $150,000. The Company's estimated market share
of high-line retail sales was 27.6%, 29.1%, and 24.5% in 1997, 1996, and 1995,
respectively. Total retail sales in this segment of the market increased to
almost 4,400 units in 1997, up 5% from 1996.
The Company continued its expansion into the Class C recreational vehicle
market through operations at its new HCO facility in Hines, Oregon. The Company
began development and prototype construction of a Safari brand Class C motor
coach at HCO late in 1996. During 1997, the Company sold 158 units of this new
product, and market acceptance appears to be favorable.
Also developed at HCO during 1997 was a new Class A motor coach, the
Renegade. With retail prices starting at $125,000, the Renegade is targeted
toward the entry-level of the Class A market -- buyers that are value-oriented
but still demanding features and quality. This segment of the market has become
very popular, and the Company expect significant sales of this product in 1998.
The production facility in Hines, Oregon has ample production capacity to meet
expected demand for both the Renegade Class A coaches as well as the Class C
production.
At the Beaver facility, the newly designed Contessa Class A model was
introduced. The Contessa had been a Beaver product before the Company acquired
Beaver in 1994, but had been dormant since that time. Priced below the existing
Patriot model but above the Monterey, the Contessa has been resurrected with a
new design and feature set that has been widely accepted. Additionally, an
upgraded version of the Patriot model, the Thunder, was introduced and features
a powerful 425-horsepower engine and a heavy-duty transmission.
At the Safari facility, an upgraded version of the Continental, the
Panther, was introduced and features a powerful 425-horsepower engine, a
heavy-duty transmission, and custom exterior graphics. Plans for a new Safari
Class A product to be introduced in 1998 are being developed. This model will be
priced at the lower range of the Class A market, targeting a market similar to
that of the Renegade, but designed with the distinction of a Safari brand
product.
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At the Magnum facility, a new chassis was developed for the Beaver Marquis.
Previously, the Marquis was constructed on a Gillig brand chassis. Gillig ceased
production of the chassis in 1997. Magnum acquired the rights to manufacture the
chassis from Gillig and, after making some modifications for the Marquis'
specific requirements, now produces the chassis at a lower overall cost to the
Company. With the new chassis, Magnum now produces the chassis for all of the
Company's models except the Trek, Renegade and Class C models, resulting in
significant overall costs savings to the Company.
The Company completed its planned exit and closure of its Midwest facility
as announced in December of 1996. In the prior year, management determined that
the losses being incurred through operation of the Midwest facility were not
acceptable. A pre-tax restructuring charge of $2.4 million was incurred related
to this decision in 1996. The exit plan was completed as planned, and no further
restructuring charges were necessary in 1997. Production of the El Dorado brand
Class C motor coach produced by Midwest is planned to be continued at the
Company's HCO production facilities in Hines, Oregon along with the Safari Class
C and Renegade products.
The Company opened a service center facility in Tampa, Florida to provide
better, more timely, and cost effective customer service. This service center
operation is a branch of the existing service center located in Harrisburg,
Oregon, and the Company is able to use the resources of skilled technicians
during slow service periods in Oregon at the new facility in Florida.
During 1997, work was completed on the implementation of a geothermal
heating system at the HCO facility. The project cost of approximately $1.4
million will be offset by approximately 45% through federal and state tax
credits available to be taken over the next five years. Additionally, the cost
of heating the facility will be reduced substantially.
Industry Background
Recreational vehicles encompass a wide range of mobile housing options,
including folding camping trailers, van conversions, truck campers, fifth wheel
trailers, Class A, B and C motor coaches, and bus conversions. The retail prices
of these vehicles range from under $3,000 for the simplest folding camping
trailer to over $750,000 for the most expensive bus conversion. The Recreational
Vehicle Industry Association (RVIA) has reported that one in ten households in
the U.S. owns a recreational vehicle, resulting in a total ownership of
approximately nine million recreational vehicles.
Although retail sales of recreational vehicles and Class A motor coaches
have fluctuated over the last five years, retail sales of high-line motor
coaches have steadily increased during this period according to Statistical
Surveys, Inc. The following table shows (i) unit shipments to dealers of all
recreational vehicles, all motor coaches, and Class A motor coaches in the U.S.,
based on RVIA data, and (ii) unit retail sales of high-line motor coaches in the
U.S. and unit retail sales of Safari and Beaver coaches as a percentage of the
high-line market, based on data distributed by Statistical Surveys, Inc.
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<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
(In thousands, except percentage data)
<S> <C> <C> <C> <C> <C>
Unit shipments from manufacturers to dealers:
All recreational vehicles................................. 420.2 518.8* 475.2* 466.8* 438.8*
All motor coaches......................................... 51.4 58.1 52.8 55.3 55.0
Class A motor coaches..................................... 31.9 37.3 33.0 36.5 37.6
Unit retail sales and market share data:
High-line motor coaches................................... 3.1 3.6 3.9 4.2 4.4
SMC percentage of high-line market:**..................... 19.4% 24.6% 24.5% 29.1% 27.6%
===== ===== ===== ===== =====
* RVIA modified its reporting to include van conversions in 1994. The impact
was to increase reported shipments by approximately 75,000 units.
** For all years includes sales for both Safari and Beaver motor coaches
(excluding Trek).
</TABLE>
SMC focuses primarily on the high-line segment of the Class A motor coach
market. Class A motor coaches incorporate kitchen, sleeping and bathroom
facilities built on a self-powered chassis. The term "high-line motor coach" is
almost synonymous with "diesel pusher." For reasons of cooling and drive train
engineering, almost all motor coaches are powered either by a gasoline engine
mounted in the front or a diesel engine mounted in the rear. Diesel pushers are
more expensive, but can be built longer and are generally more powerful. Thus
most high-line coaches are diesel pushers - with horse power ratings over 300,
and at this time nearly all high-line diesel pushers retail for over $150,000.
All of SMC's products except the Trek, El Dorado, Safari Class C, and
Renegade models are high-line coaches with retail prices over $150,000. Although
the Trek shares many high-line features of the Company's other models, its
retail price ranges from $79,000 to $97,000, and it is therefore excluded from
market data compiled for high-line products. The El Dorado is a Class C motor
coach with retail prices ranging from $44,000 to $50,000, which the Company
began selling in 1996. The Safari Class C prices range from $64,000 to $76,000.
There were no sales of the new Class A Renegade model in 1997; it will retail
sale in the price range of $125,000 to $140,000.
The high-line segment of the Class A RV market has seen consistent growth
since 1989, and in recent years this market has attracted many other companies.
Many "mainstream" RV builders, such as Fleetwood, Winnebago, and Coachmen, have
developed offerings in this market. Meanwhile, some luxury builders, such as
Monaco Coach and Country Coach, have broadened their product lines. Some
companies are not surviving. Beaver Coaches was acquired by SMC in 1994 and
Holiday Rambler was purchased by Monaco Coach in early 1996.
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Several long-term trends favor the luxury segment of the RV industry. The
most significant indicator of future growth potential is the change in RV-owner
demographics. Households over fifty years old form the principal market for
luxury RVs. As the "baby-boom" generation ages, this demographic group is
expected to increase from approximately 50 million people today to 70 million by
the year 2005. The Company believes that on average this generation is expected
to retire earlier and have more discretionary income than preceding generations,
which is expected to provide a growing base for RV sales.
This trend is also reflected in the substantial increase in the number and
quality of facilities available for RV use and in companies serving the RV
market. The increased availability of accessories and facilities will continue
to make the RV lifestyle more attractive.
Three other factors also have a lesser impact on the RV industry:
Fuel Availability and Price Stability
Diesel fuel has been relatively abundant and inexpensive since the
beginning of the 1980's. The Company believes the needs of the transportation
industry for diesel fuel may contribute to continued availability and pricing
stability. With the exception of one Trek model, all of the Company's motor
coaches are powered by diesel engines. Consequently, an interruption in the
supply or a significant increase in the price of or tax on the sale of diesel
fuel on a regional or national basis could have a material adverse effect on the
Company's results of operations. Diesel fuel has from time to time been
difficult to obtain, and there is no assurance that the supply of diesel fuel
will continue uninterrupted, that rationing of diesel fuel will not be imposed
or that the price of or tax on diesel fuel will not significantly increase in
the future.
Low Interest Rates
Interest rate levels affect the cost of a motor coach for consumers who
finance their purchase and, more significantly, the cost of inventory
maintenance for motor coach dealers. Recent periods of relatively low interest
rates have facilitated dealer financing resulting in generally higher dealer
stocking levels.
Favorable Tax Treatment
U.S. tax laws generally allow individuals who itemize deductions to deduct
interest paid on loans used to finance the purchase of either a first or second
residence. The definition of "residence" has been interpreted to include motor
coaches of the type manufactured by the Company. The Company believes the tax
deductibility of interest paid on loans used to purchase a Class A motor coach
increases the attractiveness of ownership. These laws, however, have
historically been amended frequently, and it is likely that further amendments
and additional tax laws will be applicable to financing the purchase of motor
coaches in the future. There is no assurance that favorable tax treatment for
financing the purchase of motor coaches will not be amended or repealed.
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Sales and Marketing
SMC has two distinctive brands that are marketed through separate dealer
networks. (Sales of Class C motor coaches to date have not been a significant
part of the Company's business, and the Renegade had no sales in 1997 as it was
introduced early in 1998.) The Beaver and Safari product are deliberately kept
differentiated to help increase total penetration of the high-line market. The
Beaver product is marketed as a "traditional" luxury RV. Its fiberglass wall
construction, air suspension, and "classic" RV styling places the Beaver models
near the mainstream of high-line coaches. The Safari product is avant-garde in
comparison. Its aluminum and stainless steel exterior are unique in this market,
and innovations such as the Velvet-Ride(TM) Suspension and power disk brakes
further separate the Safari from the rest of the luxury RV market. This
two-pronged attack on the luxury market has successfully expanded SMC's overall
penetration, with an estimated market share of almost 28%.
The Company markets its products through independent dealers throughout the
United States and Canada. Few dealers carry both the Safari and Beaver brand
products. SMC has made dealer development a priority, because it believes that
an expanded dealer base results in greater retail sales exposure and ultimately
more retail sales volume. Total Class A dealer locations were 87, 107, and 86 as
of December 31, 1997, 1996, and 1995, respectively.
The Company grants exclusive distribution rights to a dealer within a
geographic region. Dealers are selected based on location, financial stability,
marketing expertise, sales history, integrity and repair and service capability.
The Company provides a variety of support services to its dealers, including
promptly supplied product literature, display materials and space rental
subsidies for trade shows and exhibitions and a dealer newsletter with updates
on product development and other product information. The Company offers
training and technical support to dealer salespeople, including a plant tour
video and a product handbook, and Company representatives visit dealers on a
regular basis for sales training and assistance.
The Company focuses its advertising on consumer publications which
emphasize the RV lifestyle. In 1995, the Company consolidated all of its media
production in-house because it was cost-effective to do so. In-house media
development has also added flexibility and responsiveness to the process, which
frequently involves "rush" jobs to take advantage of market opportunities.
A key part of the Company's marketing effort is the sponsorship and active
promotion of Safari International and the Beaver Ambassador Club, both of which
are active owners clubs for owners of Safari and Beaver products, respectively.
Members of these groups socialize, discuss common experiences and enjoy motor
coaching activities together, thus helping to build customer loyalty and
enthusiasm. The Company publishes quarterly newsletters for members of the
owners' clubs, as well as a quarterly magazine, the "Rendezvous," which is
circulated to owners, prospective purchasers, suppliers, dealers and employees.
In addition, the Company annually sponsors "homecoming" rallies at the Safari
and Beaver factories, open to all Safari and Beaver coach owners.
Dealers typically finance their inventory through revolving credit
facilities established with asset-based lending institutions, including
specialized finance companies and banks. It is
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industry practice for these "floor plan" financiers to require motor coach
manufacturers to repurchase motor coaches previously sold to the dealer if the
dealer defaults on its financing agreements or if the lender otherwise has a
reasonable basis to be concerned about the ability of the dealer to meet its
obligations to the lender. This agreement typically applies for a period of 12
to 18 months from the date of the dealer's purchase from the manufacturer. See
"Item 7 --Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources."
