ITEM 1. BUSINESS
Overview
The Company is a leading second-stage manufacturer of custom van, sport utility vehicle ("SUV") and pick-up truck conversions. Starcraft has historically specialized in upscale custom vehicles and with its acquisition of the Imperial product line in 1994, now offers products at all consumer price levels. In addition, the Company sells vehicle conversions for the physically challenged through its National Mobility Corporation. The Company believes it is one of the four largest van conversion manufacturers in the U.S. The Company sells its products to an extensive network of approximately 500 authorized automotive dealers throughout the continental U.S. and overseas. The Company believes the Starcraft name has a long-standing reputation in the vehicle conversion industry for high quality. In 1998, the Company began manufacturing and marketing commercial shuttle buses.
Starcraft traces its history to 1903 when Star Tank Company was founded in Goshen, Indiana as a maker of metal farm equipment. Over the course of the century the Company's predecessor became a leading manufacturer of aluminum boats and recreational vehicles and, in the late 1970's, led the automotive conversion industry by producing luxury van conversions for middle and upper income consumers. In 1987, the predecessor's management completed a leveraged buyout and, in 1988, sold the boat manufacturing business. The resulting entity was highly leveraged and eventually sought protection from creditors in a bankruptcy reorganization proceeding in late 1990. On January 18, 1991, the Company purchased the assets of the automotive and recreational vehicle divisions (except for Canadian operations) from Starcraft Van Conversions Corporation and its affiliates, as debtors-in-possession (the "Predecessor"), with bankruptcy court approval. The Company simultaneously sold the recreational vehicle division to a third party. In July 1994, the Company's wholly owned subsidiary, Imperial Automotive Group, Inc., acquired substantially all of the assets of Imperial Industries, Inc. In February 1997, the Company purchased the assets of National Mobility Corporation in Elkhart, Indiana. In October 1997, the Company started Tecstar, Inc. with a partner. The primary business purpose of Tecstar is to supply conversion vehicles directly to the Big 3 automakers. In February 1998, the Company started manufacturing and marketing commercial shuttle buses at its Goshen manufacturing facility.
The Company was incorporated in Indiana in 1990. Its executive offices are located at 2703 College Avenue, Goshen, Indiana, 46526; telephone (219) 533-1105. The Company has two wholly-owned operating subsidiaries: Starcraft Automotive Group, Inc., and National Mobility Corporation. The Company owns 51% of Tecstar, Inc.
Starcraft's principal manufacturing facilities are in Goshen, Indiana.
Industry Information
The custom vehicle conversion industry developed during the early 1970's. Starcraft's Predecessor was a leader in transforming the industry from one oriented toward younger recreational users to one oriented toward more mature automotive customers. The Company believes retail prices of custom vans in the United States for the 1998 model year generally ranged from $20,000 to $40,000. Retail mark-ups vary widely among dealers and are not within the Company's control.
According to the Recreational Vehicle Industry Association ("RVIA"), the average domestic wholesale price to dealers of a van conversion, pick-up truck conversion and SUV conversion (including chassis) during the first nine calendar months of 1998 were $25,200, $22,900 and $31,500 respectively. The Company maintains two product lines in its conversion business. The Starcraft product line, emphasizing high-end, luxury vehicles, averaged a $28,600 wholesale price to dealers during 1998 assuming an average cost of chassis of $20,000. The Imperial product line, representing primarily the entry level position, averaged a $24,200 wholesale price.
According to RVIA statistics, domestic conversion products sold by manufacturers during the three preceding fiscal years have declined as follows:
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The domestic vehicle conversion industry has declined steadily over the last several years with a continued decline in 1998. The Company believes that the increased popularity of sport utility vehicles and factory minivans, price pressure from higher chassis costs, lower levels of conversion inventory being held on dealer lots and fewer automotive dealers selling conversion products have adversely impacted the market. The Company believes that the changing level of dealer support is due to the growing availability of additional vehicle models to stock on dealer retail lots such as sport utility vehicles and a general concern by dealers about the future of the conversion industry.
RVIA statistics are based on reports of its member manufacturers and its estimates with respect to non-member manufacturers. The Company believes RVIA members produce 80% - 85% of conversion vehicles produced in the United States.
The Company is the leading exporter of conversion vehicles. Primary markets include Japan and Northern Europe. The recent strengthening of the U.S. dollar and financial turmoil in Asian markets have negatively impacted the Company's export sales and profit margins.
The conversion industry is cyclical and is affected by the general trends of the economy and consumer preferences and consumer confidence and trends of the automotive and recreational vehicle industries. Consumer preferences for sport utility vehicles in recent years has adversely affected demand for conversion products. The level of disposable consumer income affects the Company's sales because its products are generally considered discretionary expenditures by consumers. In difficult economic times, consumers tend to spend less of their income on discretionary items. Other economic factors affecting the demand for the Company's products include the availability and price of gasoline, the level of interest rates and the availability of consumer financing. Reduced gasoline availability could adversely affect the demand for the Company's products. A significant increase in the price of gasoline could reduce demand for the Company's products because it would increase the cost of operating these products. Because many consumers finance their purchase of vehicle conversions, the availability of financing and level of interest rates can affect a consumer's purchasing decision. A decline in general economic conditions or consumer confidence can be expected to affect Starcraft's sales adversely. The Company is dependent upon the OEMs to supply its requirements for vehicle chassis. Labor stoppages, supply shortages and a variety of other factors that influence OEM production can affect the availability or timely delivery of vehicle chassis to the Company.
Company Products
The Company converts fullsize vans manufactured by each of the major original equipment manufacturers ("OEMs"): GMC Truck, Chevrolet, Dodge and Ford. The Company manufactures minivan conversions on the GMC Safari, the Chevrolet Astro, Chevrolet Venture and the Dodge Caravan. Starcraft also customizes Chevrolet and GMC SUVs, along with several pick-up truck models for GMC, Chevrolet, Ford and Dodge. The product contains a principal set of conversion features and a variety of optional accessories designed by the Company in each model year to meet prevailing customer preferences. Starcraft van models fall principally into three price ranges (conversion cost to dealer): from $4,000 - $6,000, $6,000 - $9,000, and $9,000 and above. Imperial models fall into the following price ranges: $2,000 - $3,000, $3,000 - $4,000, over $4,000. These price ranges provide marketing flexibility allowing for different demographics and varying dealer marketing objectives.
The Company's National Mobility Corporation ("NMC") converts fullsize vans with wheelchair lifts and low- floor minivans for the physically challenged community. The average conversion price to dealers for NMC products in 1998 was $10,800.
