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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, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to __________
Commission file number 0-25390
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.)
20545 Murray Road
Bend, Oregon 97701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (541) 389-1144
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 15, 2000: $6,061,196. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 15, 2000: 5,780,599.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which incorporated
- -------- ------------------
Proxy Statement for 2000 Annual
Meeting of Shareholders Part III
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TABLE OF CONTENTS
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ITEM OF FORM 10-K PAGE
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PART I.................................................................... 1
Item 1 Business..................................................... 1
Item 2 Properties................................................... 14
Item 3 Legal Proceedings............................................ 15
Item 4 Submission of Matters to a Vote of Security Holders.......... 15
Item 4(a) Executive Officers of the Registrant......................... 15
PART II................................................................... 17
Item 5 Market for the Registrant's Common
Equity and Related Shareholder Matters....................... 17
Item 6 Selected Financial Data...................................... 18
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of Operations............. 20
Item 7(a) Quantitative and Qualitative Disclosures
About Market Risk............................................ 25
Item 8 Financial Statements and Supplementary Data.................. 25
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 25
PART III.................................................................. 26
Item 10 Directors and Executive Officers of
the Registrant............................................... 26
Item 11 Executive Compensation....................................... 26
Item 12 Security Ownership of Certain Beneficial
Owners and Management........................................ 26
Item 13 Certain Relationships and Related Transactions............... 26
PART IV................................................................... 27
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................................... 27
SIGNATURES................................................................ 30
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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. In 1998, SMC relocated its
headquarters to Bend, Oregon from Harrisburg, Oregon and now has six operating
subsidiaries. The Company's executive offices are located at 20545 Murphy Road,
Bend, Oregon, 97701, and its telephone number is (541) 389-1144. 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), and Harney
County Operations, Inc. (HCO). Safari and Magnum are located in Harrisburg,
Oregon; Beaver and ED&A are located in Bend, Oregon; and CTI and HCO are located
in Hines, Oregon.
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 SMC'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 SMC expanded its product offerings to both
higher and lower price points, to include coaches ranging in length from 24 to
45 feet, and with retail prices ranging from $70,000 to $699,000.
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. In 1997, a new chassis was developed for the Beaver Marquis.
Previously, the Marquis was constructed on a purchased 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. Magnum now produces the new chassis for all of the Company's
models except the Trek and Class C models, resulting in significant overall
costs savings to the Company.
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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. In
1999, Beaver introduced the Amethyst Marquis, a 42 foot tag axle coach that
retails for over $400,000. This expansion of product offerings has enabled
Beaver to expand distribution of its products.
In 1999, the Solitaire, a bus conversion product, was also introduced. Its
features are similar to those found in luxury buses and it carries a starting
retail price of $672,000.
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 acquisition of a facility in the Midwest. 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 $66,000 to $85,000. In 1998 the Company
introduced the Desperado, another Class C model, as the Company continues to
expand in the Class C market. Although the Company's primary market focus
remains the high-line luxury motor coaches on which it built its foundation, the
Company plans to continue to develop this segment of its business.
Also, at the HCO facility, the Renegade, a new Class A motor coach, was
introduced in 1998. With retail prices starting at $137,000, the Renegade was
targeted toward the entry-level of the Class A market -- buyers that are
value-oriented but still demanding features and quality. Products in this
segment of the market have become very popular. In 1999, the Company upgraded
the Renegade and introduced the Riata as the entry level product at HCO. The
Riata retails in the $129,000 to $137,000 range. The production facility is
located in Hines, Oregon and has ample production capacity to meet expected
demand for both the Renegade and Riata as well as the Class C production.
At the Beaver facility, the newly designed Contessa Class A model was introduced
in December 1997. 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. In 1999, the
company introduced the Amethyst Marquis as the top level Class A motorhome as
well as the ultra luxurious Solitaire designed to compete in the bus conversion
market.
At the Safari facility, a new Class A model, the Zanzibar, was introduced in
June 1998. Additionally, the Cheetah was introduced in late 1999 as an entry
level diesel motorhome similar in concept to the Riata, but designed with the
distinction of a Safari brand product.
In 1998, 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 centers located in
Harrisburg and Bend, Oregon.
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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 $1.2 million 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 remained steady 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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1995 1996 1997 1998 1999
(In thousands, except percentage data)
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UNIT SHIPMENTS FROM MANUFACTURERS TO DEALERS:
All recreational vehicles 475.2 466.8 438.8 441.3 473.8
All motor coaches 52.8 55.3 55.0 63.5 71.6
Class A motor coaches 33.0 36.5 37.6 42.9 49.4
UNIT RETAIL SALES AND MARKET SHARE DATA:
High-line motor coaches 3.9 4.2 4.4 4.1 4.5
SMC percentage of high-line market:* 24.5% 29.1% 27.6% 25.3% 22.6%
==== ==== ==== ==== ====
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* Includes sales for both Safari and Beaver motor coaches (excluding Trek)
for all years.
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
virtually 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 at greater lengths 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 and the Class C units 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
$86,000 to $107,000, and it is
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therefore excluded from market data compiled for high-line products. The
Desperado is a Class C motor coach with retail prices ranging from $61,000 to
$80,000. The Safari Class C price ranges from $66,000 to $85,000.
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. Others are
merging into larger conglomerates, Beaver Coaches was acquired by SMC in 1994,
Holiday Rambler was purchased by Monaco Coach in early 1996, and Country Coach
was acquired by National RV Holdings in late 1996.
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 between 45 and 64 years old form the principal market
for luxury RVs. As the "baby-boom" generation ages, this demographic group is
expected to increase to 27% of the U.S. population by the year 2010. 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.
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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. All
of the Company's Class A 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. The
Company believes that recent price increases in diesel fuel in late 1999 and
into 2000 have not had an impact on the highline segment of the industry. 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 three 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.) The Beaver, Safari, and Harney products are
differentiated to help increase total penetration of the high-line market. The
Beaver product is marketed as an upscale luxury RV. Its fiberglass wall
construction, air suspension, and "classic" RV styling places the Beaver models
near the top of high-line coaches. The Safari product is designed for a midrange
luxury customer. Its aluminum exterior is 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. The Harney product is designed
to attract entry level and first time buyers in the Class A luxury market. While
it incorporates several luxury features into its design, the use of more
economical materials and assembly methods allow a more practical price.