The Company takes several steps to reduce its exposure to coach repurchase
risk. A dealer is typically required to make periodic payments of principal,
referred to as "curtailment," to the flooring financing institution commencing
in the seventh month after purchase of the coach. A coach manufacturer may waive
these curtailment payments at the request of a dealer, but the Company generally
will not do so and, in any event, will do so only if the dealer owes to the
flooring institution no more than 90% of the wholesale price of the coach. The
Company also monitors the inventory levels and financial circumstances of its
dealers through reports generated by the flooring institutions and through
frequent contact by its sales personnel with the dealers. If a dealer is
experiencing undue difficulty in selling the Company's coaches, the Company will
often work with that dealer to voluntarily move the coaches to a dealer that can
sell additional inventory. The Company believes, however, that its most
fundamental protection against significant loss due to repurchase obligations is
the production and marketing of motor coaches that are sufficiently popular to
enable the Company quickly to resell, at satisfactory prices, any coaches it may
be required to repurchase. For 1995 and 1996 the Company made no repurchase
payments under flooring arrangements. In 1997, the Company repurchased a total
of 8 El Dorado motor homes under the requirements of the repurchase obligations
with two of its flooring financing institutions when two separate motor home
dealerships went out-of-business. No significant losses were incurred upon the
subsequent resale of the motor homes.
For 1997, sales of Safari coaches to Guaranty RV Center, one of the largest
motor coach dealers in the U.S. and located just a few miles from the Company's
headquarters, accounted for approximately 10% of net sales. Destinations RV,
Inc., located in two locations in Oregon, accounted for 12% of net sales. See
Note 7 of Notes to Consolidated Financial Statements.
Product Information By Subsidiary
Beaver
Marquis
The Marquis is positioned at the top of the Beaver product line. With
retail prices of over $375,000, it is one of the most expensive and luxurious
motor coaches in production today. The Marquis has traditionally been the most
visible and best recognized of the Beaver models. The Marquis motor coach has
been further upgraded in 1997 to its current ultra-luxury position. As part of
this strategy, production of the Marquis was slowed and a craftsman-intensive
team production program was developed to produce each vehicle. New cabinet
technologies were introduced, allowing the use of exotic veneers and richer
lacquers. The Marquis is now positioned as a limited production, prestige
product with an average production rate of approximately 1.5 units per week.
Previously
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built on a chassis supplied by an outside supplier, in 1997 the Marquis began
being built on a chassis developed by Magnum at an overall cost savings for the
Company.
Patriot
In July 1995, SMC introduced the 1996 Patriot on the all-new Magnum
B-Series chassis. This new Magnum chassis replaced a chassis from an outside
chassis vendor used since the Patriot model was introduced in 1992. The Patriot
model has a retail price ranging from $208,000 to $300,000, depending upon
options which include the upgraded Thunder option which features a powerful
425-horsepower engine and a heavy-duty transmission.
Contessa
In 1997, the Company reintroduced the completely new designed Contessa,
which had been a Beaver model prior to the acquisition of Beaver in 1994. The
Contessa is a high-end coach powered by a 330-horsepower engine which retails
for between $190,000 and $230,000, depending upon options.
Monterey
The Monterey is the first all-new product in the Beaver line since the
acquisition in 1994. Retailing for between $151,000 and $193,000, depending upon
options, the Monterey provides Beaver with a product priced for broader appeal.
The Monterey uses chassis and floor plans that are similar to the Safari Sahara,
but differs considerably from the Safari product in styling options. In
addition, an air-ride option has been developed to provide the traditional RV
owner an alternative which is typically seen in high-line motor coaches.
Safari
Continental
The Continental is the flagship product from Safari. Its design and
technology features include disk brakes, B.F. Goodrich's Torsilastic suspension
system, and Magnum Intellidrive computerized monitoring display, all as standard
equipment. The Continental retails from $225,000 to $287,000, depending upon
options, including the Panther option which features a powerful 425-horsepower
engine and a heavy-duty transmission.
Serengeti and Ivory
As the oldest of the Safari brand names, the Serengeti has been the core
Safari product since its introduction in 1988. The Serengeti retails from
$188,000 to $245,000, depending upon options, and its sibling, the Ivory model,
occupies the higher end of that price range.
Sahara
The Sahara model was introduced in 1993 and then repositioned in 1994 to
stand as a value-oriented luxury coach. The Sahara model retails from $139,000
to $189,000, depending upon
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options. The product provides many of the features of the Serengeti and Ivory at
a lower cost to the customer.
Trek
The Trek is constructed on a Chevrolet chassis. As the lowest priced SMC
motor coach, it also has the lowest profit margin and is intended to acquaint
new customers with SMC's products and attract them to the RV lifestyle. The Trek
retails between $79,000 and $97,000, depending upon options.
Harney County Operations (DBA Harney Coach Works)
Safari Class C
The Safari Class C is constructed on a Ford or Chevrolet van chassis. The
first sales of the Safari Class C were made in 1997. These units retail from
$64,000 to $76,000, depending upon options, and occupy the high-end of the Class
C motor home market.
Renegade Class A
The Renegade is presently constructed on a Spartan "Range Master" chassis.
In the future, the Company expects to produce the chassis from its Magnum
facility (see Manufacturing section). No sales of this product were made in
1997, but shipments began early in 1998. With retail sales prices ranging from
$125,000 to $140,000, depending upon options, the Renegade is priced lower than
any of the Company's Class A product, except for the Safari Trek. The Renegade
is targeted to the expanding entry level Class A market which offers many
features of the higher-line models, but at a more affordable pricing structure.
El Dorado
The El Dorado brand Class C motor home was acquired through the acquisition
of Honorbuilt Industries in 1996. Production of the model at the Kansas facility
was ceased in 1997, but production is expected to continue at HCO. The El Dorado
is priced at the mid-range of Class C motor homes retailing in the range of
$44,000 to $50,000, depending upon options.
Backlog
Motor coach dealers, particularly those with a relatively large sales
volume, from time to time indicate to motor coach manufacturers the number of
coaches they expect to purchase in the following months. While the Company
regularly receives such indications, the Company includes in its backlog only
purchase orders it has received that are sufficiently complete as to
specifications (color, floor plan, options, etc.) to permit the Company to
schedule production of the coach. Consequently, backlog generally represents
orders for coaches scheduled to be manufactured and shipped in the following 45
to 60 days. The Company's backlog at December 31, 1997 was $21.3 million,
compared to backlog of $7.9 million at December 31, 1996. Backlog can fluctuate
substantially as the result of the receipt of purchase orders in connection with
various major motor coach shows and rallies, which are not held at even
intervals throughout the year. Consequently, and because orders
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are generally cancelable without penalty, the amount of backlog at any date is
not necessarily indicative of sales in future periods. To date, order
cancellations have not been material.
Customer Service
The Company believes one of the most important elements in the success of
its business is understanding its customers and their preferences and providing
excellent customer service. Customer service is important because many of the
Company's customers are repeat purchasers and because a high level of service is
expected by purchasers of high quality coaches. In addition, because motor coach
purchasers tend to communicate freely their views on the quality of various
coaches and business reputations of motor coach manufacturers, the quality of
post-sale customer service provided by a motor coach manufacturer is a key
factor in establishing a manufacturer's reputation among this group.
The Company offers a one-year or 12,000-mile warranty, whichever occurs
first, on all coaches. Customers have the option to purchase extended
warranties, written by others, from Company dealers. The Company's warranty
covers all manufacturing-related problems and parts and system failures,
regardless of whether the repair is made at a Company service facility or by one
of the Company's dealers or authorized service centers. In addition to the
Company's warranty, the chassis, drive train, engine and transmission are
covered by separate warranties offered by the manufacturers of those components,
or by the Company on the chassis manufactured by its Magnum Manufacturing
subsidiary. The Company's warranty on the Magnum chassis and drive train is for
three years or 36,000 miles, whichever occurs first. Appliances in the coaches
are covered by the warranties of manufacturers of those items.
The Company maintains toll-free telephone lines for customers to call with
repair or operating questions or problems. Although many questions can be
resolved by telephone, the Company often refers the customer to a local dealer
or repair facility for additional assistance. The Company also opened a new
24-bay service center in Harrisburg in November 1995 to better serve its
customers. In 1997, a service center was opened in Tampa, Florida to expand its
customer service opportunities further.
Manufacturing
The Company uses "lean production" techniques in its coach manufacturing
process. These techniques emphasize teamwork, include significant input from
worker teams and employ just-in-time inventory controls to improve product
quality and manufacturing efficiencies.
The Company believes its coach manufacturing operations are vertically
integrated to a substantial degree compared to most other high-line motor coach
builders. Components of the Company's motor coaches produced by the Company
include chassis constructed by Magnum Manufacturing, Inc., the shell or "house"
portion of the coach, fiberglass, countertops, hardwood cabinetry and portions
of the interior upholstery. The Company believes this in-house production of
certain components results in cost savings to the Company and greater control
over quality and inventory.
The construction of each motor coach begins with the preparation of the
chassis on which the superstructure of the "house" is built. The floors, walls
and roof of the motor coach "house" are
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built off-line. The coach's front and rear caps are each single pieces molded
from fiberglass resins that provide favorable strength-to-weight ratios. The
Company believes the lightweight construction of its motor coaches combined with
the diesel engines used in nearly all models add significantly to the
performance of its motor coaches.
The Company purchases raw materials, parts, subcomponents, electric systems
and appliances from approximately 1,000 suppliers. These items are either placed
directly into the coach or are incorporated into subassemblies by the Company.
All components, subassemblies and finished products are inspected for compliance
with the Company's specifications. The Company attempts to minimize its
inventory costs by ordering inventory only on an as-needed, or just-in-time,
basis. Some supplies, such as fiberglass, are ordered and delivered to the
Company's plant on a daily basis, while other items, particularly engines and
transmissions, are ordered as much as four months in advance of the expected use
date. While the Company generally commences construction on a coach only after
receipt of an order from a dealer, it must nonetheless order certain parts or
components, some of which represent a significant expenditure, in advance of
orders.
Certain of the components and subassemblies included in the Company's motor
coaches are obtained from a single or limited number of suppliers. Transmissions
of the type used in the Company's coaches and those of most of its competitors
are manufactured solely by Allison Transmission. Although the Company believes
it would be able to develop alternate sources for any of the components used in
its products, significant delays or interruptions in the delivery of certain
components from suppliers or difficulties or delays in shifting to new suppliers
could have a material adverse effect on the Company.
In 1997, the Company was limited in the number of medium-duty transmissions
it was able to obtain from Allison. This limitation caused two primary effects.
First, the Company responded to the limitation by shifting its product mix
towards the higher-end Safari Panther and Beaver Thunder model options which
utilize a heavy-duty transmission which was in available supply. This shift in
mix resulted in lower overall unit sales but increased the overall sales dollar
per unit. Secondly, the Company was unable to begin production of the chassis
for its new Renegade Class A model at its Magnum facility. Instead, the chassis
was purchased from an outside supplier and will continue to be until more
transmissions are available, thus delaying the full cost savings the Company
will achieve when it is able to produce the chassis internally. It is uncertain
when the supply of medium-duty transmissions available from Allison will return
to the level the Company requires for optimal production levels.
Upon completion of the manufacturing process, each coach undergoes a
thorough inspection and test drive, and problems discovered are corrected prior
to shipment.
Competition
The market for manufacture of mid- to high-line motor coaches is very
competitive, and the Company has significant competition in each of its product
lines. Other manufacturers of high-line coaches include Blue Bird Corporation,
Country Coach, Inc. (acquired in late 1996 by National RV Holdings, Inc.),
Fleetwood Enterprises, Inc., Foretravel Inc., Gulf Stream Coach, Inc., Hawkins
Motor Coach, Monaco Coach Corporation, and Holiday Rambler Corporation (acquired
in early 1996 by Monaco Coach Corporation). The Company competes with a number
of other manufacturers, some of which are much larger than the Company and have
greater financial and other resources than
11
<PAGE>
the Company. Certain of these larger manufacturers have also identified
value-oriented high-line motor coaches as an attractive market and have recently
developed coaches more directly competitive with the Company's coaches.
The Company believes the principal competitive factors in the manufacture
and sale of high-line motor coaches are product quality and design, price,
customer service, performance and reliability. The Company believes it is
competitive with respect to each of these factors and believes its customer
service and the performance and reliability of its products compare favorably to
those of its competitors.
Product Design; Patents
The Company strives to be a design innovator in motor coach floor plans,
interior features, coach amenities and mechanical systems and believes it is
generally recognized in the industry as a design leader. Among the innovations
introduced by the Company are the first use of a side aisle floor plan, the
Electro-Majic bed, a rear-mounted cooling system, 110 volt residential-style
lighting and the successful use of Torsilastic suspension on a high-line motor
coach. The Company updates the fabrics, carpets, fixtures and floor plans of its
coaches each year and plans for a complete redesign of each model every three to
four years.
The Company began development of its Electro-Majic bed in 1988 and in 1992
obtained a patent for this electric powered bed system. Using a hidden electric
motor, the system uses small gear tracks attached to the living room walls to
lower a double-size bed from the ceiling down to a desired sleeping level. The
Electro-Majic bed is used in most Trek models. In two of the Company's
best-selling Trek floor plans, the Electro-Majic bed is the primary sleeping
space, which allows the entire coach to be used for living, kitchen and bathroom
areas. The Company believes there is no comparable motor coach floor plan on the
market.