In 1998 the Company began manufacturing shuttle buses ranging in length from 20 to 35 feet with seating capacity for 12 to 25 passengers. Buses are offered with a choice of interior and exterior storage areas, wheelchair lifts, diesel and gasoline engines, and various seat types, arrangements and coverings. The buses are marketed under the Starcraft trade name and are primarily marketed to churches, nursing homes and hotel resorts through commercial bus dealers.
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The National Mobility and shuttle bus operations accounted for 8% of the Company's sales in 1998.
Company Strategy
The Company believes it can grow by expanding its domestic vehicle conversion business and physically challenged vehicle market share, further developing international sales opportunities and offering additional products in new markets, such as shuttle buses for airport and hotel use. Through its Tecstar joint venture, the Company is also seeking to sell conversion vehicles directly to OEM's.
Domestic Van Sales. The Company will continue to focus on core van conversion products and, through aggressive marketing and promotion, will seek to expand U.S. sales of conversion vans. While Starcraft product lines will continue to emphasize upscale custom van conversions, Imperial will continue a complementary emphasis on mid- and low-price point conversion packages. The Company will continue to seek to further differentiate its Starcraft lines from its competition by emphasizing total value and quality versus unit price. By offering both the Starcraft and Imperial product lines, the Company is able to offer dealers a full price range of conversion vehicles from a single manufacturer. Imperial will maintain its position in the entry level segment of the market. In 1997, the Company established a telemarketing division to effectively penetrate larger territories.
The Company will continue to focus on innovative product development to enhance customer appeal and vehicle quality and safety. The Company will continue to seek to differentiate itself from its competition by virtue of the resources it devotes to training dealer personnel in selling, product knowledge, service and compliance. Starcraft utilizes a specially equipped service van, videos, manuals, other visual aids, and the classroom instruction at its main facility and at dealer locations throughout the country. The Company maintains a strong customer service area which includes warranty claims and approval, parts ordering and processing and customer information. The Company maintains records of Starcraft units sold as far back as 1978 and Imperial maintains records back to 1991, which was the inception of the predecessor company, Imperial Industries, Inc.
Domestic Truck and SUV Conversions. Although the Company's conversions of SUV and pick-up trucks have proven to be a popular line of products, the significant increase in the number of models and the chassis availability of these products at automotive dealerships have reduced the demand for conversions of these products. Many of the OEM sport utility models now have options that were historically supplied by the conversion industry. As a result, the Company believes its overall sales of SUV and pick-up truck conversions will continue, but will not be a significant growth segment. The Company will focus on select models and OEMs where it feels it can continue to offer a unique product at a competitive price point.
National Mobility Corporation offers a product line aimed at a specific consumer niche, physically challenged persons. By offering additional products the Company can maintain its strategy to the dealer of being a complete product line and full service organization. The Company will target key automotive dealers in each region to maintain market share and develop cooperative marketing plans. National Mobility will continue to pursue the distribution of its products through governmental and commercial channels.
International Vehicle Sales. The Company intends to further promote Starcraft vehicles overseas, especially in Central/Northern Europe and Japan. The Company maintains a distribution agreement with General Motors and Mitsui and Co. (U.S.A.), Inc. which the Company believes makes Mitsui the sole distributor of General Motors vans in Japan. Under this agreement Mitsui agreed to use its best efforts to promote Starcraft vans in Japan and Starcraft agreed to sell van conversions in Japan solely through Mitsui.
The increase in the U.S. dollar currency rate has put significant pressure on the Company's export sales. In addition, the continuing turmoil in the Asian financial markets and economies have negatively impacted the demand for the Company's products. The Company continues to redesign products to maintain unique products in the marketplace and increase value for price to keep products competitive internationally. In addition, the Company is targeting several new markets to develop.
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Diversification. With the decline in the conversion industry and the Company's sales , the Company will attempt to diversify itself further with additional products targeted at new markets, while manufacturing such products in existing operating facilities.
The Company's shuttle bus operation was set-up in its main Goshen facility. The Company also developed a conversion for the taxi industry which is being manufactured in its National Mobility operation.
Tecstar, Inc. is a joint venture company between Starcraft and an engineering firm. Tecstar's strategy is to set-up manufacturing facilities near OEM assembly plants and manufacture conversion vehicles directly for the OEM's. The vehicles are marketed by the OEM and are distributed through the OEM distribution channel. Tecstar currently has three vehicle programs with facilities beginning operations in Shreveport, Louisiana and Arlington, Texas.
Chassis and Other Suppliers
50%, 33% and 17% of the company's domestic vehicle conversion units in 1998 were manufactured on General Motors, Dodge and Ford chassis, respectively. All of the Company's export sales are associated with General Motors product.
The OEMs supply incomplete chassis to Starcraft or other manufacturers or dealers for restricted use. The Company obtains substantially all of its chassis acquired for domestic sale from the OEMs pursuant to consignment or restricted sale contracts. Under these contracts each OEM maintains strict control over the disposition of chassis delivered to the Company for modification and the Company is prohibited from delivering a converted chassis provided by the OEM to any person except an authorized dealer for that OEM. All of the Company's consignment and restricted sale contracts with chassis suppliers are terminable by either party on short notice without cause.
Under restricted sale contracts with the OEMs, the OEM retains the certificate of origin and the Company has no right to obtain it or any other evidence of title. These contracts state that vehicle title technically passes to the Company upon acceptance of a chassis and the Company pays state property taxes on chassis, but the Company can only sell the chassis back to the OEM for resale to an authorized dealer. Except for demonstration vehicles, the Company is prohibited from making modifications to chassis under these contracts until it matches them with a dealer order. In the past, the Company has obtained waivers of this limitation to permit accumulation of GMC or Chevrolet inventory in connection with model year changes or other periods of anticipated increasing demand. Prior to matching a chassis to a dealer order, the Company finances the chassis through the OEM's financing affiliates at nominal rates. Once the Company notifies the OEM that it has matched a chassis with a dealer, the OEM "repurchases" the chassis, crediting the Company's account with the OEM's financing affiliate and invoicing its dealer (the Company's customer) for the price of the chassis. Upon receiving the converted vehicle, the dealer is obligated to pay the Company for the improvements the Company has made. If the Company fails to match a chassis with a dealer order within 90 days, the finance charge the Company must pay increases. The past 90-day finance charge is currently the prime rate plus 1%.
Historically, the Company's international conversion sales have been primarily manufactured on General Motors chassis. Generally, the foreign purchaser is an authorized dealer for General Motors and Starcraft. The dealer submits an order to General Motors' overseas sales affiliate (the "GM Export Affiliate") for the chassis together with specifications for a Starcraft conversion. The GM Export Affiliate purchases the chassis from General Motors and forwards it to Starcraft for second stage manufacturing. Starcraft invoices the GM Export Affiliate for the completed conversion, and the GM Export Affiliate arranges for shipment of the unit, at the GM Export Affiliate's expense, from Starcraft to the foreign dealer.
