ITEM 1. BUSINESS
General
Cruise America, Inc. is the largest company in North America specializing in the rental and sale of Recreational Vehicles (RVs). The Company began sales and rental operations in Miami, Florida in 1972, with an initial strategy to locate rental centers in metropolitan gateway cities which are destinations for large numbers of domestic and international travelers. Since that time, the Company has established 85 additional rental and/or sales locations across the United States and Canada. At April 30, 1996, the Company operated a total of 16 Hub offices, 70 Satellite offices, and a rental fleet of 2,366 recreational vehicles across North America.
RV rentals provide the consumer with the benefits of use without the burdens of ownership, and make Recreational Vehicle vacations available to a broad range of consumers. RVs combine transportation, lodging, and cooking facilities at a cost which the Company believes provides an economical alternative to automobile travel and related hotel and restaurant expenses. Additionally, recent technological advances, including more aerodynamic design, lighter weight construction and fuel-efficient engines, have substantially increased the fuel-efficiency of RVs. The Company also rents and sells motorcycles and vans from selected locations.
Besides rentals, the Company sells new and used RVs (including vehicles retired from the rental fleet) from its Hub offices. The sales effort is marketed under the name RV DEPOT and currently represents approximately 50% of total revenue.
The amounts of revenues, income and identifiable assets attributable to the Company's foreign operations is set forth in Note 11 to Consolidated Financial Statements included elsewhere in this Form 10-K.
Cruise America Rental System
Cruise America rents a wide variety of RVs at each of its 16 Hub and 70 Satellite offices across North America. The Company's peak rental fleet in the year ended April 30, 1996 consisted of 3,099 RVs, of which 2,219 were motorhomes, 759 were truck campers, 82 were motorcycles and 39 were vans and trailers. The majority of vehicles available for rent were current model, one or two year old vehicles.
Cruise America's RVs include a wide range of sizes from 18 to 31 feet. Cruise America motorhomes and truck campers are fully self contained with kitchen and bath facilities, heat and air conditioning as well as comfortable sleeping arrangements. Most motorhomes have electric generators and many have microwave ovens. Cruise America RVs are as easy to drive as a car with no special license requirements. All vehicles are equipped with automatic transmission, power steering and power brakes. Most vehicles also have cruise control.
Over the years, the Company's use of rental vehicles that can easily be disposed of after the peak summer rental season has increased significantly. The Company also began in the Spring of 1993 to purchase motorhomes that are designed such that the coach portion can be easily removed from the old chassis and placed on a new chassis. These two changes in the rental fleet are designed to reduce maintenance and holding costs and increase the service life of the vehicles. Virtually the entire rental fleet is now made up of these specially designed RVs.
The Company purchases its rental fleet from several manufacturers, including Chevrolet, Fleetwood, Damon, Four Winds, Holiday Rambler, Coachmen and Winnebago. The Company believes it enjoys excellent relationships with its suppliers, most of which have been suppliers to the Company for many years. The Company believes, if the need arose, that it could equip its fleet with RVs from other suppliers without any material adverse effect on its operations. Most of the Company's rental vehicles are pledged as security under financing agreements with banks and other financial institutions.
Subject to certain deductible amounts and retention limits, the Company maintains coverage to insure against claims based upon personal injury, property damage and loss of Company property in connection with its business and operations. In light of current insurance costs and the Company's experience, the Company believes that its policy limits provide sufficient coverage and the deductible amounts are reasonable.
Hub Offices
At April 30, 1996, the Company operated Hub offices from 16 locations in the United States and Canada. Each office consists of full service rental operations, new, used and fleet RV sales, fleet maintenance, and vehicle storage. In addition, each Hub office provides management and marketing support and other services to the Satellite offices within its respective service area.
Among the factors which the Company considers significant in the selection of locations for Hub offices are population, demographics, proximity to major airports, vacation destinations and favorable economic conditions within the potential service area for the rental and sale of RVs.