The Company designed and patented an all new air ride suspension system in
1996 for use in its Beaver Patriot and Marquis models. The suspensions system is
designed to optimize the stability of the moving coach, while at the same time
maximizing ride comfort.
Government Regulation
Motor coach manufacturers, such as the Company, are subject to federal,
state, and local regulations governing the manufacture and sale of their
products, including the provisions of the Motor Vehicle Act. The Motor Vehicle
Act provides for, among other things, the recall for modification, repair or
replacement of vehicles that contain defects which are potentially dangerous, or
which fail to comply with applicable standards. The Company's motor coaches also
may be subject to recall by chassis manufacturers in the event the chassis fail
to comply with applicable standards. The Company relies upon certifications from
its engine suppliers and chassis manufacturers that the Company's motor coaches
comply with all applicable emission control standards. Although motor coaches
manufactured by the Company have been voluntarily recalled for repair from time
to time in the past, the Company has not incurred significant expenses in
connection with recalls. Because the Company sells its products in Canada, it is
also governed by similar laws and regulations issued by the Canadian government.
There is no assurance that future recalls of the Company's products will not
occur or that any such recalls will not adversely affect the Company's
operations or financial condition.
12
<PAGE>
The Company is also subject to regulations promulgated by the Occupational
Safety and Health Administration ("OSHA") concerning workplace health and
safety. The Company's plants are periodically inspected by OSHA.
The business and operations of the Company are affected by federal, state,
and local environmental regulations relating to air and water pollution,
hazardous wastes, and noise. These regulations control the Company's use,
storage, and disposal of production chemicals and other wastes. The regulations
also restrict the Company's air contaminant emissions and waste water discharges
and prohibit noise in excess of certain levels.
The Company holds a federal operating permit as required by Title V of the
federal Clean Air Act Amendments of 1990 (a "Title V Permit") for its Safari and
Beaver motor coach manufacturing facilities. The combined CTI and HCO facility
holds an air contaminant discharge permit ("ACDP"), issued by the Oregon
Department of Environmental Quality and has applied for a Title V permit. The
Company believes it will be issued the permits necessary to allow it to operate
these facilities. The ACDPs and the Title V permits, however, are issued for
operations at specified levels, and any increase in emissions beyond those
levels, including increases resulting from expanded operations or process
modifications, will require permit amendments.
To date, the Company has not been required to make significant expenditures
for environmental compliance. The promulgation of additional safety or
environmental regulations, or the need to acquire permit amendments, in the
future, however, could require the Company to incur additional expense which
could adversely impact the Company's results of operations. There is no
assurance that the Company will not be required to make significant expenditures
in the future with respect to such safety or environmental regulations.
The Company believes it is in material compliance with applicable laws
relating to the manufacture and operation of motor coaches and operations of its
manufacturing facilities. There is no assurance, however, that future
governmental regulations will not be more stringent, and that compliance with
those regulations will not require the Company to incur additional cost.
Employees
At December 31, 1997 the Company had 1,433 full-time employees. None of the
Company's employees is represented by a labor union, and the Company has never
experienced a work stoppage, slowdown or strike. The Company believes it
maintains good employee relations.
ITEM 2. PROPERTIES
The Company's corporate headquarters and Safari and Magnum manufacturing
facilities are located in Harrisburg, Oregon on property owned by the Company.
The corporate headquarters and Safari manufacturing facility consists of
buildings totaling 163,000 square feet on 16 acres, with 11,300 square feet of
office space and 151,700 square feet of manufacturing space. The Magnum
manufacturing facility consists of four buildings with a combined size of
approximately 93,000 square feet on 12 acres. The Company's Beaver manufacturing
facility is located in Bend, Oregon and consists of four buildings totaling
34,600 square feet on 3.5 acres that are owned by the Company, and an additional
90,100 square feet on 7.8 acres, that are leased on a long-term basis. In
January 1996, the Company purchased a 172,000 square foot building on 16 acres
in Hines, Oregon to meet
13
<PAGE>
future production requirements. The Company leases a 13,000 square foot facility
in Bend, Oregon where ED&A operates. The present lease has an option to renew
through December of 2005.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising out of its
operations in the normal course of business, including claims under the "lemon
laws" of various states. The Company believes such legal proceedings, if
determined adversely to the Company, would not have a material impact on the
Company.
As a manufacturer and seller of motor coaches, the Company is subject to a
risk of loss resulting from claims that its products or components of its
products caused or contributed to damage or injury. The Company has obtained
product liability insurance under terms it considers acceptable. In the past,
the Company has not incurred material expenses for product liability; however,
such liabilities, if incurred in the future, could have a material adverse
effect on the Company's operations if they exceed the insurance coverage
maintained. Furthermore, there can be no assurance that the Company will be able
to obtain insurance coverage in the future at adequate levels or for a
reasonable cost.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of March 18, 1998.
Name Age Position
---- --- --------
Mathew M. Perlot 61 Chief Executive Officer and Chairman of the
Board
Jay L. Howard 45 President and Chief Operating Officer
John L. Varner 32 Chief Financial Officer
Janet Engles Kehoe 53 Vice President - Administration
Gordon R. Perlot 35 Vice President - Corporate Projects
Mathew M. Perlot co-founded the Company in November 1986 and has served as
Chief Executive Officer and Chairman of the Board since that time. Mr. Perlot
also served as President until May of 1997 when he was succeeded by Jay L.
Howard. Mr. Perlot served as Director of Sales and Marketing for Monaco Coach
Corporation from 1982 to 1985 and for Beaver Coaches, Inc. from 1985 to 1987.
Mr. Perlot also served as President of RV Marketing, Inc. from 1980 to 1987. Mr.
Perlot is married to Connie M. Perlot, a director and Secretary-Treasurer of the
Company, and is the father of Gordon R. Perlot.
14
<PAGE>
Jay L. Howard joined the Company as Corporate Vice President of
Manufacturing in December 1995. In May of 1997, he succeeded Mathew M. Perlot as
President and Chief Operating Officer. From 1979 to 1995 Mr. Howard served as
Vice President of Manufacturing for Dazey Corporation, an international
manufacturer of personal care and kitchen appliances. Mr. Howard is a Certified
Manufacturing Engineer by S.M.E. with additional certifications from A.P.I.C.S.
and A.S.Q.C.
John L. Varner joined the Company as Corporate Controller in April 1995. He
became Chief Financial Officer in August of 1997. Prior to joining the Company,
Mr. Varner was employed as an accountant with Price Waterhouse LLP, commencing
in August of 1987. Mr. Varner is a CPA and holds a B.A. degree in Business
Administration from Washington State University.
Janet Engles Kehoe joined the Company in June 1994 as Personnel Manager for
Beaver Motor Coaches. From July 1996 to December 1997 she served as Corporate
Human Resources Director and now serves as Vice President of Administration.
From April 1987 to June 1994 she held the position of Personnel Manager for
Beaver Coaches, Inc., which was purchased in June 1994 by SMC corporation. Ms.
Kehoe holds a Senior certification from the Society of Resources Management and
a B.S. degree in Business Management from Linfield College.
Gordon R. Perlot joined the Company as a production supervisor in October
1988 and became manager of mechanical operations in 1989. In 1992 Mr. Perlot
directed the design and development of the Magnum chassis and in 1993 became
plant manager of Magnum Manufacturing, Inc. In 1996, Mr. Perlot became General
Manager of the newly created subsidiary, Harney County Operations, Inc. In 1997,
he became Vice President of Corporate Projects. Mr. Perlot is the son of Mathew
M. Perlot.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
System since January 20, 1995 under the symbol SMCC. Information with respect to
the high and low sales prices for the Common Stock is set forth on page F-21.
At March 17, 1998 there were 80 shareholders of record of the Company's
Common Stock and 6,545,349 shares were outstanding. The Company believes the
number of beneficial owners is substantially greater than the number of record
holders because a large portion of the Company's outstanding Common Stock is
held of record in broker "street names" for the benefit of individual investors.
The Company did not pay any dividends in 1996 or 1997. The Company intends
to retain future earnings for use in its business and therefore does not
anticipate paying cash dividends in the foreseeable future.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five-year period ended December 31, 1997 have been derived
from the audited financial statements of the Company. This data should be read
in conjunction with the financial statements, related notes and other financial
information included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ----------- -----------
(In thousands, except per share and other operating data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Sales.................................... $ 60,583 $ 124,247 $ 148,189 $ 200,835 $ 203,019
Cost of sales............................ 52,679 108,833 128,846 174,457 175,809
---------- ---------- ----------- ----------- -----------
Gross profit............................. 7,904 15,414 19,343 26,378 27,210
Selling, general and administrative
expenses.............................. 4,591 8,429 11,702 17,601 19,353
Restructuring expense.................... -- -- -- 2,392 --
---------- ---------- ----------- ----------- -----------
Income from operations................... 3,313 6,985 7,641 6,385 7,857
Other expense............................ 258 212 774 418 813
---------- ---------- ----------- ----------- -----------
Income before provision for
income taxes.......................... 3,055 6,773 6,867 5,967 7,044
Provision for income taxes(1)............ -- -- 1,926 2,384 2,798
---------- ---------- ----------- ----------- -----------
Net income............................... $ 3,055 $ 6,773 $ 4,941 $ 3,583 $ 4,246
========== ========== =========== =========== ===========
Net income per share - basic $ .53 $ 1.18 $ .76 $ .55 $ .65
========== ========== =========== =========== ===========
Net income per share - diluted........... $ .53 $ 1.18 $ .74 $ .54 $ .65
========== ========== =========== =========== ===========
Weighted average shares outstanding -
basic.................................. 5,763 5,763 6,469 6,563 6,506
========== ========== =========== =========== ===========
Weighted average shares outstanding -
diluted................................ 5,763 5,763 6,647 6,661 6,507
========== ========== =========== =========== ===========
Pro Forma Statement of
Income Data:
Income before provision for
income taxes.......................... $ 3,055 $ 6,773 $ 6,867 N/A N/A
Pro forma provision for income
taxes (1)............................. 1,176 2,614 2,612 N/A N/A
---------- ---------- -----------
Pro forma net income (1)................. $ 1,879 $ 4,159 $ 4,255 N/A N/A
========== ========== ===========
Pro forma net income per
share - basic (1)(2)................... $ .33 $ .72 $ .66 N/A N/A
========== ========== ===========
Pro forma net income per
share - diluted (1)(2)................ $ .33 $ .72 $ .64 N/A N/A
========== ========== ===========
Pro forma common shares - basic (2)...... 5,763 5,763 6,469 N/A N/A
========== ========== ===========
Pro forma common shares - diluted (2) 5,763 5,763 6,647 N/A N/A
========== ========== ===========
Other Operating Data:
Coaches sold............................. 747 1,199 1,405 1,859 1,765
</TABLE>
<TABLE>
<CAPTION>
Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets........................... $ 10,083 $ 20,093 $ 26,109 $ 39,740 $ 39,081
Property and equipment................... 5,060 8,911 12,061 19,584 18,585
Total assets............................. 15,143 32,504 41,198 61,920 59,842
Current liabilities...................... 9,671 25,222 18,254 34,225 29,335
Long-term debt........................... 1,194 4,169 4,676 6,626 5,376
Shareholders' equity..................... 4,278 2,263 17,411 20,994 24,293
17
<PAGE>
- -----------------
(1) The Company was an S corporation and accordingly was not subject to federal
and state income taxes prior to 1995. Pro forma net income reflects federal
and state income taxes as if the Company had been a C corporation, based on
the effective tax rates that would have been in effect during those
periods. Effective January 1, 1995 the Company elected C corporation tax
status. In accordance with SFAS No. 109, "Accounting For Income Taxes," the
Company recorded a transition adjustment to establish a deferred asset for
prepaid taxes, reducing the Company's reported tax provision by $686,000
for 1995. The 1995 pro forma provision for income taxes reflects the
provision for income taxes as if this transition adjustment were excluded.
(2) Shares used in pro forma computations of income per share include the
estimated number of shares required to be sold by the Company in its
initial public offering to make final S corporation distributions to the
Company's shareholders.
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
SMC Corporation designs, manufactures, and markets predominantly Class A
motor coaches. The Company's Safari and Beaver motor coaches include seven
high-line models, with suggested retail prices ranging from approximately
$150,000 to over $375,000, and one model with suggested retail prices of $79,000
to $97,000. A new Class A model to be introduced in 1998 will have a suggested
retail price ranging from $125,000 to $140,000. In 1996 the Company entered the
Class C market with the El Dorado motor coach, which has a suggested retail
price ranging from $44,000 to $50,000. In 1997, the Company introduced another
class C model, the Safari, which has a suggested retail price ranging from
$64,000 to $76,000.