Starting in 1997, General Motors changed its chassis system for the Company's sales to Europe. The program encompasses 34% of the Company's 1998 export sales. Under this program, the Company is the "Manufacturer of Record" for units imported into Europe and is required to arrange and be responsible for all U.S. export and shipping requirements. The Company is required to purchase its chassis and the OEM assists in the financing of such purchases. The Company continues to sell only to authorized General Motors dealers. The Company does not believe this new system will have a significant impact on its European sales.
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A variety of factors govern chassis ordering and availability. Chassis are ordered from the OEM based on the Company's annual sales plan. The plan is broken down by OEM and vehicle model. Vehicle specifications are determined on the basis of historical trend analysis and analysis of the backlog of orders. The Company's chassis order forecast is shared with each OEM to determine chassis availability. The OEMs confirm chassis availability and timing on an annual basis. After confirmation by the OEM, the Company orders a 90-day supply prioritized through a central computerized system. On a weekly basis, the Company releases the actual orders it requires and the OEMs schedule delivery dates for the orders. Chassis allocation to the Company from the OEMs is based on credit lines, prior usage and wholesale and retail sales rates.
The following table sets forth for the periods indicated the number of chassis received by the Company under its restricted sales contracts with the OEM's and the dollar value in thousands thereof, and, as of the end of such periods, the number of chassis held over 90 days and the dollar value in thousands thereof.
The conversion process begins after a chassis is inspected and accepted and the Company has received a confirmed order from an authorized dealer that is compatible with the chassis. Generally, the order is scheduled for production typically four to five days before work on the vehicle commences to allow for completion of components to be installed in the chassis and the purchase of necessary assembly material. The Company completes the conversion process in an average of seven to eight days from the date that the vehicle is first scheduled for production.
The Company is dependent upon the OEMs to supply its requirements for vehicle chassis. Labor stoppages, supply shortages and a variety of other factors that influence OEM production can affect the availability or timely delivery of vehicle chassis to the Company. In 1997, chassis availability was generally good. In 1998 chassis availability was adversely impacted late in the fiscal year due to a labor stoppage at General Motors. The Company estimates that sales were adversely impacted by $1.5 million due to chassis shortages in 1998. If vehicle chassis are unavailable, or if the Company must accept delivery earlier or later than it otherwise would prefer, sales could be adversely affected and financing expenses could increase. The Company must also comply with its consignment and restricted sale contracts with the OEMs pursuant to which the OEMs impose certain specifications for the Company's vehicle conversions, including gross vehicle weight standards. Such contracts also restrict the Company's ability to dispose of completed chassis and prohibit the transfer of chassis to unauthorized U.S. and foreign dealers. All of the Company's consignment and restricted sale contracts with chassis suppliers are terminable by either party on short notice without cause. The availability of the OEM financing rates is dependent upon the Company's compliance with its OEM contracts and its ability to maintain satisfactory credit relationships with the OEM's finance subsidiaries. Adverse changes in the Company's financial condition or results of operations could cause such financing subsidiaries to seek to adversely change the Company's financing terms or to terminate such financing arrangements. Such a change or termination could have a material adverse effect on the Company's financial condition and results of operations.
Vehicle converters can be penalized by the OEM for manufacturing overweight vehicles and the National Highway Traffic Safety Administration ("NHTSA") could require overweight vehicles to be recalled. See "Safety and Regulation." Such standards are imposed by the OEMs in part to help assure that vehicle weight does not exceed the capacity of the OEM's braking system.
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The export of completed vehicles to unauthorized foreign dealers has been a significant issue in the conversion industry in recent years, especially for General Motors. In the past, some automotive dealers have sold vehicles to brokers who, in turn, have sold them to unauthorized dealers overseas. General Motors' financing subsidiary has indicated an intention to penalize or terminate financing arrangements with any firm deemed responsible for unauthorized exports. The Company makes an effort to assure itself that none of its vehicles are exported in an unauthorized manner including obtaining written assurances from certain dealers. The Company has no control over the eventual disposition of its vehicles by dealers, however, so it cannot eliminate the possibility of unauthorized export. These efforts nevertheless should help assure that the Company will not be deemed responsible for any unauthorized export.
The shuttle bus operation utilizes bailment or consignment arrangements with the OEM's, but must purchase the chassis prior to the start of manufacturing. The shuttle bus operation is subject to the same risk factors of chassis availability as the Company's vehicle conversion business.
Supplies for the components and materials the Company utilizes in its vehicle conversions are generally available from several sources. From time to time the Company experiences delays in delivery of certain components or materials from suppliers. In 1998, the availability of certain hardwood components adversely impacted the Company's production.
Manufacturing
The incomplete van chassis the Company receives directly from the OEMs have no seats or floor covering or other interior components. The Company modifies the exterior and interior of the chassis body to provide passenger comfort and enhance safety. SUVs and pick-up trucks received have full interior OEM components. The Company modifies these components and performs certain exterior enhancements.
After a chassis is inspected and accepted, tinted vista bay windows, raised roof, decorative decals and ground effects are installed. Star-structure steel bracing is installed for added structural support, followed by rust proofing, wiring, insulation and vibration dampening materials. The vehicle's interior is lined with fabric and wood-accented sidewalls and headliners. The Company's associates assemble the complete vehicle interior in multiple production lines using the Company's own manufactured components and parts supplied by others. The Company's distinctive hardwood features, contoured seats, carpeting, curtains and other amenities are installed in each vehicle, along with the customer's selection from over 100 optional accessories, including a wide variety of electronic components such as rear heating and air-conditioning, television, video cassette player and other audio equipment.
Vehicle seating and upholstery are primarily manufactured at the Company's Emma, Indiana facility, located 15 miles from its Goshen, Indiana plant. Company associates cut and sew interior wall coverings, headliners, curtains and seat upholstery from leather, cloth and vinyl materials. The seat padding and upholstery are then assembled on pre-fabricated frames. Wire harnesses are manufactured at the Goshen plant. It also finishes its hardwood components at the Goshen plant. The Company paints and finishes all of its custom fiberglass and polymer vehicle body components, such as raised roofs, running boards and other ground effects which are manufactured to the Company's design specifications by others. This water-filtered, down draft paint system is similar to those of the major automotive manufacturers and is designed to control environmentally harmful emissions.
In December 1996 the Company consolidated its Imperial Automotive Group manufacturing operation into Starcraft Automotive Group's manufacturing complex in Goshen, Indiana. The consolidation was designed to reduce excess production capacity, personnel count and fixed overhead expenses. The Company recorded a $750,000 restructure charge in the first quarter of fiscal year 1997. The Company estimates it realized annual overhead expense reductions of approximately $1.0 million from reduced facility and personnel costs during 1998 relative to 1997.