Satellite Offices
At April 30, 1996, the Company operated 70 Satellite rental centers, called Dealers. Dealers are independently owned and operated businesses that contract to rent the Company's RVs. Typically, the Dealer also is engaged in a complementary business such as car, truck or equipment rentals, or RV sales. The Satellite office operator provides the facilities and all personnel for the rental operation and is paid a commission on the rental revenue generated. The Company provides each Dealer with vehicles, maintenance, service, forms, supplies, advertising and management support.
Fleet Planning and Management
Fleet management is accomplished through the coordination of reservations, fleet purchasing, fleet distribution, fleet sales, marketing and the motorhome rechassis/refurbish operation. Information derived from each of these areas is used to establish a fleet plan designed to maximize vehicle utilization.
Reservation information from local, central and international reservations is used to schedule vehicle requirements and demands. This information is also used to schedule routine maintenance and to establish pricing and one-way surcharges in order to control vehicle utilization and availability. Expansion of the rental fleet and the timing of vehicle purchases, as well as the distribution of rental vehicles among rental centers, are determined in part by historical reservation demand and anticipated demand as expressed to management by travel wholesalers and travel agents.
Vehicle purchases are generally scheduled so that new vehicles are delivered according to anticipated rental demand. The Company encourages one-way vehicle flow into the sunbelt locations in the fall and into the snowbelt locations in the spring.
Vehicles from the fleet are sold at all Hub locations. Fleet sales are controlled at the Company's headquarters. Because fleet sales are seasonal and regionalized, the Company maintains a wide selection of RVs during the peak selling months in order to maximize sales.
Customer Service
The Company believes strongly in familiarizing the customer in all aspects of RV usage. Each customer is given a full demonstration prior to rental as well as extensive written instructions. Multilingual personnel are retained at major gateway markets to assist foreign language speaking customers. On the road, customers have access to 24- hour toll-free lines for assistance.
All vehicles are cleaned, inspected and serviced prior to pickup, and detailed quality control procedures are used to assure that vehicles are properly prepared and maintained. The Company makes available to rental customers luggage storage, kitchen supplies and utensils, linens, airport pickup and maps.
Advertising and Promotion
The Company's objective is to provide quality rental services at competitive prices to both domestic and international customers. Rental services are marketed directly to the consumer and through tour operators and travel agents. The Company's rental marketing program is designed to level out rental demand throughout the year in order to maximize vehicle utilization.
The Company's rental services are marketed internationally by commissioned general sales agents and by approximately 300 travel wholesalers in their brochures and related travel media in approximately 25 countries. The Company also engages in direct advertisement in several foreign markets. Currently, the Company's rental programs are featured in North American destination travel brochures published in many countries throughout the world.
The Company also promotes its rental programs through travel agents, airlines, automobile clubs and other targeted marketing groups. The Company has been a participating sponsor in various fund raising and sporting events. In addition, the Company offers special motorhome vacations and discounted rates designed to stimulate business in the off-season.
The Company also conducts a balanced domestic advertising program for sales and rentals, which includes advertisements in telephone directories, print media, industry trade media, local newspaper displays, classified advertising and other select publications. To a lesser extent, the Company advertises on radio and television and through direct mail promotions. The Company also promotes its products and services at RV shows, travel trade and consumer shows and other special events.
Reservations
The Company's reservations department maintains toll-free customer telephone service across the United States and Canada. The international reservations department receives, confirms, processes and invoices international reservations. Domestically, the reservations department also performs customer credit qualification procedures and processes travel agent requests and bookings.
Vehicle Service and Parts
The Company maintains or has access to fully-equipped service facilities at each office to support its rental fleet. In addition, the Company's Mesa, Arizona office maintains a retail service department, which is equipped to handle the repair of virtually any type of RV. The parts department supports the rental, sales and service functions of the Company, and also provides support to the Hub and Satellite rental centers by stocking parts that are not readily available. In addition, the parts department stocks accessory items usually sold to RV owners. The parts department conducts mail order sales, both foreign and domestic, for scarce or specialized RV parts. Parts are sold at both wholesale and retail.