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, 94, and 104 as
of December 31, 1997, 1998 and 1999 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 at 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 through its in-house
"university" programs. The 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 its media production in-house to
control costs and quality. 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 the Safari International and the Beaver Ambassador Club, both of
which are active 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
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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 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 a "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 under certain circumstances, but
the Company generally will not do so unless the dealer owes 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. 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. In 1997, 1998, and 1999, the Company repurchased a total of 8, 8,
and 3 motor homes respectively under the requirements of the repurchase
obligations. No significant losses were incurred upon the subsequent resale of
the motor homes.
In 1999, one dealer accounted for 12% of net sales. This same dealer accounted
for 14% of net sales in 1998, and for 12% of net sales in 1997. For 1997, sales
to one other motor coach dealer accounted for approximately 10% of net sales.
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PRODUCT INFORMATION BY SUBSIDIARY
SOLITAIRE
The Solitaire was introduced in the third quarter of 1999. It is built on Magnum
monocoque chassis and has a tag axle design. The coach measures forty five
feet in length and is by far the most luxurious product produced by SMC. With a
retail price ranging from $672,000 to $699,000, it is designed to compete with
luxury bus conversions. The amenities of the Solitaire are similar to those
found in luxury buses retailing in excess of $1 million. This product is a
limited production model and will be manufactured at the Beaver facility.
BEAVER
MARQUIS
The Marquis is positioned at the top of the Beaver product line. With retail
prices of over $410,000, 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 was 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 prestige product. Previously built on a chassis supplied
by an outside supplier, in 1997 the Company began building the Marquis on a
chassis developed by Magnum at an overall cost savings for the Company. In 1999,
the Company introduced the Amethyst Marquis which is a forty two foot, tag axle
model carrying the most features and highest price of any Marquis.
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 $229,000 to $313,000, depending upon options
which include the upgraded Thunder option which features a powerful
425-horsepower engine and a heavy-duty transmission. Since the Marquis upgrade
in 1997, the Patriot has successfully filled the niche of the original Marquis
product.
CONTESSA
In 1997, the Company introduced the completely redesigned 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 from $204,000
to $244,000, depending upon options.
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MONTEREY
The Monterey was the first all-new Beaver product since the acquisition of
Beaver in 1994. Retailing from $172,000 to $211,000, depending upon options, the
Monterey provides Beaver with a product priced for broader appeal. 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, Magnum Intellidrive computerized monitoring
display, and Magnum Air Chassis all as standard equipment. The coach is driven
by a 330hp Caterpillar engine and features an Allison MD3030 transmission with
six forward speeds and two overdrives. The Continental retails from $241,000 to
$308,000, 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 a core Safari
product since its introduction in 1988. The Serengeti retails from $204,000 to
$257,000, 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 $161,000 to
$204,000, depending upon options. The product provides many of the features of
the Serengeti and Ivory at a lower cost to the customer.
ZANZIBAR
The Zanzibar was introduced in 1998. The standard equipment offers an array of
features found on higher priced models, but at an entry level price. It is
constructed on the Magnum `R' chassis. The Zanzibar model retails from $152,000
to $174,000, depending on the options. This model has quickly become one of
Safari's best sellers.
CHEETAH
In late 1999, this new Class A diesel pusher model was introduced to compete as
an entry level product retailing in the $130,000 to $135,000 range. Market
analysis indicates that a strong demand exists for an entry level diesel pusher
as more consumers enter the RV market and those already owning gas RVs seek the
enhanced performance of a diesel pusher product. This product is built on BF
Goodrich's Torsilastic suspension system that is otherwise available on bus
conversions in the $1 million retail price range.
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TREK
The Trek is constructed on a Workhorse chassis powered by a gasoline engine. As
the lowest priced SMC Class A motor coach, it is intended to acquaint new
customers with SMC's products and attract them to the RV lifestyle. Equipped
with SMC's patented Electro-Majic bed, the Trek occupies a niche in the
otherwise competitive gas coach market. The Trek retails from $86,000 to
$107,000, depending upon options.
HARNEY COUNTY OPERATIONS (DBA HARNEY COACH WORKS)
SAFARI CLASS C AND DESPERADO
The Safari Class C and the Desperado are both constructed on a gasoline powered
Ford or Chevrolet van chassis. The first sales of the Safari Class C were made
in 1997 and initial sales of the Desperado were in 1998. These units retail from
$61,000 to $85,000, depending upon options, and occupy the high-end of the Class
C motor home market.
RENEGADE CLASS A
The Renegade is constructed on Magnum `R' series chassis with a Cat
330hp engine. Shipments began in January 1998. In 1999, the Renegade was
upgraded and now retails from $137,000 to $159,000. The Renegade is still
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.
RIATA
In late 1999, this new Class A diesel pusher model was introduced to compete as
an entry level product retailing in the $129,000 to $137,000 range. Similar to
the Cheetah, the Riata's design is distinct to the products made at the Harney
works. Market analysis indicates that a strong demand exists for an entry level
diesel pusher as more consumers enter the RV market and those already owning gas
RVs seek the enhanced performance of a diesel pusher product. The Riata's 300hp
engine and six speed transmission are significant features not available in
competitive coaches.
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, 1999 was $24.4 million, compared to backlog of
$12.8 million at December 31, 1998. 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 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.
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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. Repairs are made
at a Company owned 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 opened a 24-bay service center in Harrisburg in November 1995 to
better serve its customers. In late 1998, the Company purchased a service center
in Tampa, Florida and moved its service activities from a smaller leased
facility in that area. The Company also operates a service center adjacent to
its Beaver manufacturing facility in Bend, Oregon.