In June 1997 the Company closed its McGregor, Texas manufacturing facility and sold certain assets of the business. The Company recorded a $260,000 net restructure charge in the third quarter of fiscal year 1997. The Company realized savings from the closure of the Texas facility which lost $1.3 million pretax in 1997. The consolidation efforts were a result of the Company's belief that the conversion industry will remain at current lower levels and the elimination of excess production capacity was critical to returning to profitability.
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Production Associates. The Company periodically employs associate training that may include classroom instruction, job certification and technical and personal skills training. The principal objective of the training is to develop associates into more effective members of a team dedicated to continuous improvement in all facets to the Company's business.
The Goshen facility produced 45 custom vehicles per eight-hour shift during peak production periods in 1998 and has capacity to produce up to 70 units in one shift.
Sales and Marketing
Domestic. The Company sells its custom vehicles to approximately 500 automobile dealers throughout the continental U.S. and overseas. Custom vehicles are sold through a network of regional exclusive sales representatives and associate representatives. Each of its U.S. dealers is an authorized dealer for General Motors, Ford or Chrysler and most sell and service a full complement of cars, SUVs and vans. During the past two years, the geographic areas of the U.S. where the Company's sales have been strongest include the Great Lakes region (i.e., Illinois, Indiana, Michigan, New York, Ohio, Pennsylvania, and Wisconsin), and Oklahoma and Texas.
The Company's direct sales efforts to dealers are supplemented by a variety of advertising and promotional programs and participation in various automobile shows. The Company is also refining a targeting approach to better utilize advertising expenditures by expanding its team selling efforts and developing new marketing materials, including videos. In 1997 the Company established a telemarketing sales team in Ocala, Florida to cost effectively focus on smaller dealer activities and larger territories.
The Company's Starcraft lines will continue to be focused on luxury vehicle modifications and will seek to increase its market share of high-end van conversions for which Starcraft vehicles have an established reputation. Starcraft will also continue to be sensitive to changes in consumer preferences. The Imperial product lines enable the Company to participate more fully in the price-sensitive segment of the conversion market and offer its dealers a full price range of conversion vehicles from one manufacturer. The Company believes competitive factors in its industry include price, quality and variety of product line, service and warranty, dealer network and safety. The Company maintains a leading position in the conversion industry through high quality workmanship, innovation, versatility in meeting customization requirements and the diversity of its product line.
The Company will also target the mobility market through its National Mobility subsidiary by offering fullsize vans and minivans for the physically challenged. These products will be distributed through both automotive dealerships and mobility centers. In addition, the Company will participate in state government quotes for mobility vehicles and pursue commercial applications.
International. Starcraft exports converted vehicles to 18 countries around the world and employs an international department which is exclusively responsible for the development of such sales. International sales fluctuate from country to country and over time depending on import taxes and tariffs and fluctuations in currency exchange rates as well as local economic conditions. Starcraft's primary overseas markets are Japan and northern Europe. The Company exported 1,273, 1,584 and 2,543 conversions in 1998, 1997 and 1996, respectively. The recent increase in U.S. currency and turmoil in Asian financial markets have negatively impacted the Company's international sales.
The Company intends to further promote Starcraft and Imperial vehicles overseas. The Company maintains a distribution agreement with General Motors and Mitsui by which the Company believes makes Mitsui the sole distributor of General Motors vans in Japan. This agreement will continue from year-to-year unless terminated on three months notice prior to the end of any such year.
The Company's shuttle bus products are marketed and distributed through approximately 20 independent bus dealers. The majority of these bus dealers carry other bus lines in addition to Starcraft. The Company will continue to develop products to expand its customer base, including bidding for government and large commercial contracts.
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Competition
The United States conversion vehicle market is very competitive with four principal national manufacturers and numerous local and regional manufacturers, many of which are relatively small companies serving local dealers. The Company estimates it has approximately 55 competitors in the conversion vehicle on business. The Company believes it is one of the four largest van conversion companies in the United States. The others are Glaval Inc., Mark III Industries, Inc. and Explorer Van Company. The Company's Starcraft lines generally feature high-end, luxury custom vehicles competing most directly with Explorer. The Imperial product lines compete more directly in the entry level segment of the conversion market. The Company believes the number of competitors will continue to decline as increased quality, financial and engineering standards are imposed by the OEMs.
In international markets, the Company competes with numerous foreign manufacturers that produce vehicles comparable to converted vans, although custom vans and SUV's such as the Company's tend not to be widely produced within its foreign markets.
The market for the Company's shuttle buses is highly competitive. The other competitors in the bus industry are substantially larger than the Company. The Company's products are a very small percentage of the bus market. The Company will continue to position its product as an exceptional quality, high value product targeting the high end user niche market. There can be no assurance that the Company will be able to maintain or improve its competitive position in the bus market.
Tecstar competes against several much larger automotive parts suppliers. Tecstar is highly dependent on continuing to successfully bid future contracts as its existing programs have two to four year terms.
Backlog and Seasonality
At September 27, 1998, the Company had a backlog of 441 unit orders compared with a backlog of 842 unit orders at September 28, 1997. The backlog declined from prior year levels due to reduced market activity, chassis availability issues from the General Motors labor stoppage and customer concern from the Company's production constraints in the summer arising from raw material component availability. The Company considers such orders to be reasonably firm. All of the Company's products are subject to certain seasonal sales influences and sales tend to be stronger during March through July. The Company uses off-season sales promotions to market its products with a view to reducing seasonal swings in sales.
Warranties
The Company historically provided a three-year, 36,000 mile limited warranty on its conversions. In 1997, the Starcraft products began offering a 5-year, 60,000 mile warranty on certain of its Starcraft products. The OEMs provide their own standard warranties of the chassis and engine. At the time of sale of its product, the Company estimates the costs to be incurred for product warranties and establishes reserves for warranty claims. The Company believes that such reserves will adequately cover any such warranty claims. The Company provides complete owners' manuals to retail customers covering the conversion package as well as parts, warranty and service manuals for dealers. The Company keeps a record of the paint, upholstery and styles included in each vehicle conversion so that, when necessary, it can re-create matching replacement parts.
Patents and Trademarks
IBS. In 1996, the Company received a U.S. patent on IBS, which is designed to reduce significantly the risk of seat back collapse in the event of a rear-end collision by restraining the seat back. A new seat belt integrated with the conventional seat belt system is anchored to the vehicle roof or wall and traverses the seat back. In the event of collision, the seat back is secured in place. See "Research and Development."