Competition
The Company is the largest company in North America that specializes in the rental and sale of RVs. The Company competes with other leisure and vacation activities, many of which are more visible and familiar than the Company's product. The Company competes in the rental and sale of RVs with several firms, some of which operate in multiple locations. In addition, there are local competitors that operate in single locations. Significant competitive factors in the RV rental and sales industry include price, service, reliability, quality of product, convenience, the ability to offer one-way rentals and vehicle availability. The Company believes that it is competitive in all of these categories.
Employees
As of April 30, 1996, the Company had 311 full-time employees. The Company has no contracts or collective bargaining agreements with labor unions and has never experienced work stoppages. The Company's management considers its relations with employees to be excellent.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Mesa, Arizona. The Company owns facilities in Mesa, Miami, Denver, Los Angeles and Oakland. The Mesa, Miami, and Los Angeles facilities are subject to mortgages of $2,458,000.
The Company leases its facilities at each of its other Hub rental centers pursuant to operating leases expiring at various times through the year 2004.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On May 14, 1987, one of the Company's concession operators commenced a lawsuit entitled Altman's America, et. al. v. American Land Cruisers of California, Incorporated, et. al. in the Superior Court of the State of California for the County of Los Angeles. The action arose out of a claim for an alleged wrongful termination by the Company of a sublease agreement. This case has been tried twice. The first trial resulted in a judgement in the amount of approximately $3.5 million. That judgement was reversed on appeal and remanded for retrial. The second trial resulted in judgements for the plaintiffs in the amount of $235,000 and a judgement for the Company of $634,000, which equaled a net judgement for the Company of $399,000. On July 18, 1996, the Appellate Court reduced the total amount due to the Company by approximately $400,000 and remanded the case for retrial. The Company intends to pursue all means to defeat the case.
The Company is a party to various other claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were brought to a vote of security holders during the fourth quarter of fiscal 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under the symbol RVR. The following table sets forth, for the periods indicated, the high and low sales prices as reported by the American Stock Exchange.
1995 1996 --------------------- --------------------- Quarter Ended High Low High Low - ------------------------------------------------------------------------------- July 31, 1994 and 1995 3 3/4 2 3/8 5 3/8 4 3/8 October 31, 1994 and 1995 3 1/2 2 3/8 5 5/8 4 5/8 January 31, 1995 and 1996 3 13/16 2 7/16 5 15/16 4 15/16 April 30, 1995 and 1996 4 11/16 3 3/8 7 1/8 5 1/8
As of April 30, 1996, there were 224 holders of record, not including security position listings.
The Company has not paid cash dividends since 1982. The Company anticipates that for the foreseeable future its earnings will be retained for use in its business and no cash dividends will be paid on its Common Stock. Declaration of dividends in the future will remain within the discretion of the Company's Board of Directors, which will review its dividend policy from time to time on the basis of the Company's financial condition, capital requirements, cash flow, profitability, business outlook and other factors. The Company currently is restricted from paying cash dividends under the terms of some of its financing agreements. See Note 8 to the Consolidated Financial Statements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA (In thousands except per share data and Selected Operating Data)
The selected consolidated financial data presented below under the captions "Selected Statement of Operations Data" and "Selected Balance Sheet Data" has been derived from the consolidated financial statements of the Company. The information below should be read in conjunction with "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company (including the notes thereto).
(1) Revenue days is calculated as the total number of days that all fleet vehicles were rented during the period.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's profits are derived principally from its rental business. For the years ended April 30, 1995 and 1996, 78% and 85%, respectively, of the Company's gross profit from operations was from rentals. The Company's sales business also contributes to its profits, but the gross margins in the sales business are substantially less than in the rental business. The Company augments its rental vehicle sales at retail with wholesale sales and has developed fleet repurchase arrangements with fleet manufacturers. The Company has also developed the ability to replace the chassis portion of the motorhome fleet which extends the vehicle's life and reduces the Company's reliance on sales to achieve fleet turnover. The rental business is seasonal, with recreational travel and tourism being highest in the summer months. Rental revenue in the summer months (May through October) represents the majority of rental revenue for the 12 month operating cycle. Certain rental costs are variable such as depreciation, but many rental costs are fixed such as interest, licenses and insurance. Because of these seasonal characteristics the Company historically reports net losses in the months from November through April and reports net earnings during the period from May through October. Owing to the seasonality of its rental business, the results of any interim period are not necessarily indicative of the results which might be expected for a full year.