MANUFACTURING
The Company uses current 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. Recently, the Company adopted a "Kaizen"
or continuous improvement approach at its facilities that emphasizes safety,
quality, and productivity.
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 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
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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 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, other than
transmissions, 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.
Presently the company is not experiencing any interruptions or supply
limitations from its major suppliers.
Upon completion of the manufacturing process, each coach undergoes a thorough
inspection and test drive. Any 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., 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 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 AND 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.
12
<PAGE>
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 suspension 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.
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.
13
<PAGE>
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 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, 1999 the Company had 1,520 full-time employees. None of the
Company's employees are 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 Safari and Magnum manufacturing facilities are located in
Harrisburg, Oregon on property owned by the Company. The 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 and corporate headquarters are located in Bend,
Oregon and consist of buildings totaling 124,700 square feet on 11.3 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 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.
The Company also owns a 39,000 square foot facility on 5 acres in Tampa, Florida
where it operates a service center and leases about 12,000 feet of this facility
to an RV dealer. The Company also leases a facility in Bend, Oregon as a service
center. Its service center in Harrisburg, Oregon is located on the Magnum
Manufacturing property.
The Company believes its existing office and service facilities are sufficient
to meet company needs.
14
<PAGE>
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. In 1997, 1998, and 1999, the costs of all claims
including legal fees were $1.4 million, $2.9 million, and $2.8 million
respectively. The Company establishes a reserve for a case when a judgement has
been entered and the company appeals that judgement. Due to the inconsistencies
of state laws and judicial interpretations of these laws, the Company can not
anticipate which cases where it will prevail. As such, the Company often seeks
to resolve these matters before litigation takes place.
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 15, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C>
Mathew M. Perlot 63 Chief Executive Officer and Chairman of the Board
Michael R. Jacque 42 President and Chief Operating Officer
William L. Rich 45 Vice President of Finance and
Chief Financial Officer
</TABLE>
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. 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.
MICHAEL R. JACQUE joined the Company as President in June 1999. Prior to joining
the Company, Mr. Jacque served, concurrently, as the President and a major
shareholder of
15
<PAGE>
Marathon Coach, Incorporated, the largest bus converter in the U.S., from
1988-1993 and as General Manager at Guaranty RV, one of the largest single point
RV dealers in the United States between 1980 and 1995. Mr. Jacque graduated
summa cum laude with a BA in Psychology from the University of Oregon. He will
complete the requirements for a law degree from the University of Oregon Law
school and will receive his J.D. in May 2000.
WILLIAM L. RICH joined the Company as Vice President of Finance and Chief
Financial Officer in November 1998. Prior to joining the Company, Mr. Rich
served as Vice President of Finance and Administration at Marus Dental
International, a subsidiary of the Henry Schein Corporation. Prior to that, Mr.
Rich held senior financial positions at manufacturing companies in the Midwest.
Mr. Rich obtained his B.S. degree in Business from Miami University (Ohio) and
MBA from the University of North Texas. Mr. Rich is a CPA and CMA.
16
<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-18.
At March 15, 2000 there were 87 shareholders of record of the Company's Common
Stock and 5,780,599 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 1999 or 2000. The Company intends to
retain future earnings for use in its business and therefore does not anticipate
paying cash dividends in the foreseeable future.
17
<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, 1999 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
----------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(In thousands, except per share and other operating data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales $ 148,189 $ 200,835 $ 203,019 $ 217,485 $ 215,540
Cost of sales 128,846 174,457 175,809 195,405 194,127
--------- --------- --------- --------- ---------
Gross profit 19,343 26,378 27,210 22,080 21,413
Selling, general and administrative
expenses 11,702 16,668 17,968 17,610 18,099
Restructuring expense -- 2,392 -- -- --
Litigation and settlement costs -- 933 1,385 2,849 2,808
--------- --------- --------- --------- ---------
Income from operations 7,641 6,385 7,857 1,621 506
Other expense 774 418 813 940 155
--------- --------- --------- --------- ---------
Income before provision for
income taxes 6,867 5,967 7,044 681 351
Provision for income taxes(1) 1,926 2,384 2,798 272 110
--------- --------- --------- --------- ---------
Net income $ 4,941 $ 3,583 $ 4,246 $ 409 $ 241
========= ========= ========= ========= =========
Net income per share - basic $ .76 $ .55 $ .65 $ .06 $ .04
========= ========= ========= ========= =========
Net income per share - diluted $ .74 $ .54 $ .65 $ .06 $ .04
========= ========= ========= ========= =========
Weighted average shares outstanding
basic 6,469 6,563 6,506 6,429 5,825
========= ========= ========= ========= =========
Weighted average shares outstanding
diluted 6,647 6,661 6,507 6,429 5,825
========= ========= ========= ========= =========
PRO FORMA STATEMENT OF
INCOME DATA:
Income before provision for
income taxes $ 6,867 N/A N/A N/A N/A
Pro forma provision for income
taxes (1) 2,612 N/A N/A N/A N/A
---------
Pro forma net income (1) $ 4,255 N/A N/A N/A N/A
=========
Pro forma net income per
share - basic (1)(2) $ .66 N/A N/A N/A N/A
=========
Pro forma net income per
share - diluted (1)(2) $ .64 N/A N/A N/A N/A
=========
Pro forma common shares - basic (2) 6,469 N/A N/A N/A N/A
=========
Pro forma common shares -
diluted (2) 6,647 N/A N/A N/A N/A
=========
OTHER OPERATING DATA:
Coaches sold 1,405 1,859 1,765 1,706 1,584
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $26,109 $39,740 $39,081 $45,453 $59,704
Property and equipment 12,061 19,584 18,585 20,551 13,978
Total assets 41,198 61,920 59,842 68,020 75,669
Current liabilities 18,254 34,225 29,335 36,492 44,127
Long-term debt 4,676 6,626 5,376 7,353 8,646
Shareholders' equity 17,411 20,994 24,293 23,209 22,879
</TABLE>
- ----------------
(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.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This analysis of the Company's financial condition and operating results should
be viewed in conjunction with the accompanying financial statements, including
the notes thereof.