The Company shipped its first motor coach in July 1987. The Company's 1987
sales totaled $3.7 million, and the Company has experienced sales increases in
each succeeding year. Sales through 1990 were solely of the Company's Safari
model, a high-line motor coach priced as a more affordable alternative to custom
coaches. In late 1990 the Company introduced the Trek model, which was designed
to attract buyers in the mid-line price range of the market but shares many
high-line features with the Company's other models. To expand its presence in
the higher end of the motor coach market, the Company introduced the Continental
model in March 1992. These models take advantage of the cost and quality
benefits derived from production-line manufacturing techniques, while satisfying
the expectations of sophisticated motor coach purchasers. In June 1993 Magnum
Manufacturing, Inc. commenced operations to build chassis for Safari motor
coaches. The manufacture of its own chassis, uncommon in the high-line motor
coach industry, reduces the Company's production costs, improves quality control
and allows the Company to respond directly and effectively to customer service
issues on both the chassis and the coach body. In 1995 Magnum commenced
manufacturing of chassis for Beaver's Patriot and Monterey products, and in 1997
commenced manufacturing for Beaver's Marquis chassis.
Effective June 1, 1994 the Company acquired substantially all of the
operating assets of Beaver, a manufacturer of luxury Class A motor coaches,
through a bankruptcy proceeding following several years of Beaver operating
losses. From November 8, 1993 through May 31, 1994, the Company provided
executive management services to Beaver pursuant to an arrangement approved by
the Bankruptcy Court. Beginning in November 1993 the Company's results of
operations reflect its sale to Beaver dealers of coaches and trailers purchased
from Beaver at its wholesale prices, less a 2.5% discount in consideration for
the agreement by the Company to satisfy warranty obligations with respect to
those products. Because the discount was equal to the warranty accrual with
respect to such sales, the Company realized no gross profit on its sales of
Beaver products prior to the acquisition. These sales represented $1.5 million
and $16.3 million of the Company's sales for 1993 and 1994, respectively. The
Company's results of operations from June 1, 1994 include operating results of
the subsidiary that acquired the Beaver assets.
19
<PAGE>
The acquisition of Beaver enabled the Company to expand its product
offerings with Beaver's Patriot and Marquis lines, which have significantly
different characteristics from Safari products. Positioned as a more
"traditional" product, Beaver's Patriot and Marquis offer air suspension and
brake systems, have more conservative floor plans and decor and have a
reputation for extremely high quality craftsmanship. In 1995 Beaver introduced
the Monterey, a lower priced motor coach with a retail price ranging from
$151,000 to $193,000. This new product also launched a major dealer expansion
effort for Beaver products which expanded Beaver's dealer base from 14 sites in
1994 to 33 sites in 1997.
Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
Industries, Inc., a manufacturer of the Class C motor coach model El Dorado in
Minneapolis, Kansas. The Company operated the facility for six months at an
operating loss. In December 1996, the Company's management decided to
discontinue production at the Kansas facility to reduce unacceptable operating
losses. Production of the El Dorado is expected to continue at the Company's HCO
facility in Oregon.
Accounting for the Acquisition of Assets of Beaver Coaches, Inc.
Effective June 1, 1994 the Company acquired substantially all of the
operating assets of Beaver and assumed certain of its liabilities in accordance
with a Plan of Reorganization of Beaver under the U.S. Bankruptcy Code. The
Company paid cash of $3.9 million, forgave $3.1 million of accounts receivable
from Beaver and incurred acquisition related costs of $400,000. In addition, the
Company agreed to pay a royalty equal to the greater of $1.6 million or 1% of
gross sales of Beaver products for three years. Goodwill of $2.6 million was
recorded in connection with the acquisition and is being amortized over 15 years
on a straight-line basis.
Accounting for the Acquisition of Assets of Honorbuilt Industries, Inc.
Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
for cash. Honorbuilt was primarily engaged in the design, manufacture,
distribution and sale of Class C motor coaches (under the name brand of El
Dorado) from its facility in Minneapolis, Kansas. The Company formed a new
subsidiary, Midwest, to operate the facility.
The acquisition was accounted for by the purchase method. Accordingly, the
purchase price of $1.4 million was allocated to the assets acquired based on
their estimated values as of the date of acquisition. The excess of the
consideration paid over the estimated fair value of assets acquired totaled
$561,000, which was recorded as goodwill and was initially amortized on the
straight-line basis over 15 years. See Note 9 of Notes to Consolidated Financial
Statements
On December 26, 1996, the Company announced the planned exit and closure of
the operations at the Minneapolis, Kansas facility in an effort to reduce
excessive costs that were not anticipated when the Company acquired the assets
of Honorbuilt. The closure has been treated as a restructuring for financial
reporting purposes, and a total charge of $2.4 million has been made for the
year ended December 31, 1996 related to the Midwest restructuring.
20
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data, expressed as a percentage of sales, and the
percentage change in such data from the comparable prior period.
<TABLE>
<CAPTION>
Percentage change in
dollar amounts from
Year ended December 31, ---------------------
---------------------------------- 1995 1996
1995 1996 1997 to 1996 to 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales............................ 100.0% 100.0% 100.0% 35.5% 1.1%
Cost of sales.................... 87.0 86.9 86.6 35.4 0.8
-------- -------- -------- -------- --------
Gross profit..................... 13.0 13.1 13.4 36.4 3.2
Selling, general and
administrative expenses......... 7.9 8.7 9.5 50.4 10.0
Restructuring expense............ -- 1.2 -- N/A N/A
-------- -------- --------
Income from operations........... 5.1 3.2 3.9 (16.4) 23.1
Interest expense................. 0.6 0.3 0.5 (24.7) 36.2
Other (income) and
expense......................... (0.1) (0.1) (0.1) 96.3 (55.1)
-------- -------- --------
Pretax income.................... 4.6 3.0 3.5 (13.1) 18.1
Provision for income taxes....... 1.3 1.2 1.4 23.8 17.4
-------- -------- --------
Net income....................... 3.3 1.8 2.1 (27.5) 18.5
======== ======== ========
Pretax income.................... 4.6 N/A N/A N/A N/A
Pro forma provision for
Income taxes................... 1.8 N/A N/A N/A N/A
--------
Pro forma net income............. 2.8% N/A N/A N/A N/A
========
</TABLE>
1997 Compared to 1996
Consolidated sales increased by $2.2 million (1.1%) to $203.0 million for
1997 from $200.8 million for 1996. Safari sales were down by $12.7 million or
10.9% to $104.1 million in 1997 compared to 1996. Beaver sales were up by $7.2
million or 9.4% to $84.2 million in 1997 compared to 1996. Sales at the
Company's newest division, HCO, were $7.9 million with no sales being generated
in the start-up operation in 1996. Sales generated before the shut-down at
Midwest were down by $1.1 million or 29.7% to $2.6 million in 1997 compared to
1996. Increases in parts and service sales of approximately $900,000 made up the
rest of the increase in consolidated sales from 1996 to 1997.
Consolidated unit coach sales decreased by 94 units (5.06%) to 1,765 units
in 1997 from 1,859 units in 1996. Safari unit coach sales decreased by 180 units
(14.9%) to 1,025 units in 1997 from 1,205 units in 1996. Beaver unit coach sales
decreased by 48 units (8.5%) to 519 units in 1997 from 567 in 1996. HCO unit
sales were 158 in 1997. Midwest unit sales decreased by 24 units (27.6%) to 63
units in 1997 from 87 units in 1996.
21
<PAGE>
Although unit sales decreased in 1997 compared to 1996, sales dollars
increased due to a shift in mix towards the Company's higher valued coaches,
which are generally more profitable. As discussed in Item 1 under the
"Manufacturing" section, the Company was unable to obtain all of the medium-duty
transmissions necessary to meet its initially planned production schedule. In
response to this, the Company shifted its production to its higher-end models
which use a heavy-duty transmission which was in available supply. This shift
resulted in lower than planned unit sales, but higher sales dollars per unit.
The Company believes that the lowered overall unit sales volume was also
reflective of increased competition in 1997 compared to 1996. The Company
believes that its overall market share of the high-line motor home market
dropped slightly from the prior year, and it continues to monitor the
performance of each of its model lines in relation to the competition.
Consolidated gross profit margin increased $832,000 (3.2%) and increased as
a percentage of sales to 13.4% from 13.1% in 1996. A number of factors led to
the overall increase in consolidated gross profit margin. On the positive side,
in the prior year, gross margin was negatively impacted by the Company's
start-up operations at Midwest. This facility was shut down in 1997 resulting in
an overall $1.0 million positive impact on gross margin compared to the prior
year. Additionally, sales of Beaver product continue to became a larger portion
of the overall sales mix. Since most of Beaver's products sell at higher average
prices than the Safari models, and the Company's products generally achieve a
greater gross margin on higher priced products, the increase in Beaver sales in
1997 contributed approximately an additional $500,000 to gross margin compared
to 1996. On the negative side, gross margin was negatively impacted by the
Company's start up of HCO and CTI, which reduced gross margin by approximately
$700,000 compared to 1996. The start-up phase was completed in 1997 during which
time extra costs for set-up and training of the labor force were incurred.
Selling, general, and administrative expenses increased by $1.8 million
(10.0%) to $19.4 million in 1997 from $17.6 million in 1996. As a percentage of
sales, selling, general and administrative costs were 9.5% and 8.7% of sales for
1997 and 1996, respectively. The Company incurred approximately $1.3 million in
higher marketing related expenses in 1997 compared to 1996 in an effort to boost
the lower than expected sales demand which was described above. Additionally,
the decrease of approximately $300,000 in expenses associated with the shut-down
of Midwest was offset by an increase of approximately $500,000 in costs related
to the start up of HCO and CTI.
The Company recorded a pre-tax restructuring expense of $2.4 million in the
fourth quarter of 1996. No further restructuring expense was required in 1997.
Given the factors affecting gross margin and selling, general, and
administrative expenses, and the impact of the restructuring charge from 1996,
operating income increased $1.5 million (23.1%) to $7.9 million from $6.4
million in 1996. As a percentage of sales, operating income was 3.9% of sales in
1997 compared to 3.2% of sales in 1996.
22
<PAGE>
Interest expense increased 36.2% to $933,000 in 1997 from $685,000 in 1996.
The increase was due to higher overall borrowings on the Company's revolving
lines of credit during 1997 compared to 1996. Higher borrowings were required
during the first half of the year when finished goods inventory levels were
higher than expected due to the slower than anticipated sales demand described
above. Production rates were lowered later in the year, and sales also
increased, which resulted in reducing the finished goods inventory and the
substantial payoff of the short-term borrowings; however, the net impact for the
year was higher interest expense compared to 1996.
The Company's effective tax rate was 39.7%, resulting in an income tax
provision of $2.8 million compared to an effective rate of 40.0% and an income
tax provision of $2.4 million for 1996.
Net income after tax increased $663,000 (18.5%) to $4.3 million from 1996's
net income after tax of $3.6 million.
1996 Compared to 1995
Sales increased by $52.6 million (35.5%) to $200.8 million for 1996 from
$148.2 million for 1995. The increase was attributable primarily to a
significant increase in sales of Beaver coaches, which increased by $36.9
million (92.2%) compared to 1995, sales of Safari coaches, which increased by
$9.1 million (8.4%) compared to 1995, and sales of El Dorado coaches produced by
the Company's newly-acquired Midwest facility, which totaled $3.7 million.
Increases in parts and service sales of approximately $2.9 million made up the
rest of the increase in sales from 1995.
Beaver unit coach sales increased by 271 units (91.6%) to 567 units in 1996
from 296 units in 1995. Safari unit coach sales increased by 96 units (8.7%) to
1,205 units in 1996 from 1,109 in 1995.
Gross profit increased $7.0 million (36.4%) and increased slightly as a
percentage of sales to 13.1% from 13.0% in 1995. A number of offsetting factors
led to relatively stable overall gross margin performance. The significant
increase in Beaver coach sales improved gross margin percentage. Beaver
products, which sell at higher average prices than the Safari models, became a
larger portion of the Company's overall sales mix in 1996. The Company's
products generally achieve greater gross margin on higher-priced coaches, and
the significant increase in Beaver sales contributed to a greater overall margin
performance. Conversely, operating results of the Company's start-up of Midwest,
which produces and sells the El Dorado Class C coaches, reduced gross margin by
$1.0 million (0.5%). Midwest's inability to achieve profitable performance led
to the Company's decision to terminate operations at the Minneapolis,
Kansas-based facility. Higher warranty costs in 1996 compared to 1995 also had a
negative effect on gross margin.