Trademarks. The Company's Predecessor manufactured boats, motor homes and other recreational vehicles under the name "Starcraft." The boat manufacturing business was sold by the Predecessor to Brunswick Corporation in 1988 which subsequently sold the business. The Company initially acquired the recreational vehicle business in the Predecessor's 1991 reorganization proceeding, but immediately sold it to an RV company. The Predecessor's Canadian conversion business was acquired by a Canadian firm. A corporation in the boating industry has independently registered and owns the "Starcraft" and related trademarks for use with boats and marine products and thus the Company has no control over the quality of boats produced and sold under the "Starcraft" mark. The Company retains ownership of "Starcraft" and related registered marks for use with automotive and recreational vehicle products. It licenses the owners of the Predecessor's RV
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business and Canadian van conversion business to use these trademarks. While it has some control over the quality of its licensees' products, it does not control all aspects of their businesses. The Canadian entity is required to pay a royalty to the Company and to purchase its components from the Company (or from others with the Company's approval). The Company is not permitted to export to Canada and its Canadian licensee does not export to the United States.
Because of these considerations, there is a risk that the distinctiveness of the "Starcraft" mark could become diluted or that its reputation for quality could be adversely affected if the quality of another manufacturer's products sold under the mark declines. The Company believes, however, that customers are sufficiently discerning when making a purchase as significant as a vehicle conversion that confusion between the Company and makers of other "Starcraft" products is unlikely. It also believes its licensees are currently in compliance with their obligations under their license agreements.
Safety and Regulation
The manufacture, distribution and sale of the Company's products are subject to governmental regulations in the United States at the federal, state and local levels. The most extensive regulations are promulgated under the National Traffic and Motor Vehicle Safety Act which, among other things, empowers NHTSA to require a manufacturer to remedy vehicles containing "defects related to motor vehicle safety" or vehicles which fail to conform to all applicable federal motor vehicle safety standards.
Federal Motor Vehicle Safety Standards are promulgated by the NHTSA. Many of the Company's conversion components were affected by these standards. Starcraft engaged a testing Company, which also performs testing for NHTSA, to test the company's components. The Company's components subject to the new standards were determined to meet or exceed them. Promulgation of additional safety standards in the future could require the Company to incur additional testing and engineering expenses which could adversely affect the Company's results of operations. NHTSA can require automotive manufacturers to recall products. The Company has not experienced any material recalls.
The Company's international sales are subject to foreign tariffs and taxes, changes in which are difficult to predict and which can adversely affect Starcraft sales. Starcraft's products must also comply with government safety standards imposed in its foreign markets.
Both federal and state authorities have various environmental control standards relating to air, water and noise pollution that affect the business and operations of the Company. In particular, the Company generates paint, varnish and other finishing wastes that it is required to dispose of in compliance with environmental regulations. The Company believes that it has complied in all material respects with applicable environmental regulations and standards and does not currently expect that any failure of compliance will have any material adverse effect on the Company.
Like other automotive manufacturers, the Company may be subject to claims that its products caused or contributed to damage or injury sustained in vehicle accidents or may be required to recall products deemed unsafe. Any such claims in excess of the Company's insurance coverage or material product recall expenses could adversely affect the Company's financial condition and results of operations.
Employees
As of September 27, 1998, the Company employed 550 people. Of these, approximately 450 were production line associates and 100 were salaried sales, engineering and administrative staff. During peak production periods, the Company may increase its work force. Historically, the available labor force has been adequate to meet such periodic requirements. The Company considers its relationships with its personnel to be satisfactory.
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ITEM 2.
ITEM 2. PROPERTIES
The Company owns its properties in Goshen, and Emma, Indiana and leases the Elkhart property, as further described below.
Size of Location Facility Type of Operation - -------------------- ------------------ ----------------------------- Goshen, Indiana 454,400 s.f. Executive Offices (20,420 s.f.); Manufacturing and Assembly Emma, Indiana 42,700 s.f. Sewing and Upholstery Manufacturing Elkhart, Indiana 56,000 s.f. Offices (2,600 s.f.); (National Mobility) Manufacturing and Assembly
The Goshen and Emma production facilities were constructed in the 1960's. They have been maintained and improved upon from time to time and are presently in satisfactory condition and sufficient for the Company's current requirements. The Company also stores chassis on a 37-acre lot it owns near its Goshen production facility. See "Manufacturing."
The Elkhart facility, on approximately 3 acres of land, is leased for three years through February 29, 2000 with five, one-year renewal options at the Company's discretion. The lease contains an option to purchase the facility for $800,000. Monthly rent is $14,500 and the Company is responsible for property taxes and building insurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company does not anticipate that any pending legal proceeding to which it is party will have any material adverse effect on its financial conditions or results of operations. The Company maintains product liability insurance which it currently considers adequate.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock is quoted on the NASDAQ Stock Market, under the symbol "STCR." As of December 21, 1998, there were 85 shareholders of record of Starcraft's Common Stock.
During 1998, the Company did not meet the new market capitalization requirements for continued listing on the NASDAQ National Market. As a result, in September 1998 the Company's shares began trading on the NASDAQ Small Cap market.
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The following table sets forth the high and low bid prices per share of Common Stock for the periods indicated.
Quarter Ended High Low - ------------- ---- --- December 29, 1996 4.875 2.875 March 30, 1997 5.250 3.469 June 29, 1997 3.750 2.500 September 28, 1997 3.750 1.750 December 28, 1997 3.000 2.000 March 29, 1998 2.750 1.750 June 28, 1998 2.875 2.125 September 27, 1998 2.313 1.000
The foregoing quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Dividend Policy. The Company has paid no cash dividends since its initial public offering. The Company currently intends to retain earnings for use in the operation and expansion of its business and therefore does not anticipate paying cash dividends on Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will be dependent, among other things, upon earnings, capital requirements, any financing agreement covenants and the financial condition of the Company.
Stock Repurchase. In March 1995, the Company's Board of Directors approved the repurchase of up to 500,000 shares of the Company's outstanding shares of common stock, of which 153,000 shares have been acquired to date. No shares were repurchased in 1997 or 1998.
Anti-Takeover Provisions. Indiana law and the Company's Articles of Incorporation and Code of By-laws contain provisions that restrict the acquisition of control of the Company. Such provisions can affect the rights of shareholders acquiring substantial interests in the Company's shares. For example, a shareholder who acquires more than 10% of the Company's shares without prior board approval will be limited in the timing and terms of any transaction it may enter into with the Company and will be subject to related provisions. Any shareholder who effects an acquisition after which such shareholder holds more than 20% of the Company's outstanding shares will have no voting rights in the shares acquired in such acquisition, unless such rights are conferred by the disinterested shareholders at the next annual meeting (or earlier special meeting).