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, --------------------
1997 1998
1997 1998 1999 TO 1998 TO 1999
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Sales 100.0 % 100.0 % 100.0 % 7.1 % (0.9)%
Cost of sales 86.6 89.8 90.1 11.1 (0.7)
----- ----- -----
Gross profit 13.4 10.2 9.9 (18.9) (3.0)
Selling, general and
administrative expenses 8.9 8.1 8.4 (2.0) 2.8
Litigation and
settlement costs 0.6 1.3 1.3 105.7 (1.4)
----- ----- -----
Income from operations 3.9 0.8 0.2 (79.4) (68.8)
Interest expense 0.5 0.4 0.7 (12.9) 89.2
Other (income) expense (0.1) 0.1 (0.6) 205.8 (1,189.0)
----- ----- -----
Pretax income 3.5 0.3 0.1 (90.3) (48.5)
Provision for income taxes 1.4 0.1 0.0 (90.3) (59.6)
----- ----- -----
Net income 2.1 0.2 0.1 (90.4) (41.1)
===== ===== =====
</TABLE>
20
<PAGE>
1999 COMPARED TO 1998
Consolidated sales decreased by $1.9 million or 0.9% to $215.5 million in 1999
from $217.5 million for 1998. Safari sales decreased from 1998 levels by $3.0
million or 3.1% to $95.8 million in 1999. Beaver sales decreased from 1998
levels by $2.1 million or 2.4% to $87.9 million in 1999. Sales at the HCO
division increased by $3.8 million or 16.1% to $27.6 million for 1999 from $23.8
million for 1998.
Consolidated unit coach sales decreased by 122 units or 7.2% to 1,584 units in
1999 from 1,706 units in 1998. Safari unit coach sales decreased by 100 units or
11.1% to 801 units in 1999 from 901 units in 1998. Beaver unit coach sales
decreased by 38 units or 7.6% to 461 units in 1999 from 499 in 1998. HCO unit
sales increased by 16 or 5.2% to 322 units in 1999 from 306 units in 1998.
Even though unit sales decreased by approximately 7% in 1999 from 1998, the
average revenue per coach increased by 6.7%. The impact of product mix was not
significant. The increase in revenue per coach is a function of consumer
preferences for more optional features on the coaches.
Consolidated gross profit margins decreased $667,000 or 3.0% and decreased as a
percentage of sales to 9.9% from 10.2% in 1998. The impact of lower sales
volumes account for approximately $200,000 of the decline in gross profit. The
remainder of the variance was a function of a $3.8 million improvement in
material costs that was offset by increases of $1.3 million in direct labor
million and $2.4 million in factory overheads. These increases were incurred
primarily in the first half of the year. Warranty costs were also higher by
approximately $500,000.
Selling, general, and administrative expenses increased by $489,000 or 2.8% to
$18.1 million in 1999 from $17.6 million in 1998. As a percentage of sales,
selling, general and administrative expenses increased to 8.4% from 8.1% of
sales for 1999 and 1998, respectively. Selling costs for the year increased by
$1.3 million as a result of new product introductions of the Solitaire, Marquis
Amethyst, Cheetah, and Riata models as well as increased promotional costs.
Promotional costs were higher due to a year end special promotion and increasing
our dealer base in the second half of the year. Administrative costs decline by
$800,000 due to reductions in accounting and administrative staff.
Interest expense increased 89.2% to $1.5 million in 1999 from $813,000 in 1998
as the result of a higher utilization of the operating credit line and the
financing of the Florida service center property acquired at the beginning of
the year.
The Company's effective tax rate was 31.3%, resulting in an income tax provision
of $110,000 compared to an effective rate of 40.0% and an income tax provision
of $272,000 for 1998. The primary impact creating the lower rates in 1999 was a
state energy credit received from its HCO and CTI operations. The 1999 provision
also includes some unanticipated energy credits received in 1999 that relate to
a prior period.
21
<PAGE>
Net income after tax decreased $168,000 or 41.1% to $241,000 from 1998's net
income after tax of $409,000. This is a result from the factors affecting gross
margin, as discussed earlier.
1998 COMPARED TO 1997
Consolidated sales increased by $14.5 million or 7.1% to $217.5 million in 1998
from $203.0 million for 1997. Safari sales decreased from 1997 levels by $5.3
million or 5.0% to $98.8 million in 1998. Beaver sales increased from 1997
levels by $5.9 million or 7.0% to $90.1 million in 1998. Sales at the HCO
division increased by $15.8 million or 199.6% to $23.8 million for 1998 from
$7.9 million for 1997.
Excluding coach sales from discontinued operations, consolidated unit coach
sales increased by 4 units or .2% to 1,706 units in 1998 from 1,702 units in
1997. Safari unit coach sales decreased by 124 units or 12.1% to 901 units in
1998 from 1,025 units in 1997. Beaver unit coach sales decreased by 20 units or
3.9% to 499 units in 1998 from 519 in 1997. HCO unit sales increased by 148 or
93.7% to 306 units in 1998 from 158 units in 1997.
Although unit sales were flat in 1998 compared to 1997, sales dollars increased
due to a shift in mix towards the Company's higher priced coaches. A 2% price
increase for all models was implemented during the fourth quarter, however, its
impact on annual revenues was not significant. The sales revenue increase was
attributable to the decrease in sale units of the lower priced Trek model that
were offset by increased units of the relatively higher priced Renegade. The
Renegade began shipping in 1998.
Consolidated gross profit margins decreased $5.1 million or 18.9% and decreased
as a percentage of sales to 10.2% from 13.4% in 1997. A number of factors led to
this decrease. The new Class A Renegade model sales contributed to sales growth.
However, the profit margins of this coach were low, due to the higher costs of
introduction and production startup. Also, the gross margin was impacted by
production difficulties of the Safari 1999 model changeover during the second
and third quarters of 1998.