Selling, general, and administrative expenses increased by $5.9 million
(50.4%) to $17.6 million in 1996 from $11.7 million in 1995. Selling, general,
and administrative costs were 8.7% and 7.9% of sales for 1996 and 1995,
respectively. Selling, general, and
23
<PAGE>
administrative costs, in percentage terms, increased more than sales in 1996 due
to higher legal and accounting costs associated with the Company's transition to
public company status, increases in staffing required to handle increased sales
volume, the commencement of operations at the Company's newly formed
subsidiaries (EDA, CTI, Midwest, and HCO), and the Company's customer service
center. Additionally, travel costs were significantly higher in 1996 because
employees headquartered in Oregon were dispatched to assist with the start-up of
the Midwest facility, and also needed to travel between the newly established
subsidiaries in Oregon.
The Company recorded a pre-tax restructuring expense of $2.4 million in the
fourth quarter of 1996 ($1.4 million after tax) related to the planned exit and
closure of the operations at Midwest in an effort to reduce excessive costs and
eliminate the operating losses associated with Midwest. The major components of
the 1996 restructuring charge included the write down of goodwill and
organizational costs recorded at the time of the acquisition (approximately
$700,000), the reserve for impairment of certain property, plant, and equipment
(approximately $930,000), and other incremental costs of closing the facility
(approximately $800,000).
The combined effect of relatively unchanged gross margin, increased
selling, general, and administrative expenses, and the Midwest restructuring
charge was to decrease operating income by $1.2 million (16.4%) to $6.4 million
from $7.6 million in 1995. Operating income was 3.2% of sales in 1996 compared
to 5.2% of sales in 1995. If the restructuring charge and operating loss of
Midwest during 1996 were eliminated, operating income would have been 5.2% of
sales in 1996, the same as in 1995.
Interest expense decreased 24.7% to $685,000 in 1996 from $910,000 in 1995.
The decrease was due to lower borrowings on the Company's revolving line of
credit. Positive cash flows created by profits from operations and reductions in
inventory levels during the first half of the year were used to reduce revolving
indebtedness. The strong sales growth at Beaver and Safari accounted for these
operating profits and inventory reductions. Operating losses at Midwest resulted
in increased borrowings late in 1996, but this did not completely offset the
impact of positive cash flows during the first half of the year.
The Company's effective tax rate for 1996 was 40.0%, resulting in an income
tax provision of $2.4 million, compared to an effective rate of 28.0% and an
income tax provision of $1.9 million for 1995. The increase in the effective tax
rate from 1996 to 1995 is due to the Company's termination of its S corporation
tax status and commencement of its tax-paying C corporation status effective
January 1, 1995. Upon conversion to C corporation status, the Company recorded a
transition deferred tax asset of $686,000. This reduced the income tax provision
recorded during 1995. If the Company had been a C corporation before 1995, its
effective tax rate in 1995 would have been 38.0%, which would have resulted in
an income tax provision of $2.6 million and would have been comparable to the
effective rate of 40.0% for 1996.
On a pro forma basis, after adjusting for the 1995 deferred tax asset
described above, net income after tax decreased $670,000 (15.8%) to 1996's
actual net income of $3.6 million from 1995's pro forma net income of $4.3
million. The decrease was primarily due to the poor operating performance of
Midwest. Midwest's operating losses and restructuring charge
24
<PAGE>
combined to create an after-tax loss of $2.4 million in 1996. This loss was
offset in part by income generated by the increase in sales volume at Beaver and
Safari. Excluding the results of the Midwest, net income after taxes would have
been $6.0 million, or $1.7 million (40.2%) above 1995's pro forma net income of
$4.3 million.
Income Taxes
Prior to January 1, 1995, the Company was an S corporation not subject to
federal and state income taxes. In anticipation of its initial public offering,
the Company terminated its S corporation status and the Company paid taxes as a
C corporation in 1995. Pro forma net income reflects federal and state income
taxes as if the Company had been a C corporation, based on the rates that would
have been in effect during the periods reported.
Inflation
The Company does not believe inflation has had a material impact on its
results of operations for the periods presented.
Factors Affecting Future Operating Results
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Short-term fluctuations in operating
results may be caused by a variety of factors, including the relatively high
unit cost of the Company's motor coaches, the timing of orders from dealers,
dealer cancellations of orders, the repurchase of coaches from dealers, new
product introductions, production delays and the timing of trade shows and
rallies. Because the Company's gross profit is generally greater with respect to
its more expensive coaches, changes in the product mix of coaches sold can
affect the Company's operating results. Over longer periods, the cyclical nature
of the recreational vehicle industry, changes in interest rates and changes in
the level of discretionary consumer spending may also adversely affect the
Company's results of operations. The impact of these and other factors on the
Company's sales and operating results in any future period cannot be predicted
with certainty, and the results for any prior period may not be indicative of
results for any future period.
The Company believes that the high-line motor coach market is much less
volatile than the RV industry as a whole, and believes buyers purchasing
high-line products are making lifestyle decisions largely independent of factors
such as the state of the economy or interest rates. High-line coach sales have
increased every year since 1989, while the sale of all Class A motor coaches
have seen both increases and decreases during this period.
Liquidity and Capital Resources
During 1997 SMC generated $7.5 million in cashflows from operations, while
its net working capital increased from $5.5 million at December 31, 1996 to $9.7
million at December 31, 1997 (including cash and cash equivalents of $103,000).
25
<PAGE>
The Company made capital expenditures of $2.5 million during 1997.
Approximately $1.3 million of the expenditures related to the completion of the
set up of the production facility at HCO. The remaining expenditures were made
on various capital projects needed to maintain the existing facilities.
The Company has lines of credit of $10.0 million, with $8.3 million
available at December 31, 1997, plus an additional $4.0 million equipment
financing line of credit, which is all available at December 31, 1997. Amounts
outstanding under these lines of credit bear interest at prime (8.50% at
December 31, 1997) and are secured by all assets not specifically identified in
other financing obligations. The terms of the revolving credit and equipment
financing agreements require compliance with certain financial covenants and
other covenants which provide that the Company receive consent from the lender
to declare or pay dividends in cash, stock or other property. The covenants also
include restrictions relating to (1) mergers, consolidations and sale of assets,
(2) guarantees by the Company of debts or obligations of other persons or
entities, and (3) acquisition of the Company's own stock. The Company was in
compliance with all covenants and agreements at December 31, 1997. The Company
does not believe any of these covenants will have a material impact on the
Company's ability to meet its cash obligations. See Notes 4 and 5 of Notes to
Consolidated Financial Statements.
Most dealer purchases of motor coaches from the Company are financed under
flooring financing arrangements between the dealer and a bank or finance
company. Under these flooring arrangements, the financing institution lends the
dealer all or substantially all of the wholesale purchase price of a motor coach
and retains a security interest in the coach purchased. These financing
arrangements provide that, for a period of time after a coach is financed
(generally 12 to 18 months), if the dealer defaults on its payment or other
obligations to the lender, the Company is obligated to repurchase the dealer's
inventory for the amount then due from the dealer plus, in certain
circumstances, costs incurred by the lender in connection with repossession of
the inventory. The repurchase price may be more than the resale value of the
coach. The Company's contingent liability under its repurchase obligations
varies from time to time. As of December 31, 1997, the Company estimates its
total contingent liability under repurchase obligations was approximately $86.3
million. To date, losses incurred by the Company pursuant to repurchase
obligations have not been material. The Company cannot predict with certainty
its future losses, if any, pursuant to repurchase obligations, and these amounts
may vary materially from the expenditures historically made by the Company.
Furthermore, even in circumstances where losses in connection with repurchase
obligations are not material, a repurchase obligation can represent a
significant cash requirement for the Company. See "Business -- Sales and
Marketing" and Note 10 of Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
included on pages F-1 to F-21 of this report.
26
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1998
annual meeting of shareholders (the "1998 Proxy Statement") to be filed not
later than 120 days after the end of the fiscal year covered by this Report and
is incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1998 Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the Company's
1998 Proxy Statement and is incorporated herein by reference.
28
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page in this Report
Report of Independent Accountants F-1
Consolidated Balance Sheet at December 31, 1996
and 1997 F-2
Consolidated Statement of Income for the Years
Ended December 31, 1995, 1996 and 1997 F-3
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended December 31, 1995,
1996 and 1997 F-4
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedules - None
(a)(3) Exhibits
2.1 Order Confirming Second Modified Plan of Reorganization of Beaver
Coaches, Inc. (April 4, 1994) as amended (the "Plan"), filed May 20,
1994, and Plan; incorporated by reference to Exhibit 2.1 to the
Registrant's Registration Statement on Form S-1, Registration No.
33-85780 (the "1995 S-1")
3.1 Restated Articles of Incorporation; incorporated by reference to
Exhibit 3.1 to the 1995 S-1
3.2 Restated Bylaws; incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994
4.1 See Articles II and V of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
*10.1 1994 Stock Incentive Plan, as amended; incorporated by reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994
29
<PAGE>
10.2 Stock Purchase Agreement dated March 28, 1988 among Curtis Lawler
and Sandra Lawler, Mathew M. Perlot and the Registrant; incorporated
by reference to Exhibit 10.2 to the 1995 S-1
10.3 Stock Purchase Agreement dated November 30, 1990 among L. Michael
Cary, Mathew M. Perlot and the Registrant; incorporated by reference
to Exhibit 10.3 to the 1995 S-1
10.4 Revised form of Representatives' Warrant Agreement, including form
of warrant; incorporated by reference to Exhibit 10.5 to the 1995
S-1
10.5 Manufacturer Agreement dated June 24, 1987 between General Electric
Credit Corporation and the Registrant; incorporated by reference to
Exhibit 10.7 to the 1995 S-1
+10.6 Manufacturer's Financing Agreement dated April 30, 1991 between
John Deere Company and the Registrant, and addenda thereto;
incorporated by reference to Exhibit 10.8 to the 1995 S-1
10.7 Repurchase Agreement dated November 30, 1993 between the Registrant
and General Motors Acceptance Corporation; incorporated by reference
to Exhibit 10.9 to the 1995 S-1
+10.8 Floorplan Agreement dated April 14, 1994 between ITT Commercial
Finance Corp. and the Registrant, and amendment and amendment
letters thereto; incorporated by reference to Exhibit 10.10 to the
1995 S-1
10.9 Lease Assignment and Assumption Agreement dated June 1994 between
Beaver Coaches, Inc. and Beaver Motor Coaches, L.L.C., with Lease
dated May 15, 1989 by and between Frank Storch and James Hogue, dba
S&H Associates, and Beaver Coaches, Inc., and amendments thereto;
incorporated by reference to Exhibit 10.11 to the 1995 S-1
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
- ----------------
* This exhibit constitutes a management contract or compensatory plan or
arrangement.
+ Confidential treatment has been granted by the Commission for certain
portions of this agreement.
30
<PAGE>
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company in the last quarter of
1997.