SHAREHOLDER RIGHTS PLAN
In August 1997 the Company adopted a shareholders Rights Plan issuing one right for each outstanding share. Each right entitles the registered holder to purchase from the Company one share of common stock at $15 per share, subject to adjustment. The rights become exercisable if a person or group (other than certain related persons) acquires or announces a tender offer for prescribed percentages of the Company's shares or is declared an "adverse person" by the Company's Board of Directors. In these events, each right holder may purchase shares with a value equal to twice the exercise price. Furthermore, if the Company engages in certain mergers or similar business combinations a right holder may purchase shares of the acquiring company with a value of two times the purchase price of the right. The rights expire on August 12, 2007.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The consolidated statements of income summarize operating results for the last three years. This section of Management's Discussion highlights the main factors affecting the changes in operating results during the three-year period.
1998 VERSUS 1997
Net Sales
Net Sales for 1998 decreased 26.5% to $53.1 million from $72.3 million in 1997. Vehicle conversion sales declined 27.2%, comprised of a 28.2% decline in domestic and 32.0% decline in export. The start-up of the shuttle bus business generated $1.2 million in sales in 1998.
The Company's domestic sales declined consistent with the decline in the overall conversion market of 23.7% as reported by the Recreational Vehicle Industry Association. In addition, the Company's sales were adversely impacted by production constraints in the third quarter from shortages of key raw material parts, primarily hardwood components. The Company estimates that the production issues negatively impacted the year's sales by approximately $7 million.
Export sales declined due to price pressures from the stronger U.S. dollar and reduced demand in Japan and Korea caused by the economic turmoil in Asia.
Gross Profit
Gross profit margin for 1998 was 6.6% of sales compared to 8.2% in 1997. The decrease in gross margin as a percent of sales is primarily attributable to the impact of fixed plant overhead costs on the lower sales volume.
Selling and promotion expense
Selling and promotion expense for 1998 decreased 38.1% to $4.5 million primarily due to the lower domestic sales volume. The decrease in selling and promotion expense as a percentage of sales in 1998 is due to cost reductions from fixed salesmen salaries and the elimination of the Texas operation.
General and Administrative Expense
General and administrative expense in 1998 was $5.1 million, a 24.2% decrease from 1997. The decrease is primarily attributable to reductions in personnel, partially offset by $487,000 of start-up expense from Tecstar.
Restructuring Charges
In December 1996 the Company consolidated its Imperial Automotive Group manufacturing operation and its Texas manufacturing facility into Starcraft Automotive Group's manufacturing complex in Goshen, Indiana. The Company recorded a $1.0 million restructure charge in fiscal 1997.
Goodwill
Operating losses at Imperial, together with a strategic review of the conversion industry, resulted in an evaluation of the goodwill related to the acquisition of Imperial Industries, Inc. In 1997. As a
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result of the change in the domestic market, abandonment of the original strategic operating plan for Imperial, cumulative operating losses and continued weakness in the domestic vehicle conversion market, an impairment loss of $4.9 million was recorded in 1997 to write-off the remaining goodwill associated with this acquisition.
Income taxes
The Company recorded a minimal income tax credit in 1998 as the tax carry-back is fully utilized. The 1997 income tax credit was recorded at a 19.9% effective rate primarily due to the impact of a $2.5 million valuation allowance for deferred income taxes.
Net Sales
Net sales for 1997 were $72.3 million compared to $99.0 million in 1996. Domestic sales declined 21.9% to $57.2 million and export sales declined 41.3% to $15.0 million. The Company's average sale per unit was $6,000 in 1997 on 12,000 sale units versus $6,100 in 1996 on 16,100 sale units. The domestic conversion market continued to decline in 1997 due to the increased popularity and availability of sport utility vehicles and factory minivans, price pressure from higher chassis costs and lower levels of conversion inventory being held on dealer retail lots. The Company's domestic sale units declined 23.3% versus an industry average of 14.6% as reported by the Recreational Vehicle Industry Association. International sales in 1996 benefited from the early build of 1997 model year minivans for Japan totaling $6 million.
Gross Profit
Gross profit decreased from $15.3 million (15.5% of sales) in 1996 to $5.9 million (8.2% of sales) in 1997. The decrease in gross margin as a percent of sales is attributable to the impact of fixed plant overhead costs on the lower sales volume and $1.0 million of incremental carrying costs on chassis consignment inventory.
Selling and promotion expense
Selling and promotion expense decreased $1 million to $7.2 million in 1997 from 1996 due to the lower domestic sales volume. This expense increased from 8.4% of sales to 10.0% of sales due to the impact of fixed salesmen salaries on the lower sales volume.
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General and Administrative Expense
General and administrative expense decreased 7.0% in 1997 relative to 1996 before the impact of the National Mobility acquisition (1.7% after National Mobility). The decrease is primarily attributable to a reduction in personnel.
Restructuring Charges
In December 1996 the Company completed the consolidation of its Imperial Automotive Group manufacturing operation into Starcraft Automotive Group's manufacturing complex in Goshen, Indiana. The consolidation was designed to reduce excess production capacity, personnel count and fixed overhead expenses. The Company recorded a $750,000 restructure charge in the first quarter of fiscal year 1997.
In June 1997 the Company closed its McGregor, Texas manufacturing facility and sold certain assets of the business. The Company recorded a $260,000 net restructure charge in the third quarter of fiscal year 1997 primarily for the write-down of leasehold improvements.
Goodwill Impairment Loss
Operating losses at Imperial, together with a strategic review of the conversion industry, resulted in an evaluation of the goodwill related to the acquisition of Imperial Industries, Inc. The July 1994 acquisition of Imperial Industries, Inc. was viewed at that time as a strategic expansion of the Company's production capacity, conversion products lines, and sales and dealer network. The operating strategy was to allow Imperial to remain an independent manufacturing and operating subsidiary focused exclusively on the price sensitive, entry level domestic market. However, subsequent to the acquisition, the domestic market contracted, gross margins deteriorated, and Imperial experienced operating losses. In 1997, the manufacturing operations of Imperial were consolidated into the Starcraft manufacturing facility to reduce excess capacity. Further integration of the manufacturing operations, as well as integration and reduction of the sales, dealer and general and administration functions, have occurred since this consolidation.
As a result of the change in the domestic market, abandonment of the original strategic operating plan for Imperial, cumulative operating losses and continued weakness in the domestic vehicle conversion market, an impairment loss of $4.9 million was recorded in the fourth quarter of 1997 to write-off the remaining goodwill associated with this acquisition.