Selling, general, and administrative expenses decreased by $358,000 or 2.0% to
$17.6 million in 1998 from $18.0 million in 1997. As a percentage of sales,
selling, general and administrative expenses decreased from 8.9% to 8.1% of
sales for 1997 and 1998, respectively. During 1998, the Company recognized and
reserved for costs associated with product claims. During the third quarter of
1998, the Company increased its reserves for these costs by approximately $1.1
million. The increase from 1997 levels represented reserves established on
certain claims appealed by the Company.
Interest expense decreased 12.9% to $813,000 in 1998 from $933,000 in 1997. The
operating revolving facility had no utilization as of December 31, 1998.
The Company's effective tax rate was 40.0%, resulting in an income tax provision
of $272,000 compared to an effective rate of 39.7% and an income tax provision
of $2.8 million for 1997.
22
<PAGE>
Net income after tax decreased $3.8 million or 90.4% to $409,000 from 1997's net
income after tax of $4.2 million. This resulted from the factors affecting gross
margin, as discussed earlier.
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 1999, net cash used in operating activities was $16.9 million. This
was primarily the result of increased inventories (primarily finished goods) at
the year-end. Most of this inventory has been subsequently sold. Accounts
receivable were over $2.0 million higher than previous year end levels
in part because of very heavy sales in the last two weeks of December.
The Company generated $6.0 million in cash from investing activities as the
result of proceeds from the sale of assets including an airplane and certain
real estate. As part of the acquisition of the Florida service center property,
SMC received $1.1 million from the prior tenant for their release from a
long-term lease obligation.
The Company maintains an operating line of credit of $10 million and a real
estate line of credit of $10.1 million, plus an additional $4.0 million
equipment financing line of credit.
23
<PAGE>
At December 31, 1999, the Company utilized $9.5 million of the operating line.
There was no utilization of the equipment line at December 31, 1999. There was
approximately $7.7 million utilized of the real estate line of credit at
December 31, 1999. Amounts outstanding under these lines of credit bear interest
at a LIBOR based rate (8.188% at December 31, 1999) 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 and other covenants unless the Company receives consent from
the lender. The covenants 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, (3) acquisition of the Company's own
stock, and (4) declaring or paying dividends in cash, stock, or other property.
The Company was in compliance with all covenants and agreements at December 31,
1999. 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, 1999, the
Company estimates its total contingent liability under repurchase obligations
to be approximately $104.0 million. Included in this amount is approximately
$3.0 million that is guaranteed by SMC in the event one particular dealer
fails to repay the finance company from sales proceeds. 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 9 of Notes to Consolidated Financial Statements.
24
<PAGE>
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. To be in "Year 2000 compliance" a computer program
must be written using four digits to define years. As a result, computer systems
and/or software used by many companies may have required upgrading to comply
with such "Year 2000" (Y2K) requirements.
The Company completed its evaluation of both information technology systems
("IT") and non-IT systems to determine Year 2000 compliance. The Company
experienced no significant Y2K problems when the new year started.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
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-18 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
<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 2000
annual meeting of shareholders (the "2000 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 2000 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 2000 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 2000
Proxy Statement and is incorporated herein by reference.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(1) FINANCIAL STATEMENTS PAGE IN THIS REPORT
-------------------
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheet at December 31, 1998
and 1999 F-2
Consolidated Statement of Income for the Years
Ended December 31, 1997, 1998 and 1999 F-3
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended December 31, 1997, 1998
and 1999 F-4
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1997, 1998 and 1999 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES - NONE
(a)(3) EXHIBITS
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
27
<PAGE>
10.3 Revised form of Representatives' Warrant Agreement, including
form of warrant; incorporated by reference to Exhibit 10.5 to the
1995 S-1
10.4 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
10.5 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
+10.6 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
10.7 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 PricewaterhouseCoopers 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.
28
<PAGE>
(b) REPORTS ON FORM 8-K.
No report on Form 8-K was filed by the Company in the last quarter of 1999.
29
<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 29, 2000 SMC CORPORATION
By: /s/ WILLIAM L. RICH
----------------------------
William L. Rich
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 29, 2000.
SIGNATURE TITLE
MATHEW M. PERLOT Chief Executive Officer
- --------------------------- and Chairman of the Board
Mathew M. Perlot (Principal Executive Officer)
MICHAEL R. JACQUE President and Director
- ---------------------------
Michael R. Jacque
WILLIAM L. RICH Chief Financial Officer
- --------------------------- (Principal Financial and Accounting Officer)
William L. Rich
CURTIS W. LAWLER Director
- ---------------------------
Curtis W. Lawler
CONNIE M. PERLOT Director
- ---------------------------
Connie M. Perlot
LAWRENCE S. BLACK Director
- ---------------------------
Lawrence S. Black
JIM L. TRAUGHBER Director
- ---------------------------
Jim L. Traughber
30
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
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 Revised form of Representatives' Warrant Agreement, including form
of warrant; incorporated by reference to Exhibit 10.5 to the 1995 S-1
10.4 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
10.5 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
+10.6 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
10.7 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 PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
31
<PAGE>
- ----------------
* 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.