Results of Operations
For the year ended April 30, 1996 compared to the year ended April 30, 1995. Rental Revenue increased to $44,319,000 in 1996, from $36,842,000 in 1995, a 20% increase. A 25% improvement in revenue days more than offset a 4% reduction in revenue per day. The improvement in revenue days was due to an increase in utilization as well as a larger fleet.
Sales in 1996 were $43,569,000 compared to $48,476,000 in 1995, a 10% decline. An increase in rental vehicle sales was more than offset by a decrease in new and used vehicle sales which have been affected by an industry-wide slowdown in demand beginning in fiscal 1995.
Cost of Rentals as a percentage of Rental Revenue was 44% in 1996 compared to 42% in 1995. This slight increase was due primarily to a reduction in revenue per day while variable costs increased with volume.
Cost of Sales as a percentage of Sales was 90% in 1996 compared to 88% in 1995. This increase was due to a shift in sales mix toward lower margin rental vehicle sales and away from higher margin new and used vehicle sales.
Gross Profit from Operations as a percentage of Total Revenue was 34% in 1996 compared to 32% in 1995. This improvement is due to an increase in higher margin Rental Revenue as a percentage of Total Revenue.
Interest Expense in 1996 was $7,279,000 compared to $6,035,000 in 1995, as a result of higher interest rates and higher average debt levels.
Selling, General and Administrative Expenses were $20,897,000 in 1996 compared to $20,779,000 in 1995. This slight increase was mainly the result of personnel costs related to the Company's headquarters operations. Selling, General and Administrative Expenses as a percentage of total revenues was 24% in both 1996 and 1995.
Income tax expense in 1996 represented a 26% effective tax rate compared to 17% in 1995. See note 7 to the consolidated financial statements.
For the year ended April 30, 1995 compared to the year ended April 30, 1994. Rental Revenue decreased to $36,842,000 in 1995, from $40,537,000 in 1994, a 9% decline. An 11% increase in revenue per day was more than offset by a 19% reduction in revenue days. The volume decline was primarily due to severe discounting by competitors at a time when the Company was raising rates.
Sales in 1995 were $48,476,000 compared to $55,540,000 in 1994, a decrease of 13%. The Company's ability to extend the service life of rental vehicles by replacing the chassis impacted sales volume by limiting the need to turn the fleet as often. New vehicle sales also declined as a result of an industry-wide slowdown from the prior year.
Cost of Rentals as a percentage of Rental Revenue was 42% in 1995 compared to 61% in 1994. Included in Cost of Rentals in 1994 is a one time charge of $3,452,000 to revalue vehicles retired from the fleet. Without this charge, cost of rentals would have been 52% in 1994. The improvement in 1995 was mainly due to lower costs of maintenance and other variable costs associated with the 19% reduction in rental volume at the same time the Company raised rates by 11%.
Cost of Sales as a percentage of Sales was 88% compared to 91% in 1994. Improvements were seen in Rental Vehicle, New and Used Vehicle Sales as the Company's reduced need to sell fleet vehicles resulted in a significant shift away from lower margin sales at wholesale.
Gross Profit from Operations as a percentage of Total Revenue was 32% in 1995 up from 22% in 1994. The percentage in 1994 would have been 26% without the one time charge to cost of rentals of $3,452,000 to revalue vehicles retired from the fleet. Gross profit percentage improvements were seen across the board.
Interest Expense in 1995 was $6,035,000 compared to $5,031,000 in 1994, as a result of higher interest rates.
Selling, General and Administrative Expenses increased to $20,779,000 in 1995 from $19,826,000 in 1994. This was mainly as a result of increased advertising expenditures as well as a slight increase in personnel costs related to the Company's headquarters operations.
Income tax expense in 1995 represented a 17% effective tax rate compared to a benefit of 17% in 1994. See note 7 to the consolidated financial statements.