31
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
SMC Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
SMC Corporation and its subsidiaries at December 31, 1997, and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
February 3, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Balance Sheet
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
December 31,
1996 1997
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 316 $ 103
Accounts receivable, net (Note 4) 12,859 12,397
Inventories (Notes 2 and 4) 23,633 23,038
Prepaid expenses and other 574 709
Deferred tax asset (Note 6) 2,358 2,834
------------- -------------
Total current assets 39,740 39,081
Property, plant and equipment, net (Notes 3, 4 and 5) 19,584 18,585
Intangible assets, net (Note 9) 2,154 2,129
Deferred tax asset (Note 6) 343 --
Other assets 99 47
------------- -------------
Total assets $ 61,920 $ 59,842
============= =============
Liabilities and Shareholders' Equity Current liabilities:
Notes payable (Note 4) $ 5,798 $ 1,695
Current portion of long-term debt (Note 5) 1,752 1,381
Accounts payable 17,251 17,342
Income taxes payable (Note 6) 1,365 405
Royalties payable 652 --
Product warranty liabilities 2,808 3,769
Current portion of capital lease obligation (Note 8) 16 18
Accrued liabilities 4,095 4,725
Accrued restructuring costs (Note 9) 488 --
------------- -------------
Total current liabilities 34,225 29,335
Long-term debt, net of current portion (Note 5) 6,626 5,376
Capital lease obligation, less current portion (Note 8) 75 57
Deferred income taxes (Note 6) - 781
------------- -------------
Total liabilities 40,926 35,549
------------- -------------
Commitments and contingencies (Notes 7 and 10)
Shareholders' equity:
Preferred stock, 5,000 shares authorized, none issued or
outstanding (Note 12) - -
Common stock, 30,000 shares authorized, 6,563 and 6,343 shares
issued and outstanding, respectively (Note 11) 10,914 10,810
Additional paid-in capital (Note 11) 1,556 1,488
Retained earnings (Note 11) 8,524 11,995
------------- -------------
Total shareholders' equity 20,994 24,293
------------- -------------
Total liabilities and shareholders' equity $ 61,920 $ 59,842
============= =============
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Statement of Income
(in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Sales $ 148,189 $ 200,835 $ 203,019
Cost of sales 128,846 174,457 175,809
------------- ------------- -------------
Gross profit 19,343 26,378 27,210
Selling, general and administrative expenses 11,702 17,601 19,353
Restructuring expense (Note 9) - 2,392 -
------------- ------------- -------------
Income from operations 7,641 6,385 7,857
Interest expense 910 685 933
Other income (136) (267) (120)
------------- ------------- -------------
Income before tax provision 6,867 5,967 7,044
Provision for income taxes (Note 6) 1,926 2,384 2,798
------------- ------------- -------------
Net income $ 4,941 $ 3,583 $ 4,246
============= ============= =============
Net income per share - basic $ .76 $ .55 $ .65
============= ============= =============
Net income per share - diluted $ .74 $ .54 $ .65
============= ============= =============
Weighted average number of shares - basic 6,469 6,563 6,506
============= ============= =============
Weighted average number of shares - diluted 6,647 6,661 6,507
============= ============= =============
Unaudited pro forma data (Note 6):
Income before provision for income taxes $ 6,867
Pro forma provision for income taxes 2,612
-------------
Pro forma net income $ 4,255
=============
Pro forma net income per share - basic $ .66
=============
Pro forma net income per share - diluted $ .64
=============
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Common Stock Additional
--------------------------- paid-in Retained
Shares Amount capital earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 5,000 $ 707 $ - $ 1,556 $ 2,263
Common stock issued in public
offering 1,553 12,032 - - 12,032
Common stock issued upon
exercise of options 10 82 - - 82
Equity issuance costs related to
public offering - (1,907) - - (1,907)
Reclassification of retained
earnings to additional paid-in
capital (Note 11) - - 1,556 (1,556) -
Net income - - - 4,941 4,941
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 6,563 10,914 1,556 4,941 17,411
Net income - - - 3,583 3,583
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 6,563 10,914 1,556 8,524 20,994
Net Income - - - 4,246 4,246
Stock repurchase (Note 11) (220) (104) (68) (775) (947)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 6,343 $ 10,810 $ 1,488 $ 11,995 $ 24,293
========== ========== ========== ========== ==========
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
SMC Corporation
Consolidated Statement of Cash Flows
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,941 $ 3,583 $ 4,246
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Noncash restructuring charges - 2,392 -
Depreciation and amortization 1,202 1,838 2,092
Deferred taxes (375) (2,326) 648
Gain on asset dispositions - (183) (44)
Changes in certain assets and liabilities (excluding impact of
acquisition of a business and noncash restructuring charges):
Accounts receivable (1,918) (4,294) 462
Inventories (3,305) (7,270) 595
Prepaid expenses and other (152) (162) (135)
Other assets (331) 547 52
Accounts payable (1,137) 6,198 91
Income taxes payable - 1,365 (960)
Accrued liabilities and other obligations 217 2,946 451
------------ ------------ ------------
Net cash provided by (used in) operating activities (858) 4,634 7,498
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of a business, net of cash acquired
(Note 9) - (1,420) -
Capital expenditures (4,171) (11,059) (2,468)
Proceeds from disposal of equipment - 1,669 275
Other - - (195)
------------ ------------ ------------
Net cash used in investing activities (4,171) (10,810) (2,388)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings on notes payable (1,003) 4,127 (4,103)
Proceeds from long-term debt 2,250 4,330 1,924
Repayments of long-term debt (2,025) (2,029) (3,545)
Principal payments on capital lease obligation - (5) (16)
Payments of notes payable to shareholders (Note 11) (5,133) - -
Proceeds from sale-leaseback - - 1,364
Repurchase of capital stock (Note 11) - - (947)
Proceeds from issuance of common stock 12,114 - -
Public offering costs incurred (1,285) - -
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,918 6,423 (5,323)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (111) 247 (213)
Cash and cash equivalents, beginning of period 180 69 316
------------ ------------ ------------
Cash and cash equivalents, end of period $ 69 $ 316 $ 103
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized of $91,000,
$94,000 and $22,000 in 1995, 1996 and 1997,
respectively $ 906 $ 626 $ 982
Income taxes $ 2,524 $ 3,011 $ 3,128
The accompanying notes are an integral part of this financial statement.
</TABLE>
F-5
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies
Nature of business
SMC Corporation (the "Company"), an Oregon corporation, and its wholly
owned subsidiaries design, manufacture, and market Class A and Class C
motor coaches sold primarily to dealers which are independent of the
Company and its subsidiaries throughout the United States and Canada.
Basis of consolidation
The accompanying consolidated financial statements include the accounts of
SMC Corporation and the following seven wholly owned subsidiaries which
operate under the control of SMC Corporation: Safari Motor Coaches, Inc.
("Safari"), Beaver Motor Coaches, Inc. ("Beaver"), Magnum Manufacturing,
Inc. ("Magnum"), Electronic Design and Assembly, Inc. ("ED&A"), Composite
Technologies, Inc. ("CTI"), SMC Midwest, Inc. ("Midwest"), and Harney
County Operations, Inc. ("HCO"). Safari, Beaver, and HCO purchase motor
coach chassis and other components used in the manufacture of finished
motor coaches from the other subsidiaries, excluding Midwest which was
engaged in the manufacture of Class C motor coaches but ceased operations
in 1997. All significant intercompany transactions have been eliminated for
purposes of presentation of the consolidated financial statements of SMC
Corporation.
Reporting periods
The Company reports its annual results of operations on the basis of
52-week periods ending December 31 and its quarterly results of operations
on the basis of 13-week periods ending on the Saturday nearest the calendar
month end. For presentation purposes, the Company has indicated its
quarters as ending March 31, June 30, September 30, and December 31.
Cash and cash equivalents
Cash consists of demand deposits with financial institutions. The Company
considers all highly liquid short-term investments with original maturities
of three months or less to be cash equivalents for purposes of the
consolidated balance sheet and consolidated statement of cash flows.
Noncash transactions have been excluded from the consolidated statement of
cash flows (see Note 9).
Accounts receivable
Accounts receivable are net of an allowance for doubtful accounts of
$98,000 and $58,000 at December 31, 1996 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
by the first-in, first-out method for raw materials, work-in-progress and
finished goods and by the specific cost method for chassis. Cost includes
the purchase price of raw materials, direct labor and an allocation of
overhead costs. Raw materials inventory consists of component parts and
motor coach chassis. Chassis manufacturers provide terms calling for
payment generally upon completion of the motor coach.
F-6
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Property, plant and equipment
Property, plant and equipment are stated at cost. Additions, renewals and
betterments are capitalized. Expenditures for maintenance, repairs, and
minor renewals and betterments are charged to expense. Gains or losses
realized from sales or retirements are reflected in earnings. Gains of
$183,000 and $44,000 were recorded during the years ended December 31, 1996
and 1997, respectively, and were not significant for the year ended
December 31, 1995. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of 15 years for land
improvements, 20 to 30 years for buildings and improvements, and 5 to 12
years for machinery and equipment.
Intangible assets
Costs in excess of the fair value of the assets of Beaver acquired in 1994
and the assets of Midwest acquired in 1996 consist primarily of product
trade names, which are being amortized using the straight-line method over
15 years (see Notes 9 and 10). Amortization expense for the years ended
December 31, 1995, 1996 and 1997 was $181,000, $189,000 and $220,000,
respectively. At the end of each quarter, the Company reviews the
recoverability of its intangible assets based on estimated undiscounted
future cash flows from operating activities compared with the carrying
value of the intangible assets. If the aggregate future cash flows are less
than the carrying value, a write-down would be required, measured by the
difference between the discounted future cash flows and the carrying value
of the intangible assets. All goodwill recorded related to the Midwest
acquisition was written-off in 1996 (Note 9).
Financial instruments
The Company estimates the fair value of its monetary assets and liabilities
based upon the existing interest rates related to such assets and
liabilities compared to the current market rates of interest for
instruments of a similar nature and degree of risk. Cash and cash
equivalents, and notes payable to banks approximate fair value as reported
in the consolidated balance sheet. The fair value of long-term debt is
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
The fair value of the Company's long-term debt at December 31, 1996 and
1997 approximates the carrying value. The Company records all other
financial instruments, including accounts receivable and accounts payable,
at cost, which approximates market value.
Revenue recognition and accounts receivable
The Company recognizes revenue from the sale of motor coaches when title
and risk of ownership are transferred to the dealer, which generally is
upon shipment or dealer pick-up. Motor coaches are shipped to dealers only
upon verification of dealer financing from the finance company providing
the motor coach financing. Finance companies remit funds directly to the
Company upon receipt of the manufacturer's certificate of origin, generally
within 10 days after shipment. A dealer may be invoiced for and receive
title to motor coaches prior to taking physical possession when the dealer
has made a fixed, written commitment to purchase, the motor coaches have
been completed and are available for pick-up or delivery, and the dealer
has requested the Company to hold the motor coaches until the dealer
determines the most
F-7
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Revenue recognition and accounts receivable (Continued)
economical means of taking physical possession. Upon such a request, the
Company has no further obligation except to segregate the motor coaches,
invoice them under normal billing and credit terms and hold them for a
short period of time as is customary in the industry, generally less than
two weeks, until pick-up or delivery. Motor coaches are built to dealer
specification and no right of return or exchange privileges are granted.
Accordingly, no provision for sales allowances or returns is recorded.
Sales and the percentage of total sales made to dealers representing more
than 10% of consolidated sales in any of the following periods were as
follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Dealer 1 $ 23,131 16% $ 23,314 12% $ 20,843 10%
Dealer 2 (See Note 7) $ 17,732 12% $ 20,777 10% $ 300 0%
Dealer 3 (See Note 7) -- -- $ 24,368 12%
</TABLE>
Certain risks, uncertainties and concentration of credit risk
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
The Company has a concentration of credit risk in the recreational vehicle
industry, and specifically related to amounts outstanding at any point in
time in accounts receivable and/or under repurchase agreements (see Note
10) with any specific dealership to which it has sold motor coaches. The
Company requires no collateral from its dealers upon sale of a motor coach,
and most dealer financing arrangements provide for repurchase agreements
which require the Company to repurchase previously sold motor coaches in
the event of the dealer's default on its financing arrangement.
Product warranty
The Company provides a one year warranty against defects in material and
workmanship to dealers and purchasers of motor coaches and a similar three
year warranty for chassis manufactured by the Company. Certain components
used in the manufacture of the Company's motor coaches carry warranties of
other manufacturers. Estimated warranty costs are reserved at the time of
sale of the warranted products.
Income taxes
Effective January 1, 1995, the Company adopted the liability method of
accounting for income taxes, as set forth in Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS No.
109). Under the liability method, deferred taxes are determined based upon
the difference between the financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax expense represents the
change in the deferred tax asset/liability balance. A valuation allowance
is established for deferred taxes if their realization is not likely.
F-8
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Income taxes (Continued)
Prior to January 1, 1995, the Company had elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those
provisions and analogous provisions of certain state laws, the Company did
not pay federal or state corporate taxes on taxable income. Instead, the
shareholders were responsible for federal and state income taxes for their
respective shares of the Company's taxable income. Accordingly, no accrual
or provision for income taxes was made prior to 1995. For comparative
purposes, a pro forma provision for income taxes (unaudited) is presented
for the year ended December 31, 1995 due to the impact of the recognition
of a cumulative net deferred tax asset of $686,000 associated with the
change from S corporation status to C corporation status as of January 1,
1995 (Note 6).
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation. These changes had no impact on previously reported
results of operations or shareholders' equity.
2. Inventories
Inventories by major classification are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1997
------------ ------------
<S> <C> <C>
Raw materials $ 11,560 $ 11,418
Work-in-progress 7,285 9,581
Finished goods 4,788 2,039
------------ ------------
Total $ 23,633 $ 23,038
============ ============
</TABLE>
F-9
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Property, Plant and Equipment
The components of property, plant and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1997
------------ ------------
<S> <C> <C>
Land and improvements $ 1,143 $ 2,950
Buildings and improvements 8,663 10,344
Machinery and equipment 9,563 10,404
Construction in progress 3,711 171
------------ ------------
23,080 23,869
Less accumulated depreciation (3,496) (5,284)
------------ ------------
Property, plant and equipment, net $ 19,584 $ 18,585
============ ============
</TABLE>
4. Notes Payable
The Company has a $10.0 million revolving line of credit for working
capital requirements. The available borrowings under the lines of credit
are limited to 80% of eligible accounts receivable plus 90% of eligible
finished goods inventory plus 50% of eligible raw and work-in progress
inventory. At December 31, 1997, $1.7 million was outstanding on the
Company's line of credit with interest at the bank's prime rate (8.50%),
and $8.3 million was available to be borrowed. Outstanding borrowings under
the lines of credit are due on demand. The lines of credit are secured by
accounts receivable, inventory (excluding chassis inventory purchased from
third parties), and equipment.
Further, the lines of credit are cross-collateralized among the companies.
The terms of the respective credit agreements require compliance with
certain financial covenants, including working capital requirements.