32
<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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
February 9, 2000
F-1
<PAGE>
SMC CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,310 $ 26
Accounts receivable, net (Note 1) 12,857 15,056
Inventories (Notes 1 and 2) 26,715 41,703
Prepaid expenses and other 530 292
Prepaid taxes 897 --
Deferred tax asset (Note 6) 3,144 2,627
------- -------
Total current assets 45,453 59,704
Property, plant and equipment, net (Notes 1 and 3) 20,551 13,978
Intangible assets, net 1,942 1,756
Deferred tax asset (Note 6) -- 43
Other assets 74 188
------- -------
Total assets $68,020 $75,669
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 4) $ -- $ 9,464
Current portion of long-term debt (Note 5) 953 364
Accounts payable 24,789 22,969
Income taxes payable (Note 6) -- 700
Product warranty liabilities 3,766 3,481
Current portion of capital lease obligation (Note 8) 19 21
Accrued liabilities 6,965 7,128
------- -------
Total current liabilities 36,492 44,127
Long-term debt, net of current portion (Note 5) 7,353 8,646
Capital lease obligation, less current portion (Note 8) 38 17
Deferred income taxes (Note 6) 928 --
------- -------
Total liabilities 44,811 52,790
------- -------
Commitments and contingencies (Notes 7 and 9)
Shareholders' equity:
Preferred stock, 5,000 shares authorized, none issued or
outstanding (Note 11) -- --
Common stock, 30,000 shares authorized, 5,890 and 5,780 shares
issued and outstanding, respectively (Note 10) 9,604 9,033
Additional paid-in capital (Note 10) 1,472 1,472
Retained earnings (Note 10) 12,133 12,374
------- -------
Total shareholders' equity 23,209 22,879
------- -------
Total liabilities and shareholders' equity $68,020 $75,669
======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE>
SMC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 203,019 $ 217,485 $ 215,540
Cost of sales 175,809 195,405 194,127
--------- --------- ---------
Gross profit 27,210 22,080 21,413
Selling, general and administrative expenses 17,968 17,610 18,099
Litigation and settlement costs 1,385 2,849 2,808
--------- --------- ---------
Income from operations 7,857 1,621 506
Interest expense 933 813 1,538
Other (income) expense, net (120) 127 (1,383)
--------- --------- ---------
Income before tax provision 7,044 681 351
Provision for income taxes (Note 6) 2,798 272 110
--------- --------- ---------
Net income $ 4,246 $ 409 $ 241
========= ========= =========
Net income per share - basic $ .65 $ .06 $ .04
========= ========= =========
Net income per share - diluted $ .65 $ .06 $ .04
========= ========= =========
Weighted average number of shares - basic 6,506 6,429 5,825
========= ========= =========
Weighted average number of shares - diluted 6,507 6,429 5,825
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
SMC CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 6,563 10,914 1,556 8,524 20,994
Net income -- -- -- 4,246 4,246
Stock repurchase (Note 10) (220) (104) (68) (775) (947)
-------- -------- -------- -------- --------
Balance, December 31, 1997 6,343 $ 10,810 $ 1,488 $ 11,995 $ 24,293
======== ======== ======== ======== ========
Net income -- -- -- 409 409
Common Stock issued upon
exercise of options 252 1,954 -- -- 1,954
Stock repurchase (Note 10) (705) (3,160) (16) (271) (3,447)
-------- -------- -------- -------- --------
Balance, December 31, 1998 5,890 $ 9,604 $ 1,472 $ 12,133 $ 23,209
======== ======== ======== ======== ========
Net Income -- -- -- 241 241
Stock repurchase (Note 10) (110) (571) -- -- (571)
-------- -------- -------- -------- --------
Balance, December 31, 1999 5,780 $ 9,033 $ 1,472 $ 12,374 $ 22,879
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE>
SMC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,246 $ 409 $ 241
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,092 2,133 2,081
Deferred taxes 648 (163) (454)
(Gain) loss on asset dispositions (44) 2 (1,450)
Litigation and settlement costs -- 1,070 (191)
Changes in certain assets and liabilities
Accounts receivable 462 (460) (2,199)
Inventories 595 (3,677) (14,988)
Prepaid expenses and other (135) (718) 1,135
Other assets 52 (27) (114)
Accounts payable 91 7,447 (1,820)
Income taxes payable (960) (405) 700
Accrued liabilities and other obligations 451 1,167 69
-------- -------- --------
Net cash provided by (used in) operating activities 7,498 6,778 (16,990)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (2,468) (3,952) (734)
Proceeds from disposal of equipment 275 38 5,758
Lease abatement -- -- 1,104
Other (195) -- --
-------- -------- --------
Net cash provided by (used in) investing activities (2,388) (3,914) 6,128
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable (4,103) (1,695) 9,464
Proceeds from long-term debt 1,924 4,522 3,216
Repayments of long-term debt (3,545) (2,973) (2,512)
Principal payments on capital lease obligation (16) (18) (19)
Proceeds from sale-leaseback 1,364 -- --
Repurchase of capital stock (Note 10) (947) (3,447) (571)
Proceeds from issuance of common stock -- 1,954 --
-------- -------- --------
Net cash provided by (used in) financing activities (5,323) (1,657) 9,578
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (213) 1,207 (1,284)
Cash and cash equivalents, beginning of year 316 103 1,310
-------- -------- --------
Cash and cash equivalents, end of year $ 103 $ 1,310 $ 26
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized of $22,000
in 1997, respectively. There were no amounts
capitalized in 1998 and 1999 $ 982 $ 687 $ 1,504
Income taxes $ 3,128 $ 1,725 $ (1,033)
</TABLE>
The accompanying notes are an integral part of this financial statement
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, an Oregon corporation, and its wholly owned subsidiaries
(collectively, the "Company") design, manufacture, and market Class A and
Class C motor coaches sold primarily to dealers which are independent of
the Company 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 and cash equivalents consist 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.
ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of
$66,000 and $55,000 at December 31, 1998 and 1999, 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
$44,000, $2,000 and $1,450,000 were recorded during the years ended
December 31, 1997, 1998 and 1999, respectively. 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
consists primarily of product trade names, which are amortized using the
straight-line method over 15 years. Amortization expense for the years
ended December 31, 1997, 1998 and 1999 was $220,000, $186,000 and $186,000
respectively. Periodically 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.
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, 1998 and
1999 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 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 generally granted. Accordingly, no provision for
sales allowances or returns is recorded.
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)
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); (n/a means sales did not meet
levels requiring disclosure):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Dealer 1 $20,843 10% $ n/a n/a
Dealer 2 $24,368 12% $29,546 14% $26,242 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
9) 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
The Company accounts for income taxes under the liability method, 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.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. Comprehensive income is equal to net income for all
periods presented.
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.
F-8
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SEGMENT DISCLOSURE
The Company complies with segment reporting as set forth in Statement of
Financial Accounting Standards No.131,"Disclosures about Segments of an
Enterprise and Related Information," (SFAS No. 131) effective December
1998. Under this statement, the Company employs the aggregation criteria
of this standard.