Liquidity and Capital Resources
As of April 30, 1996, the Company had a working capital deficiency in the amount of $3,538,000. The Company's working capital, as presented, includes a significant amount of Rental Vehicle Financing. The Company's working capital does not, however, include any of the related assets; Rental Vehicles, even though the Company historically sells a significant number of Rental Vehicles each year. If the related assets were included in the presentation, the Company would not have a working capital deficiency. The Company believes that, during fiscal 1997, cash generated from operations and financing available from banks and vehicle manufacturers will be sufficient for its capital and operating needs. The Company currently has lines of credit totaling $109,000,000 to finance rental vehicle purchases, of which approximately $69,000,000 is unused. Interest rates on these lines range from U.S. prime to U.S. prime plus 2% for U.S. based vehicles and Canadian prime plus 1% for Canadian based vehicles. The Company is required to make monthly principal curtailments of 1.5% of the outstanding balances of its lines of credit. It is anticipated that borrowings under current financing arrangements will increase to finance the purchase of additional rental vehicles during the first quarter of fiscal year ended April 30, 1997 as the Company prepares for the peak summer rental season. The Company presently anticipates that future purchases of new rental vehicles will be financed primarily with funds available under lines of credit from financial institutions and manufacturers, but the Company may seek additional debt or equity financing in the future.
Other Matters
The Company believes that its business has not been significantly affected by inflation. The Company believes that increases in the cost of new rental vehicles resulting from inflation will be offset by higher resale values for used rental vehicles. Historically, increases in operating costs are passed on to the consumer. Higher interest rates and construction costs would increase the cost of acquiring and opening new locations.
The Company's wholly owned subsidiary, Cruise Canada, Inc. was incorporated in October 1987 and began operations in 1988. Cruise Canada, Inc. operated a peak fleet of approximately 886 vehicles for the year ended April 30, 1996 from four hub locations and one satellite location in Canada. Financial information regarding Canadian operations is included in Note 11 to the Consolidated Financial Statements.
Independent Auditors' Report
The Board of Directors and Stockholders Cruise America, Inc.:
We have audited the accompanying consolidated balance sheets of Cruise America, Inc. and subsidiaries as of April 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended April 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cruise America, Inc. and subsidiaries as of April 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona July 25, 1996
CRUISE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
See accompanying notes to consolidated financial statements.
CRUISE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
See accompanying notes to consolidated financial statements.
CRUISE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
See accompanying notes to consolidated financial statements.
CRUISE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands)
YEARS ENDED APRIL 30, 1994, 1995 AND 1996
See accompanying notes to consolidated financial statements.
CRUISE AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996
1. Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
The consolidated financial statements include the accounts of Cruise America, Inc. (the "Company") and its wholly owned subsidiaries which operate Recreational Vehicle rental and sales centers throughout North America.
All significant intercompany transactions have been eliminated in consolidation.
(b) Inventories
Inventories of new and used vehicles held for sale are valued at the lower of cost or market using specific identification. Parts and accessories are valued at the lower of cost (first-in, first-out basis) or market.
(c) Rental Vehicles, Property and Equipment and Depreciation
Property and Equipment are stated at cost. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance on property and equipment are charged to operations as costs are incurred. Costs incurred for major renewals and betterments are capitalized. Gains and losses on sales of property and equipment are recorded in Selling, General and Administrative expenses.
Rental Vehicles are stated at cost, net of volume purchase discounts. Depreciation of rental vehicles is based on either mileage or the straight line method depending on the category of vehicle. Repairs and maintenance on rental vehicles are charged to operations as costs are incurred and are included in Cost of Rentals.
(d) Income Taxes
The Company and its Subsidiaries file consolidated U.S. Federal and State income tax returns. Cruise Canada, Inc., a foreign corporation, files Canadian Federal and Provincial income tax returns.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(e) Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(f) Reclassifications
For comparative purposes, certain amounts have been reclassified to conform with April 30, 1996 financial statement presentation.
(g) Revenue Recognition
Rental Revenue is recognized as earned, on an accrual basis. Revenue from sales operations is recognized as earned at the time of delivery of a vehicle or at the time service is performed.