Income Taxes
The 1997 income tax credit was recorded at a 19.9% effective rate primarily due to the impact of a $2.5 million valuation allowance for deferred income taxes. The effective rate in 1996 was 15.4% which benefitted from the implementation of a foreign sales corporation subsidiary.
SEASONALITY AND TRENDS
The Company's sales and profits are dependent on the automotive markets in the United States and overseas, primarily Japan and northern Europe, and the OEM's ability to supply vehicle chassis. The business tends to be seasonal with stronger sales in March through July and is influenced by a number of factors including atypical weather for any sales region and OEM programs affecting the price, supply and delivery of vehicle chassis. General Motors' chassis represented 58% of the Company's total unit shipments in 1998 compared to 65% in 1997.
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The Company's retail dealers had approximately 1,300 units on hand at the end of 1998 compared to 3,600 at the end of 1997 and 5,300 at the end of 1996. Conversion inventory on dealer retail lots is down for the entire industry relative to prior years. The Company believes dealers are stocking fewer conversion products because of the growing availability of additional vehicle models such as sport utility vehicles and a general concern by dealers about the future of the conversion industry.
The strengthened U.S. dollar and recent turmoil in financial markets in Asia pressured the Company's 1998 export sales and margins. However, new market penetration and continued development of existing markets, especially Europe, should partially offset the Asia market decline in 1999. The domestic conversion market is expected to continue to decline in 1999.
The Company eliminated much excess production capacity and reduced overhead in 1997 to address the decline in revenue. In 1997 the Company began a plan to diversify both its product base and target markets as it acquired National Mobility Corporation. National Mobility markets its products in both the retail and government markets and has commenced production of a taxi product. In 1998 the Company continued to pursue its cost reduction and diversification strategy with the introduction of the shuttle bus product and the Tecstar program. The Company plans to continue to develop these new products and to increase its product offerings in the vehicle conversion commercial market.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $4.6 million during 1998 compared to using cash of $3.0 million in the prior year. The use of cash resulted primarily from the pretax operating loss. Receivables decreased $0.8 million due to the decrease in sales and production levels. Inventories increased primarily due to chassis purchase requirements under the shuttle bus business and the European conversion van sales program. Raw chassis in inventory at the end of September 1998 was $2 million compared to none at the end of last year. This inventory growth was primarily financed by the OEM through accounts payable which increased $1.9 million over prior year levels.
The Company invested $785,000 million in property and equipment during the year primarily for information systems ($430,000) and the shuttle bus plant start-up ($200,000).
The Company acquired National Mobility Corporation of Elkhart, Indiana in February 1997 for $1.2 million in cash, assumption of certain bank debt, and 15,000 shares of the Company's Common Stock.
The Company's use of cash for operations and investing activities was financed by bank debt. At the end of September 1998, bank debt was $11.8 million.
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On October 30, 1998, the Company entered into a new $14 million credit agreement with a lending institution. The agreement is subject to renewal in November 2001. Revolving advances under the agreement are limited to specified percentages of eligible receivables and inventories and are subject to a maximum limit of $9.2 million. The credit agreement also includes a $4.8 million term loan which is payable in monthly principal installments of $57,000 beginning December 1, 1998. The revolving borrowings bear interest of either 1/2% over prime or 3% over the Eurodollar rate. The term loan bears interest at either 3/4% over prime or 3.5% over the Eurodollar rate. The borrowings are secured by substantially all of the Company's assets. There is a fee of .25% of the average unused portion of the maximum borrowing amount. Pursuant to the agreement, the Company must, among other things, maintain a minimum level of tangible net worth of $(3.2 million) as of January 3, 1999, $(3.2 million) as of March 28, 1999, $(350,000) as of June 27, 1999 and $700,000 as of October 3, 1999. Additionally, the Company must generate earnings before income taxes, depreciation and amortization (EBITDA) of at least $(2.4 million), $362,000, $1.5 million and $410,000 for the fiscal quarters ending January 3, 1999, March 28, 1999, June 27, 1999 and October 3, 1999, respectively. If these minimum levels are not maintained, any outstanding balances become payable upon demand of the lending institution. In order to maintain the minimum levels of tangible net worth and EBITDA through 1999, the Company needs to achieve operating results substantially consistent with its 1999 operating plan.
On November 23, 1998, the Company entered into an amended credit agreement with its former primary lender. The agreement called for all borrowings over $3 million to be paid with proceeds from the $14 million refinancing described above. The remaining $3 million is payable in monthly principal installments of $36,000 beginning December 1, 1998. The note matures in November 2001 at which time any remaining principal balance is due. The note bears interest at 2% over the bank's prime rate and is subordinate to the $14 million credit agreement described above. The note is partially guaranteed by two individuals, one of whom is a director and officer of the Company and the other is currently an outside director. As incentive for their guarantees, the Company issued to the individuals warrants to purchase a total of 400,000 shares of Common Stock for $2.20 per share. The warrants have a five year term and are exercisable at the date of the grant.
The current and long-term notes payable on the September 27, 1998 balance sheet reflect the above modifications.
On January 12, 1998, the Company entered into an amended credit agreement with its former primary lender which was effective as of December 31, 1997. Borrowings were limited to specified percentages of eligible receivables, inventories and property and equipment, and were subject to maximum limits of $15 million through March 30, 1998, $12 million from March 31, 1998 through June 29, 1998 and $10 million thereafter. Borrowings under this agreement bore interest at 1% over the bank's prime rate were secured by substantially all of the Company's assets.
In addition to the availability of bank financing, the Company has restricted sales agreements with General Motors Acceptance Corporation, Chrysler Financial Corporation and Ford Motor Credit Company. Pursuant to these agreements, the Company obtains vehicle chassis from the OEM's for 90 days at nominal rates. If the Company fails to match a chassis with a dealer order within 90 days after delivery of the chassis to the Company, carrying charges increase to prime rate plus 1%.
In 1995 the Board of Director's approved the repurchase of up to 500,000 shares of the Company's outstanding shares of Common Stock, of which 153,000 shares have been acquired to date. No shares were repurchased in 1997. Additional shares are not expected to be acquired until the Company's debt is reduced.
The Company estimates that it will require $2 million to finance the start-up of Tecstar in 1999. The Company's new financing agreement is forecasted to satisfy this requirement.
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The Company believes that future cash flows from operations, funds available under its revolving credit agreement, and the continued use of OEM financing arrangements to manage its chassis inventory will be sufficient to satisfy its anticipated operating needs and capital improvements for 1999.