EARNINGS PER SHARE
The Company has adopted FASB Statement 128, "Earnings Per Share". 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. Prior periods have
been restated to conform to FASB 128.
2. INVENTORIES
Inventories by major classification are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------- -------
<S> <C> <C>
Raw materials $14,982 $15,506
Work-in-progress 8,527 10,080
Finished goods 3,206 16,117
------- -------
Total $26,715 $41,703
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
-------- --------
<S> <C> <C>
Land and improvements $ 3,094 $ 3,624
Buildings and improvements 10,449 10,597
Machinery and equipment 11,042 7,787
Construction in progress 3,150 522
-------- --------
27,735 22,530
Less accumulated depreciation (7,184) (8,552)
-------- --------
Property, plant and equipment, net $ 20,551 $ 13,978
======== ========
</TABLE>
F-9
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. NOTES PAYABLE
The Company has a $10.0 million revolving line of credit for working
capital requirements. The available borrowings under the line of credit
are limited to 80% of eligible accounts receivable plus 90% of eligible
finished goods inventory and 50% of eligible raw and work-in progress
inventory. As of December 31, 1999, the available amount was $536,000.
Outstanding borrowings under the line of credit are due on demand. The
line of credit is secured by accounts receivable, inventory (excluding
chassis inventory purchased from third parties), and equipment. Further,
the line of credit is cross-collateralized among the companies.
The Company has entered into a credit agreement which enable borrowings of
up to $4.0 million for equipment purchases, or operations, as needed. No
amounts were borrowed under this credit agreement at December 31, 1999.
The terms of the respective credit agreements require compliance with
certain financial covenants, including working capital requirements. As of
December 31, 1999, 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
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Bank loan secured by equipment with monthly payments of
$35,000 plus interest at LIBOR plus 1.5%, or 6.875% at
December 31, 1998. This loan was paid in full July 23, 1999. $ 2,050 $ --
Bank loan secured by equipment, with monthly payments of
$35,000 including interest at 7.625%, with the balance due
December 31, 2002. 1,454 1,131
Bank loan secured by a first trust deed on the Beaver
manufacturing facility, with monthly payments of $13,000
plus interest at the bank's prime rate plus .75%, or 8.5% at
December 31, 1998. This loan was paid in full April 29, 1999. 138 --
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. 142 142
Real estate line of credit, with a maximum amount of $10.1
million, based on a reducing revolving term, with only interest
payable until no principle is available. Interest is LIBOR
based at 8.188% as of December 31, 1999. This line is amortized
on a 10 year term. 4,522 7,737
------- -------
8,306 9,010
Less portion due within one year (953) (364)
------- -------
Long-term debt less current portion $ 7,353 $ 8,646
======= =======
</TABLE>
The aggregate maturities of long-term debt for the next five years and
thereafter as of December 31, 1999 are $364,000, $393,000, $422,000,
$18,000, $19,000 and $7,794,000, respectively.
Certain of the borrowings are subject to restrictive covenants, including
working capital requirements, with which the Company is in compliance at
December 31, 1999. Other terms of the borrowings require the lending
bank's written consent prior to the issuance of any dividends.
F-11
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1997,
1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 1,961 $ 390 $ 582
State 189 45 (18)
------- ------- -------
2,150 435 564
------- ------- -------
Deferred:
Federal 574 (144) (402)
State 74 (19) (52)
------- ------- -------
648 (163) (454)
------- ------- -------
$ 2,798 $ 272 $ 110
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following
components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------- -------
<S> <C> <C>
Current:
Vacation reserve $ 369 $ 345
Accrued workers' compensation claim liabilities 87 77
Warranty reserves 1,916 1,648
Inventory reserves 43 32
Other liabilities 718 504
Allowance for doubtful accounts 11 21
------- -------
$ 3,144 $ 2,627
======= =======
Noncurrent:
Tax depreciation in excess of book depreciation $ (950) $ 23
Other 22 20
------- -------
$ (928) $ 43
======= =======
</TABLE>
F-12
<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>
YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 3.7 4.0 3.0
Nondeductible expenses 1.1 5.0 8.9
Other, net 0.9 (3.0) (14.6)
---- ---- -----
39.7% 40.0% 31.3%
==== ==== =====
</TABLE>
The primary impact creating the lower rate in 1999 was a state energy
credit received from its HCO and CTI operations. The 1999 provision also
includes some unanticipated energy credits received in 1999 that relate to
a prior period.
7. RELATED PARTIES
In 1998, the Company began purchasing electronic parts from a supplier
company that is owned by a principal related to an officer. The total
amount of purchases for the year ended December 31, 1998 was $449,000.
For the year ended December 31, 1999, the Company purchased a total
amount of $946,000 from this supplier.
In 1998, as part of the Company's program to repurchase 800,000 shares of
stock, the Company repurchased 100,000 shares from an officer of the
Company for $4.2375 per share. In 1999, another 100,000 shares of stock
were repurchased from an officer for $5.25 per share as part of this
program. See Note 10 for further details.
8. LEASES
The Company is obligated under a capital lease for computer software that
expires in September of 2001. At December 31, 1998 and 1999, the gross
amount of equipment and related accumulated amortization recorded under
capital leases was $95,000 and $55,000, and $95,000 and $76,000,
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 $783,000, $944,000, and $1,080,000 for the years ended December
31, 1997, 1998, and 1999, respectively.
F-13
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: CAPITAL LEASE OPERATING LEASES
------------------------ ------------- ----------------
<S> <C> <C>
2000 $ 23,000 $ 1,301,000
2001 18,000 1,171,000
2002 -- 1,033,000
2003 -- 865,000
2004 -- 844,000
Thereafter -- 4,898,000
----------- -------------
Total minimum lease payments 41,000 $ 10,112,000
Less amount representing interest
(at 8.52%) 3,000
-----------
Minimum lease payments,
excluding interest 38,000
Current installments of obligation
under capital lease 21,000
-----------
Obligation under capital lease
excluding current installments $ 17,000
===========
</TABLE>
9. 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 $106.8
million and $104.0 million at December 31, 1998 and 1999, 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.