(h) Vendor Allowances
In addition to volume purchase discounts received from motorhome manufacturers which are recorded as a reduction to vehicle cost, the Company receives advertising subsidies and marketing allowances from certain vendors. These subsidies and allowances are recorded as earned as a reduction to the related costs.
(i) Finance Commissions
The Company discounts retail installment receivables related to the sale of new, used and rental vehicles with financial institutions on a nonrecourse basis. Finance income is recorded on an accrual basis and is included in Sales revenue. Under the terms of the arrangements with some of these financial institutions, the Company is contingently liable to repay a portion of such finance income in the event of prepayment or repossession.
(j) Foreign Currency
The Company's foreign operation uses the local currency as its functional currency. The impact of currency fluctuation is included in stockholders' equity as a translation adjustment. The Company recognizes transaction gains and losses on intercompany loans and debt arrangements denominated in currencies other than the Subsidiary's functional currency. These gains and losses are reported in Selling, General and Administrative expenses.
(k) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consisted primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the large and diversified nature of the Company's customer base. Although the Company receives significant vendor allowances from manufacturers, there have been no credit losses related to these suppliers.
(l) Self Insurance
The Company participates in insurance programs that contain a self-insured retention. The Company estimates its liability for the self-insured portions of the risks covered by such programs and accrues appropriate amounts.
(m) Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121). SFAS No. 121 becomes effective for fiscal years beginning after December 15, 1995. The Company is currently assessing the impact of SFAS No. 121 on its consolidated financial statements.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 is effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company is currently assessing the impact of SFAS No. 123 on its consolidated financial statements.
(n) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(o) Earnings (Loss) Per Share
Earnings (loss) per share computations are based upon the earnings (loss) applicable to common shares and the average number of shares of common stock outstanding and, for 1996, dilutive common stock equivalents (stock options) outstanding.
(p) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107) "Disclosures about Fair Value of Financial Instruments" requires that the Company disclose estimated fair values for its financial statements.
Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of these instruments.
Receivables, Accounts Payable and Accrued Liabilities The carrying amount approximates fair value because of the short-term maturity of these instruments.
Floor Plan Contracts, Rental Vehicle Financing and Long-Term Debt The carrying value of the Company's debt approximates fair value as the present value of future cash flows of each instrument approximate rates currently offered to the Company for similar debt instruments of comparable maturities by the Company's lenders.
2. Inventories and Floor Plan Contracts
Inventories consist of the following (in thousands):
All new vehicles that are financed, are pledged as security under floor plan contracts with banks and other financial institutions. Floor plan contracts are due upon the sale of the related vehicle or one year. Interest rates on floor plan contracts are at U.S. prime at April 30, 1995 and 1996. Interest expense on floor plan contracts amounted to $483,000, $483,000 and $257,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unused floor plan contracts as of April 30, 1996 were approximately $4,200,000.
During the third quarter of fiscal 1994, the Company made a strategic decision to permanently retire a segment of older vehicles from its rental fleet. This decision is consistent with the Company's ongoing goal to maintain its position as the industry leader by operating the newest rental fleet in the industry. The retired vehicles have been transferred to the Company's RV DEPOT sales division for refurbishing where needed and for sale at retail and at wholesale. In conjunction with this retirement, the Company has transferred vehicles having a net book value of $22,075,000 into sales inventory and has taken a one time charge of $3,452,000 to adjust the carrying value of the vehicles for disposition and to cover any refurbishing costs needed. The one time charge is included in Cost of Rentals. The decrease in inventories for the year ended April 30, 1994 in the Consolidated Statements of Cash Flows is net of the transfer in of vehicles.
3. Rental Vehicles
The following is a summary of Rental Vehicles and the related accumulated depreciation (in thousands):
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Rental Vehicle Financing
Most rental vehicles are pledged as security under financing agreements with banks and other financial institutions. The following is a summary of rental vehicle financing:
Interest expense on rental vehicle financing was $3,576,000, $2,807,000 and $4,546,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
The Company's rental vehicle lines of credit are renewed annually. Unused rental vehicle lines of credit as of April 30, 1996 were approximately $69,000,000.