The Company has entered into a credit agreement which enable borrowings of
up to $4.0 million for equipment purchases, as needed. No amounts have been
borrowed under this credit agreement at December 31, 1997, and a remaining
available balance of $4.0 million is outstanding at December 31, 1997 to
finance future equipment requirements.
As of December 31, 1997, the Company was in compliance with all of its
financial covenants associated with its line of credit facilities and other
bank loans.
F-10
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31,
1996 1997
------------- -------------
(in thousands)
<S> <C> <C>
Bank loan secured by equipment with monthly payments of
$35,000 plus interest at LIBOR plus 1.5%, or 7.47% at
December 31, 1997, with the balance due October 12, 2003 $ 2,885 $ 2,468
Bank loan secured by equipment, with monthly payments of
$35,000 including interest at 7.625%, with the balance due
December 31, 2002 - 1,750
Bank loan secured by a first trust deed on the Magnum
manufacturing facility, with monthly payments of $9,000
plus interest at 8.22%, with the balance due November 30, 2005 1,540 1,421
Bank loan secured by a first trust deed on the Safari manu-
facturing facility, with monthly payments of $31,000 plus
interest at the bank's prime rate plus .75%, or 9.25% at
December 31, 1997, with the balance due October 18, 1999 1,043 675
Bank loan secured by a first trust deed on the Beaver manu-
facturing facility, with monthly payments of $13,000 plus
interest at the bank's prime rate plus .75%, or 9.25% at
December 31, 1997, with the balance due October 18, 1999 438 287
Promissory note secured by a mortgage on the related
property, with annual payments of $24,000 including
interest at 6%, with the balance due no later than
January 15, 2007 - 156
Bank equipment loans secured by equipment financed,
with monthly payments of $24,000 plus interest
at the bank's prime rate plus .25%, repaid
December 22, 1997 1,386 -
Bank equipment loan secured by equipment financed,
with monthly payments of $10,000 plus interest at
the bank's prime rate plus 1%, repaid December 22, 1997 300 -
Bank equipment loan secured by equipment financed,
with monthly payments of $8,000 including interest at
the bank's prime rate plus .25%, repaid December 22, 1997 296 -
Bank equipment loan secured by equipment financed,
with monthly payments of $8,000 plus interest at the bank's
prime rate plus 1%, repaid December 22, 1997 250 -
Bank equipment loan secured by capital acquisitions financed,
with monthly payments of $4,000 including interest at the
bank's prime rate plus .25%, repaid December 22, 1997 148 -
Notes payable to a financing company, with monthly payments
of $21,000 including interest at 9%, repaid May 1, 1997 92 -
------------- -------------
8,378 6,757
Less portion due within one year (1,752) (1,381)
------------- -------------
Long-term debt less current portion $ 6,626 $ 5,376
============= =============
</TABLE>
F-11
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Long-Term Debt (Continued)
The aggregate maturities of long-term debt for the next five years and
thereafter as of December 31, 1997 are $1,381,000, $1,309,000, $892,000,
$921,000, $535,000 and $1,719,000, respectively.
Certain of the borrowings are subject to restrictive covenants, including
working capital requirements, with which the Company is in compliance at
December 31, 1997. Other terms of the borrowings require the lending bank's
written consent prior to the issuance of any dividends.
6. Provision for Income Taxes
In connection with the Company's completion of the offering of its common
stock (see Note 11), its S corporation status was terminated effective
January 1, 1995. Accordingly, the consolidated income statement includes a
pro forma adjustment for income taxes which would have been recorded if the
Company had been a C corporation, based on tax rates in effect during all
periods presented, as calculated under SFAS No. 109.
The unaudited pro forma provision for income taxes is as follows (in
thousands):
Year ended
December 31, 1995
-----------------
Current:
Federal $ 1,905
State 396
-------------
2,301
-------------
Deferred:
Federal 280
State 31
-------------
311
-------------
$ 2,612
=============
A pro forma provision is presented only for 1995 because 1996 and 1997 were
not affected by the Company's transition from S corporation to C
corporation status.
F-12
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Provision for Income Taxes (Continued)
The audited actual provision for income taxes for the years ended December
31, 1995, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,905 $ 3,897 $ 1,961
State 396 813 189
---------- ----------- -----------
2,301 4,710 2,150
---------- ----------- -----------
Deferred:
Federal 280 (1,925) 574
State 31 (401) 74
---------- ----------- -----------
311 (2,326) 648
---------- ----------- -----------
Provision before cumulative deferred tax asset 2,612 2,384 2,798
Cumulative deferred tax asset (686) -- --
---------- ----------- -----------
$ 1,926 $ 2,384 $ 2,798
========== =========== ===========
</TABLE>
The provision for income taxes for the year ended December 31, 1995 is
offset by recognition of a cumulative net deferred tax asset of $686,000
associated with the termination of the Company's S corporation status on
January 1, 1995 in accordance with SFAS 109.
Deferred tax assets (liabilities) are comprised of the following components
(in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1997
----------- -----------
<S> <C> <C>
Current:
Vacation reserve $ 250 $ 278
Accrued workers' compensation claim liabilities 76 69
Warranty reserves 1,077 1,610
Restructuring reserve (Note 10) 187 --
Inventory reserves 26 40
Other liabilities 598 815
Other reserves (Note 10) 106 --
Allowance for doubtful accounts 38 22
----------- ----------
$ 2,358 $ 2,834
=========== ==========
Noncurrent:
Tax depreciation in excess of book depreciation $ (282) $ (781)
Other reserves (Note 10) 625 --
----------- ----------
$ 343 $ (781)
=========== ==========
</TABLE>
F-13
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Provision for Income Taxes (Continued)
The effective tax rate differs from the U.S. statutory federal tax rate due
to the following:
<TABLE>
<CAPTION>
Pro forma unaudited Actual year ended
year ended December 31 December 31,
1995 1995 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.4 4.4 4.4 3.7
Nondeductible expenses -- -- 1.6 1.1
Other, net (.4) (.4) -- .9
Effect of change in tax status -- (10.0) -- --
---------- ---------- ---------- ----------
38.0% 28.0% 40.0% 39.7%
========== ========== ========== ==========
</TABLE>
7. Related Parties
During 1991, the Company opened a retail sales lot in Southern California.
Effective December 1, 1992, the motor coach inventory of the retail sales
lot was sold to Motor Home Safari, Inc. ("Motor Home"), a corporation owned
by two shareholders of the Company. Effective March 1, 1995, Motor Home was
sold to an unrelated third party. At times, the Company's principal
shareholder has provided financing to Motor Home for its purchase of motor
coach inventory from Safari.
Sales to Motor Home for the years ended December 31, 1995, 1996 and 1997
were $8.5 million, $7.8 million, and $8.4 million, respectively. Sales were
made at the manufacturer's suggested list price offered to third parties.
The Company had accounts receivable due from Motor Home of $350,000 and
$435,000 at December 31, 1996 and 1997, respectively, related to the sale
of motor coaches.
In March of 1997, Romania RV Center ("Romania") resigned as a dealer for
the Company's products. Sales to Romania represented 12% and 10% of the
Company's total sales during the years ended December 31, 1995 and 1996,
respectively. The Company repurchased the motor coaches remaining in
Romania's inventory at the time of termination for their original sales
value of $4.2 million. Concurrent with its termination of the Romania
dealer relationship, the Company initiated a new dealer relationship with
Destinations RV, Inc. ("Destinations"). For purposes of establishing a
starting base of salable inventory, Destination's purchased all of the
motor coaches that had been repurchased by the Company from Romania for the
Company's repurchase price of $4.2 million; therefore, no gain or loss was
recorded on the transaction.
Destinations is owned by principals related to an officer of the Company,
and the Company is the guarantor of up to $1.0 million in liabilities that
may become contractually owing to Destination's primary motor home
financing source. The Company's sales of motor coaches to Destinations are
at prices consistent with sales to unrelated third parties. Sales to
Destinations for the year ended December 31, 1997 were $24.4 million, and
the Company had accounts receivable due from Destination's of $799,000 at
December 31, 1997.
F-14
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Leases
The Company is obligated under a capital lease for computer software that
expires in September of 2001. At December 31, 1996 and December 31, 1997,
the gross amount of equipment and related accumulated amortization recorded
under capital leases was $95,000 and $5,000, and $95,000 and $24,000,
respectively.
The Company also has noncancelable operating leases, primarily for
facilities space, manufacturing equipment, telecommunications,
transportation equipment, and computer software and hardware, which expire
over the next five years and thereafter. Rental expense under operating
leases was, $270,000, $511,000, and $783,000 for the years ended December
31, 1995, 1996, and 1997, respectively.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
Year ending December 31: Capital Lease Operating Leases
------------------------ ------------- ----------------
<S> <C> <C>
1998 $ 23,000 $ 914,000
1999 23,000 914,000
2000 23,000 889,000
2001 18,000 707,000
2002 -- 457,000
Thereafter -- 3,289,000
----------- -------------
Total minimum lease payments 87,000 $ 7,170,000
Less amount representing interest
(at 8.52%) 12,000
Minimum Lease payments,
excluding interest 75,000
Current installments of obligation
under capital lease 18,000
Obligation under capital lease
excluding current installments $ 57,000
==========
</TABLE>
9. Acquisition of the Assets of Honorbuilt Industries, Inc.
Effective June 14, 1996, the Company acquired certain assets of Honorbuilt
Industries, Inc. ("Honorbuilt") for cash. Honorbuilt was primarily engaged
in the design, manufacture, distribution and sale of Class C motor coaches
(under the name brand of El Dorado) from its facility in Minneapolis,
Kansas. The Company formed a new subsidiary, SMC Midwest, Inc., to operate
the facility.
F-15
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Acquisition of the Assets of Honorbuilt Industries, Inc. (Continued)
The acquisition was accounted for by the purchase method. Accordingly, the
purchase price of $1.4 million was allocated to the assets acquired based
on their estimated values as of the date of acquisition. The excess of the
consideration paid over the estimated fair value of assets acquired totaled
$561,000, which was recorded as goodwill and was initially amortized on the
straight-line basis over 15 years.
The estimated fair value of assets acquired is summarized as follows:
Inventory $ 327,000
Equipment 432,000
Goodwill 561,000
Other Assets 100,000
-------------
Total Purchase Price $ 1,420,000
=============
On December 26, 1996, the Company announced the planned exit and closure of
the operations at the Minneapolis, Kansas facility in an effort to reduce
excessive costs that were not anticipated when the Company acquired the
assets of Honorbuilt. The closure has been treated as a restructuring for
financial reporting purposes, and a total charge of $2.4 million was made
for the year ended December 31, 1996 related to the Midwest restructuring.
Restructuring activities primarily involve the separation of the workforce,
the closing of the facility, and the termination of existing leases. Costs
for restructuring activities are limited to incremental costs that directly
result from the restructuring activities and that provide no future benefit
to the Company.
A reserve of $488,000 to cover expected future costs of the restructuring
was recorded as of December 31, 1996. Additionally, the remaining
unamortized goodwill, deferred acquisition costs, and certain property,
plant, and equipment was charged to restructuring expense during the year
ended December 31, 1996. Recording of the reserves for book purposes but
not for tax purposes created a related deferred tax asset (Note 6) that was
realized when the exit plan was completed during 1997. The restructuring
reserve recorded at December 31, 1996 was adequate to cover the
restructuring costs incurred during 1997, and no further restructuring
charges were made or are expected to be made as of the date of this report.
Commencing June 14, 1996, results of operations of Honorbuilt are included
in the Consolidated Statement of Income for the year ended December 31,
1996. The following unaudited pro forma summary presents information as if
the acquisition of Honorbuilt had occurred at the beginning of 1995. The
pro forma information is provided for informational purposes only. It is
based on historical information and includes adjustments for interest
expense that would have been incurred to finance the purchase, depreciation
adjustments related to asset valuations, and amortization of intangibles.
The pro forma information is not indicative of future results of operations
of the combined companies.
F-16
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pro Forma Information
(in thousands, except per share amounts)
Year ended December 31,
1995 1996
------------- -------------
<S> <C> <C>
Net Sales............................................ $ 164,005 $ 207,763
Net Income........................................... $ 2,931 $ 2,975
Earnings per share - basic........................... $ .45 $ .45
Earnings per share - diluted ........................ $ .44 $ .45
</TABLE>
10. Commitments and Contingencies
As is customary in the recreational vehicle industry, the Company is
contingently liable under the terms of repurchase agreements with finance
companies which provide secured inventory financing for dealers of the
Company's products. These agreements require the Company to repurchase its
products from the finance company in the event of a dealer's default. The
contingent liability under these agreements approximates the sales price of
the motor coaches, less principal payments made by the dealer. The Company
expects to resell any products repurchased to reduce any liabilities
incurred. Historically, the Company has not experienced significant losses
under these repurchase agreements.