F-14
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMON STOCK MATTERS AND EARNINGS PER SHARE
In conjunction with the Company's initial public offering on January 20,
1995, 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. Subsequent to December 31, 1999, these warrants have expired.
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>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C>
SHARES SUBJECT TO OPTION:
Balance at January 1 883,000 937,785 928,500
Options granted 152,500 333,000 222,000
Options exercised - (252,285) -
Options terminated (97,715) (90,000) (327,000)
--------- --------- ---------
Balance at December 31 937,785 928,500 823,500
--------- --------- ---------
WEIGHTED AVERAGE OPTION
PRICE IN DOLLARS:
At January 1 $ 7.97 $ 7.84 $ 8.23
Options granted 7.76 9.05 4.77
Options exercised - 7.75 -
Options terminated 7.75 8.49 8.52
At December 31 7.84 8.23 7.18
SHARES AVAILABLE FOR
GRANT AT DECEMBER 31: 451,651 208,651 313,651
</TABLE>
The exercise prices of the 823,500 options granted as of December 31, 1999
range between $4.625 and $9.375 and have a weighted average remaining
contractual life of 7.5 years; 574,497 of the total options granted are
fully vested, and therefore may be exercised, as of December 31, 1999 at a
weighted average exercise price of $8.17.
F-15
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMON STOCK MATTERS AND EARNINGS PER SHARE (CONTINUED)
STOCK INCENTIVE PLAN (CONTINUED)
The Company applies ABP Opinion 25 and related Interpretations in
accounting for the stock incentive plan. Had compensation cost for the
stock incentive plan been determined based on 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 income per share would have been reduced to the pro forma
amounts indicated below:
PRO FORMA INFORMATION
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- ------ -------
<S> <C> <C> <C>
Net Income As reported $ 4,246 $ 409 $ 241
Pro Forma $ 3,882 $ 14 $ (130)
Income per share - basic As reported $ .65 $ .06 $ .04
Pro Forma $ .60 $ - $ (.02)
Income per share - diluted As reported $ .65 $ .06 $ .04
Pro Forma $ .60 $ - $ (.02)
</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 1997: expected dividend
yield: 0.0%, expected volatility: 71.49%, risk-free interest rate: 6.3%,
expected life: 10 years. For 1998 and 1999, the expected dividend yield
and expected life was the same as 1997. The expected volatility was 72.11%
and 71.23% for 1998 and 1999, respectively. The risk-free interest rate
used was 5.5% and 6.48% for 1998 and 1999, respectively. Results may not
be representative of future years because options are generally granted on
an annual basis and vest over time.
STOCK REPURCHASE
During 1997, 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 of $4.30, resulting in an overall
purchase price of $947,000. The shares have been returned and canceled.
During 1998, the Company repurchased 50,000 of its common shares from a
director of the Company. The shares were purchased subject to the terms of
Stock Purchase Agreement between the Company and the director. 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 $6.00, resulting in an overall purchase
price of $300,000. The shares have been returned and canceled.
F-16
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMON STOCK MATTERS AND EARNINGS PER SHARE (CONTINUED)
STOCK REPURCHASE (CONTINUED)
Pursuant to a board resolution, the Company authorized 800,000 shares of
stock to be repurchased by the Company for the year ended December 31,
1998. Under this program, 655,000 shares were repurchased at the average
price of $4.80, for an overall amount of $3,147,000. Continuing this
program in 1999. The Company repurchased 109,500 shares at the average
price of $5.22, for an overall amount of $571,000.
11. 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.
12. 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, 1997, 1998,
and 1999 aggregated were $245,000, $326,000, and $15,000 respectively.
The Company has 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 $2,000 was contributed by the Company and
its subsidiaries to the plan during the year ended December 31, 1997.
There were no contributions for 1998 and 1999. To date there have been no
amounts contributed by the Company or its subsidiaries to the profit
sharing element of the plan.
F-17
<PAGE>
SMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. 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, 1998:
Revenue 47,805 52,324 50,276 67,080
Gross profit 6,006 5,869 2,793 7,412
Net income (loss) 916 838 (2,482) 1,137
Net income (loss) per share - basic .14 .13 (.38) .18
Net income (loss) per share - diluted .14 .13 (.38) .18
YEAR ENDED DECEMBER 31, 1999:
Revenue 56,822 53,794 46,711 58,213
Gross profit 6,209 4,143 5,012 6,049
Net income (loss) 108 (149) 130 152
Net income (loss) per share - basic .02 (.03) .02 .03
Net income (loss) per share - diluted .02 (.03) .02 .03
</TABLE>
14. 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
daily closing prices of the stock for each quarter of 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
HIGH LOW HIGH LOW
------ ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter 9.750 6.875 6.750 4.250
Second quarter 10.875 6.750 5.375 4.250
Third quarter 7.875 5.563 5.750 3.563
Fourth quarter 6.000 4.000 4.500 3.750
</TABLE>
F-18
<PAGE>
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
<TABLE>
<CAPTION>
PLACE OF
SUBSIDIARY INCORPORATION
- ---------- -------------
<S> <C>
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
Safari FSC Ltd. Barbados
</TABLE>
33
<PAGE>
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 9, 2000 appearing on page F-1 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March 29, 2000
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 15,056
<ALLOWANCES> 0
<INVENTORY> 41,703
<CURRENT-ASSETS> 59,704
<PP&E> 22,530
<DEPRECIATION> 8,552
<TOTAL-ASSETS> 75,669
<CURRENT-LIABILITIES> 44,127
<BONDS> 0
0
0
<COMMON> 9,033
<OTHER-SE> 13,846
<TOTAL-LIABILITY-AND-EQUITY> 75,669
<SALES> 215,540
<TOTAL-REVENUES> 215,540
<CGS> 194,127
<TOTAL-COSTS> 194,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,538
<INCOME-PRETAX> 351
<INCOME-TAX> 110
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