5. Property and Equipment
A summary of property and equipment, at cost, less accumulated depreciation and amortization, follows:
Depreciation and amortization expense on property and equipment is charged to selling, general and administrative expenses and amounted to $755,000, $668,000 and $643,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long Term Debt
Aggregate maturities on long-term debt are as follows (in thousands):
1997............................. $ 3,023 1998............................. 5,623 1999............................. 5,210 2000............................. 2,874 2001............................. 2,876 Thereafter....................... 2,995 --------------- Total $22,601 ---------------
Interest expense on long-term debt amounted to $972,000, $2,745,00 and $2,476,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
At April 30, 1996, the Company is in compliance with all debt covenants associated with the various financing agreements outstanding.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
Income tax expense (benefit) is composed of the following (in thousands):
Income tax expense (benefit) attributable to income (loss) before income taxes for the years ended April 30, 1994, 1995 and 1996, differed from the amounts computed by applying the U.S. Federal Income Tax rate of 34 percent as a result of the following (in thousands):
At April 30, 1994, 1995 and 1996, the deferred income tax liability reflects the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The most significant type of temporary difference that gives rise to a deferred tax liability is tax over book depreciation, offset partially by tax over book gains on the sale of assets.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities are as follows (in thousands):
The valuation allowance for deferred tax assets as of May 1, 1995 was $1,098,000. The net change in the total valuation allowance for the year ended April 30, 1996 was a decrease of $170,000.
At April 30, 1996, the Company has net operating loss carryforwards for U.S. Federal income tax purposes of $16,900,000 which are available to offset future U.S. Federal taxable income, if any, through 2010. Cruise Canada has net operating loss carryforwards for Canadian Federal income tax purposes of $4,700,000 which are available to offset taxable income in Canada, if any, through 2003.
The Company also has investment tax credit carryforwards for Federal income tax purposes of approximately $409,000 which are available to reduce future Federal income taxes, if any, through 2001.
8. Common and Preferred Stock
(a) Common Stock
The Company's 1987 Stock Option Plan has 500,000 shares of common stock reserved, and as of April 30, 1996, 342,500 options are outstanding at exercise prices of $3.00 per share, expiring at various times through October 2004. Options may be granted through October 27, 1997, the date of the Plan's expiration.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of the Plan:
On October 6, 1994, the Company repriced options granted pursuant to the Company's 1987 Stock Option Plan, at $3.00 per share, the fair value at the date of repricing.
Currently, the Company is restricted from issuing cash dividends and making certain other investments by a covenant to the 9.9% Unsecured Senior Notes and the 9% Senior Notes. In conjunction with the issuance of the $20 million 9.0% Senior Notes in the fourth quarter of fiscal 1994, the Company issued to the note holders immediately exercisable warrants to purchase 166,000 shares of common stock at a per share price of $5.75.
On March 8, 1989, the Board of Directors of the Company declared a dividend of one preferred stock purchase right for each share of common stock outstanding on March 23, 1989. The rights become exercisable only after a person or group acquires 20 percent or more, or makes a tender or exchange offer for 30 percent or more, of the Company's common stock or is declared adverse to the Company by the Board of Directors. When exercisable, each right entitles the holder to purchase, at an exercise price of $20, one one-hundredth of a share of Series A Junior Participating Preferred Stock or, under certain circumstances, securities of the Company or the acquiring entity having a market value of twice the exercise price. The rights expire on March 8, 1999, if not previously redeemed by the Company at a redemption price of $.01 per right.
During 1994, the Company relocated its corporate offices from leased space in Miami, Florida to an owned operating facility in Mesa, Arizona. The relocation moves the corporate staff closer geographically to where the majority of the Company's business is derived. The new Mesa facility was purchased for approximately $2,200,000. The cost was funded with a $1,500,000 loan and $700,000 in common stock of the Company. The land and building were recorded at cost which was considered equal to the value of the cash received plus the fair market value of the stock on the transaction date.