The risk of loss is spread over various dealers and finance companies.
Total secured inventory financing obligations of the Company's dealers, for
which the Company was contingently liable, were approximately $82.2 million
and $86.3 million at December 31, 1996 and December 31, 1997, respectively.
From time to time, the Company is involved in various customer complaints
which arise in the ordinary course of business. The Company does not
believe that losses, if any, incurred under outstanding repurchase
agreements or customer complaint settlements will have a significant impact
on the Company's financial position or results of operations.
In connection with its acquisition of Beaver in 1994, the Company sold a
division of Beaver, Collins Trailer, to a third party. The Company
guaranteed certain lease and other commitments assumed by the buyer. As of
December 31, 1997, the Company has guaranteed the payment of certain notes
in the aggregate amount of $499,000.
11. Common Stock Matters and Earnings Per Share
Initial Public Offering
On January 20, 1995, the Company sold 1,552,500 shares of common stock of
SMC Corporation at an offering price of $7.75 per share pursuant to an
Initial Public Offering (the Offering). The proceeds of the Offering, (net
of underwriting discounts and commissions and offering expenses) of $10.1
million, were used to repay borrowings in the amount of approximately $3
million, $2.6 million of which were outstanding at December 31, 1994, and
to repay $5.1 million due under promissory notes issued to shareholders.
The remaining proceeds were used for working capital needs.
F-17
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Common Stock Matters and Earnings Per Share (Continued)
In conjunction with the Company's initial public offering, a total of
125,000 warrants were issued to the Underwriters of the Offering. Such
warrants entitle the holder to purchase an equal amount of shares of common
stock of the Company anytime after January 20, 1996 until their expiration
on January 20, 2000 at a price of $9.30 per share. No stock has been
purchased related to the warrants as of the date of this report.
As discussed in Note 6, the Company terminated its S corporation status
effective January 1, 1995 in conjunction with the Offering and,
accordingly, the remaining undistributed S corporation retained earnings at
December 31, 1994 of $1.6 million were reclassified as additional paid-in
capital.
Stock Incentive Plan
Effective October 20, 1994, the Company adopted a stock incentive plan for
key employees and directors of the Company. In 1997, the shareholders of
the Company voted to increase the number of shares authorized under the
plan from 1.1 million to 1.4 million shares of common stock; accordingly,
these shares have been reserved for by the Company. The stock options
generally become exercisable ratably over a period of three years from the
date of grant at prices equal to the fair market value at the date of
grant. The maximum option term is 10 years. The following table summarizes
option transactions under the plan:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Shares subject to option:
Balance at January 1 745,000 781,000 883,000
Options granted 76,000 117,000 152,500
Options exercised (10,564) - -
Options terminated (29,436) (15,000) (97,715)
----------- ----------- -----------
Balance at December 31 781,000 883,000 937,785
----------- ----------- -----------
Weighted average option
price in dollars:
At January 1 $ 7.75 $ 7.82 $ 7.97
Options granted 8.47 9.29 7.76
Options exercised 7.75 - -
Options terminated 7.75 7.75 7.75
At December 31 7.82 7.97 7.84
Shares available for
grant at December 31: 308,436 206,436 451,651
</TABLE>
The exercise prices of the 937,785 options granted as of December 31, 1997
range between $7.375 and $9.00 and have a weighted average remaining
contractual life of 7.5 years; 717,517 of the total options granted are
fully vested, and therefore may be exercised, as of December 31, 1997 at a
weighted average exercise price of $7.80.
The Company applies ABP Opinion 25 and related Interpretations in
accounting for the stock incentive plan. Accordingly, no compensation cost
has been recognized in the accompanying consolidated financial statements.
Had compensation cost for the stock incentive plan been determined based on
F-18
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Common Stock Matters and Earnings Per Share (Continued)
the fair value at the grant dates for awards under the plan consistent with
the method of FASB Statement 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Pro Forma Information
(in thousands, except per share amounts)
Year ended December 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Income As reported $ 4,941 $ 3,583 $ 4,246
Pro Forma $ 4,838 $ 3,306 $ 3,882
Earnings per share - basic As reported $ .76 $ .55 $ .65
Pro Forma $ .75 $ .50 $ .60
Earnings per share - diluted As reported $ .74 $ .54 $ .65
Pro Forma $ .73 $ .50 $ .60
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected dividend yield:
0.0%, expected volatility: 68.17%, risk-free interest rate: 6.5%, expected
life: 10 years. In 1997, the expected dividend yield and expected life used
in the calculation were the same; however, the expected volatility was
71.49%, and the risk-free interest rate was 6.3%. Results may not be
representative of future years because options are generally granted on an
annual basis and vest over time.
Earnings per Share
The Company has adopted FASB Statement 128, "Earnings Per Share," in the
current year. FASB 128 requires dual presentation of basic and diluted EPS.
Previously, the Company had presented primary EPS. Diluted EPS is
calculated by dividing net income by the total of the weighted average
actual shares outstanding for each period plus the number of shares
calculated as having a dilutive impact, if any, related to the stock
options under the Company's Stock Incentive Plan, and the warrants issued
in conjunction with the Company's initial public offering. Previously
reported amounts for primary EPS are the same as the diluted EPS amounts
now reported. Basic EPS is computed by dividing the net income by the
weighted average actual shares outstanding for each period presented with
no consideration as to the dilutive impact of the Company's outstanding
stock options or warrants.
Stock Repurchase
During the year, the Company purchased 220,000 of its common shares from a
former officer of the Company. The shares were purchased subject to the
terms of Stock Purchase Agreement between the Company and the former
officer. Under the terms of the agreement, the Company had first option to
purchase the subject shares for two-thirds of the current market value. The
shares were purchased for a price per share of $4.30, resulting in an
overall purchase price of $947,000. The shares have been returned and
canceled.
F-19
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Preferred Stock
The Company has authorized 5,000,000 shares of Preferred Stock which may be
issued from time to time in one or more series as authorized by the
Company's Board of Directors. The Board of Directors, without any further
approval by the shareholders of the Company is authorized to fix the
dividend rights and terms, dividend rates, voting rights, terms of
redemption price, conversion rights and liquidation preferences related to
the Preferred Stock. There have been no shares of Preferred Stock issued,
and the Company has no plans to issue any as of the date of this report.
13. Incentive and Deferred Compensation Plans
The Company has an incentive compensation plan for its key officers. The
amounts charged to expense for the years ended December 31, 1995, 1996, and
1997 aggregated $278,000, $487,000, and $245,000, respectively.
Effective July 1, 1995, the Company and its subsidiaries established a
joint 401(k) and Profit Sharing Plan which allows eligible employees to
contribute up to 15% of their compensation annually. The plan allows for a
Company matching percentage based upon the discretion of management, and
$1,000, $4,000 and $2,000 were contributed by the Company and its
subsidiaries to the plan during the years ended December 31, 1995, 1996,
and 1997, respectively. To date there have been no amounts contributed by
the Company or its subsidiaries to the profit sharing element of the plan.
14. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenue 43,102 48,731 56,016 52,986
Gross profit 5,973 6,941 8,112 5,352
Net income (loss) 1,296 1,613 1,814 (1,140)
Net income (loss) per share - basic .20 .24 .28 (.17)
Net income (loss) per share - diluted .20 .24 .27 (.17)
Year ended December 31, 1997:
Revenue 50,087 48,977 51,578 52,377
Gross profit 6,597 5,282 6,901 8,430
Net Income 1,190 164 1,206 1,686
Net income (loss) per share - basic .18 .02 .18 .27
Net Income per share - diluted .18 .02 .18 .27
</TABLE>
F-20
<PAGE>
SMC Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. Market Information (Unaudited)
The Company's common stock is traded on the Nasdaq National Market System
under the symbol SMCC. The following table sets forth the high and low sale
prices of the stock for each quarter of 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter 8.25 6.75 8.50 6.875
Second quarter 10.00 7.375 9.25 5.625
Third quarter 11.25 8.50 8.00 5.625
Fourth quarter 11.25 6.50 8.25 5.000
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998 SMC CORPORATION
By: JOHN L. VARNER
-------------------------------------
John L. Varner
Chief Financial 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 following capacities on March 27, 1998.
Signature Title
--------- -----
MATHEW M. PERLOT Chief Executive Officer
- ---------------------------------- and Chairman of the Board
Mathew M. Perlot (Principal Executive Officer)
JAY L. HOWARD President and Director
- ----------------------------------
Jay L. Howard
JOHN L. VARNER Chief Financial Officer
- ---------------------------------- Principal Financial and Accounting
John L. Varner Officer)
CURTIS W. LAWLER Director
- ----------------------------------
Curtis W. Lawler
CONNIE M. PERLOT Director
- ----------------------------------
Connie M. Perlot
32
<PAGE>
MILTON L. RAY Director
- ----------------------------------
Milton L. Ray
LAWRENCE S. BLACK Director
- ----------------------------------
Lawrence S. Black
33
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
2.1 Order Confirming Second Modified Plan of Reorganization of Beaver
Coaches, Inc. (April 4, 1994) as amended (the "Plan"), filed May
20, 1994, and Plan; incorporated by reference to Exhibit 2.1 to
the Registrant's Registration Statement on Form S-1, Registration
No. 33- 85780 (the "1995 S-1")
3.1 Restated Articles of Incorporation; incorporated by reference to
Exhibit 3.1 to the 1995 S-1
3.2 Restated Bylaws; incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994
4.1 See Articles II and V of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
*10.1 1994 Stock Incentive Plan, as amended; incorporated by reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994
10.2 Stock Purchase Agreement dated March 28, 1988 among Curtis Lawler
and Sandra Lawler, Mathew M. Perlot and the Registrant;
incorporated by reference to Exhibit 10.2 to the 1995 S-1
10.3 Stock Purchase Agreement dated November 30, 1990 among L. Michael
Cary, Mathew M. Perlot and the Registrant; incorporated by
reference to Exhibit 10.3 to the 1995 S-1
10.4 Revised form of Representatives' Warrant Agreement, including form
of warrant; incorporated by reference to Exhibit 10.5 to the 1995
S-1
<PAGE>
10.5 Manufacturer Agreement dated June 24, 1987 between General
Electric Credit Corporation and the Registrant; incorporated by
reference to Exhibit 10.7 to the 1995 S-1
+10.6 Manufacturer's Financing Agreement dated April 30, 1991 between
John Deere Company and the Registrant, and addenda thereto;
incorporated by reference to Exhibit 10.8 to the 1995 S-1
10.7 Repurchase Agreement dated November 30, 1993 between the
Registrant and General Motors Acceptance Corporation; incorporated
by reference to Exhibit 10.9 to the 1995 S-1
+10.8 Floorplan Agreement dated April 14, 1994 between ITT Commercial
Finance Corp. and the Registrant, and amendment and amendment
letters thereto; incorporated by reference to Exhibit 10.10 to the
1995 S-1
10.9 Lease Assignment and Assumption Agreement dated June 1994 between
Beaver Coaches, Inc. and Beaver Motor Coaches, L.L.C., with Lease
dated May 15, 1989 by and between Frank Storch and James Hogue,
dba S&H Associates, and Beaver Coaches, Inc., and amendments
thereto; incorporated by reference to Exhibit 10.11 to the 1995
S-1
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
- --------------
* This exhibit constitutes a management contract or compensatory plan or
arrangement.
+ Confidential treatment has been granted by the Commission for certain
portions of this agreement.
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The following list sets forth the subsidiaries of the Company. The Company
owns 100 percent of the outstanding stock of each of the companies listed
Place of
Subsidiary Incorporation
---------- -------------
Safari Motor Coaches, Inc. Oregon
Beaver Motor Coaches, Inc. Oregon
Magnum Manufacturing, Inc. Oregon
Composite Technologies, Inc. Oregon
Electronic Design and Assembly, Inc. Oregon
Harney County Operations, Inc. Oregon
SMC Midwest, Inc. Kansas
Safari FSC Ltd. Barbados
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-27713) of SMC Corporation of our report dated
February 3, 1998 appearing on page F-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Portland, Oregon
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEETS AND RELATED STATEMENTS OF OPERATIONS FOR THE PERIOD
ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 12397
<ALLOWANCES> 0
<INVENTORY> 23038
<CURRENT-ASSETS> 39081
<PP&E> 23869
<DEPRECIATION> 5284
<TOTAL-ASSETS> 59842
<CURRENT-LIABILITIES> 29335
<BONDS> 0
0
0
<COMMON> 10810
<OTHER-SE> 13483
<TOTAL-LIABILITY-AND-EQUITY> 59842
<SALES> 203019
<TOTAL-REVENUES> 203019
<CGS> 175809
<TOTAL-COSTS> 175809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 933
<INCOME-PRETAX> 7044
<INCOME-TAX> 2798
<INCOME-CONTINUING> 4246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4246
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