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Preferred Stock
Pursuant to the Company's Articles of Incorporation, the Board of Directors of the Company is authorized to issue in series, without further shareholder approval, 1,000,000 shares of $1.00 par value preferred stock. The Board of Directors is authorized to fix the particular designations, powers, preferences, rights (including voting rights), qualifications and restrictions of each series. The Board of Directors designated 200,000 shares of the preferred stock as Series A Junior Participating Preferred Stock for issuance upon exercise of the rights described in paragraph (a), above.
9. Sales
The following is a summary of sales and cost of (in thousands):
10. Commitments
The Company leases its facilities at 11 of its locations under operating leases expiring at various times through 2004. Rent expense, included in Selling, General and Administrative expenses, was $1,592,000, $1,263,000 and $1,036,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
Minimum annual rental commitments under these leases as of April 30, 1996 are as follows (in thousands):
1997............................. $ 984 1998............................. 762 1999............................. 658 2000............................. 401 2001............................. 202 Thereafter....................... 520 --------------- Total $3,527 ---------------
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Other Matters
(a) During 1984, the Company entered into a redemption agreement with Robert A. Smalley (Chairman), which provides that upon the death of Robert A. Smalley, the Company, upon the request of his personal representative will purchase up to $1,000,000 of the common stock of the Company from his estate at the average bid price for a period of 60 days prior to his death. The obligation has been funded by an insurance policy on the life of Robert A. Smalley in the amount of $1,000,000. The policy has been paid for by the Company and the premiums were approximately $43,000, $40,000, and $40,000 for the policy years ended October 1994, 1995 and 1996, respectively.
(b) On May 14, 1987, one of the Company's concession operators commenced a lawsuit entitled Altman's America, et. al. v. American Land Cruisers of California, Incorporated, et. al. in the Superior Court of the State of California for the County of Los Angeles. The action arose out of a claim for an alleged wrongful termination by the Company of a sublease agreement. This case has been tried twice. The first trial resulted in a judgement in the amount of approximately $3.5 million. That judgement was reversed on appeal and remanded for retrial. The second trial resulted in judgements for the plaintiffs in the amount of $235,000 and a judgement for the Company of $634,000, which equaled a net judgement for the Company of $399,000. On July 18, 1996 the Appellate Court reduced the total amount due to the Company by approximately $400,000 and remanded the case for retrial. The Company intends to pursue all means to defeat the case.
The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company or results of operations.
(c) Foreign Operations
Included in the consolidated financial statements are the following amounts related to the Company's operations in Canada (in thousands):
CRUISE AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Supplemental Disclosures of Cash Flow Information (in thousands):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of accountants or reported disagreements on any matter of accounting principles or procedures or financial statement disclosure in fiscal 1996.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive officers of the Company are as follows:
The information regarding directors as required by Item 401 of Regulation S-K is set forth in the Company's proxy statement which will be filed with the Securities and Exchange Commission not later than 120 days after April 30, 1996, and is incorporated herein by this reference.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION
The information required by Item 402 of Regulation S-K is set forth in the Company's proxy statement which will be filed with the Securities and Exchange Commission not later than 120 days after April 30, 1996, and is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is set forth in the Company's proxy statement which will be filed with the Securities and Exchange Commission not later than 120 days after April 30, 1996, and is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information regarding certain relationships and related transactions as required by Item 404 of Regulation S-K is set forth in the Company's proxy statement which will be filed with the Securities and Exchange Commission not later than 120 days after April 30, 1996, and is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
Information required by other schedules has either been incorporated in the financial statements and accompanying notes, or is not applicable to the Company.
(b) Reports on Form 8-K filed during the quarter ended April 30, 1996. NONE
(c) The exhibits to this Report are listed in Item 14 (a) 3.
(d) The financial statement schedules required by Regulation S-X which are excluded from the Annual Report to Stockholders by Rule 14a-3(b) (1). NONE
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Cruise America, Inc., has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Cruise America, Inc.
Randall Smalley -------------------------------- By: Randall Smalley, President
July 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on July 26, 1996, by the following persons on behalf of the registrant and in the capacities indicated.