OTHER MATTERS
The Company is dependent on a centralized computer which provides data in support of vital company-wide operational and accounting functions. Many of the computer processes used to generate this data were programmed in-house following the common practice of using only two digits to designate a year. Other software purchased by the Company was written using the same convention. As the year 2000 approaches, programs with such date-related logic will not be able to distinguish between the years 1900 and 2000, potentially causing software and hardware to fail, generate erroneous calculations or present information in an unusable form beyond December 31, 1999. In 1997, the Company began devoting significant resources to replace its current system with a new, year 2000-compliant enterprise computer system. It is expected that the new system will be operational by June 1999. The total cost of the project, including hardware, software and consulting costs, is currently estimated to be approximately $1.1 million, of which $900,000 has been incurred as of September 27, 1998. These costs do not include any costs associated with the implementation of contingency plans, which are in the process of being developed.
Due to the uncertainty of the year 2000 readiness of third-party suppliers, customers and financial institutions, the Company is currently unable to determine whether the consequences of year 2000 failures will have a material impact on the Company's operations. The Company is attempting to assess the status of its significant third party vendors, customers and financial institutions through the use of questionnaires. Management expects this process to be complete by mid-1999. It is anticipated that the Company's year 2000 project will reduce the risk of significant business interruptions, but there is no assurance that this outcome will be achieved. Failure to detect and correct all internal instances of non-compliance or the inability of third parties to achieve timely compliance could result in the interruption of normal business operations which could, depending on its duration, have a material adverse effect on the Company's financial condition or results of operations.
DISCUSSION OF FORWARD-LOOKING INFORMATION
The discussion above includes forward-looking statements respecting restructuring cost estimates, future personnel and facility expense reductions, anticipated tax refunds, domestic and international market and economic trends, the Company's product and target market diversification plans, anticipated capital expenditures, the adequacy of capital resources and other matters. From time to time, Starcraft may make oral or written forward-looking statements regarding its anticipated sales, costs, expenses, earnings and matters affecting its condition and operations. All such forward- looking statements are subject to a number of material factors which could cause the statements or projections contained therein to be materially inaccurate. Such factors include, without limitation, the following:
General Operating Contingencies. The Company may not be able to attract and retain employees with sufficient skills to conduct its operations efficiently and may from time to time be subject to work slow-downs or stoppages. The Company may be adversely affected by delay or unavailability of supply of numerous component parts. The Company will not always be able to satisfy its capital requirements with internally generated funds and may, from time to time, need to rely on bank financing and other third party capital resources. There is no assurance that such resources will always be available to the Company or as to the terms that will apply to any financing, or as the Company's ability to continue to comply with such terms over time.
Acquisitions and Diversification. The Company may be engaged in negotiations from time to time regarding prospective acquisitions of van conversion or related businesses. Such acquisitions could be material to the Company and, if
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effected, could have a material effect on the Company's financial condition or results of operations. There is no assurance as to when or whether the Company will be able to effect acquisitions, whether it will be able to generate requisite funding to effect such acquisitions, or as to the terms on which such acquisitions may be effected. A significant aspect of the Company's strategy is to diversify its product offerings into new product lines, such as taxis and shuttle buses. The Company has less experience manufacturing and marketing such products than it has in its core conversion vehicle business. There is no assurance that such new product lines will be profitable.
Economic Conditions. The van conversion industry is cyclical and is affected by the general trends of the economy and consumer preferences and consumer confidence and trends of the automotive and recreational vehicle industries both domestically and in international markets. The level of disposable consumer income affects the Company's sales because its products are generally considered discretionary expenditures by consumers. In difficult economic times, consumers tend to spend less of their income on discretionary items. Other economic factors affecting the demand for the Company's products include the availability and price of gasoline, the level of interest rates and the availability of consumer financing. A decline in general economic conditions or consumer confidence can be expected to affect Starcraft's sales adversely.
Supply and Financing of Vehicle Chassis. The Company is dependent upon the OEMs to supply its requirements for vehicle chassis. Labor stoppages, supply shortages and a variety of other factors that influence OEM production can affect the availability or timely delivery of vehicle chassis to the Company. If vehicle chassis are unavailable, or if the Company must accept delivery earlier or later than it otherwise would prefer, sales could be adversely affected and financing expenses could increase. The Company must also comply with its consignment and restricted sale contracts with the OEMs pursuant to which the OEMs impose certain specifications for the Company's vehicle conversions, including gross vehicle weight standards. Such contracts also restrict the Company's ability to dispose of completed chassis and prohibit the transfer of chassis to unauthorized U.S. and foreign dealers. All of the Company's consignment and restricted sale contracts with chassis suppliers are terminable by either party on short notice without cause. The availability of the OEM financing rates is dependent upon the Company's compliance with its OEM contracts and its ability to maintain satisfactory credit relationships with the OEM's finance subsidiaries. Adverse changes in the Company's financial condition or results of operations could cause such financing subsidiaries to seek to change adversely the Company's financing terms or to terminate such financing arrangements. Such a change or termination could have a material adverse effect on the Company's financial condition and results of operations.
Regulation. The Company is subject to various foreign, federal, state and local regulations. In particular, van conversion components produced by the Company are required to comply with Federal Motor Vehicle Safety Standards and similar safety standards imposed in its foreign markets. Promulgation of additional safety standards in the future could require the Company to incur additional testing and engineering expenses which could adversely affect the Company's results of operations. The Company's international sales can be adversely affected by changes in foreign import tariffs and taxes and fluctuations in exchange rates. The Company must comply with certain Federal and state regulations relating to the disposition of hazardous wastes generated in its production processes. The Company's failure to comply with applicable regulations or changes in current regulations, including the adoption of new safety or environmental standards, could have material adverse effect on the Company's results of operations.
Competition. The United States vehicle conversion industry is very competitive with several principal nationwide manufacturers and numerous local and regional competitors. There is no assurance the Company will be able to maintain its current competitive position in the vehicle conversion market.
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Potential Product Liability. Like other automotive manufacturers, the Company may be subject to claims that its products caused or contributed to damage or injury sustained in vehicle accidents or may be required to recall products deemed unsafe. Any such claims in excess of the Company's insurance coverage or material product recall expenses could adversely affect the Company's financial condition and results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
Board of Directors Starcraft Corporation and Subsidiaries Goshen, Indiana
We have audited the accompanying consolidated balance sheet of Starcraft Corporation and Subsidiaries as of September 27, 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended September 27, 1998. 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 audit. The consolidated financial statements of Starcraft Corporation and Subsidiaries as of September 28, 1997 and for the years ended September 28, 1997 and September 29, 1996 were audited by other auditors whose report dated January 12, 1998 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Starcraft Corporation and Subsidiaries as of September 27, 1998 and the consolidated results of their operations and their cash flows for the year ended September 27, 1998 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Elkhart, Indiana November 23, 1998
To the Board of Directors Starcraft Corporation
We have audited the accompanying consolidated balance sheets of Starcraft Corporation and Subsidiaries as of September 28, 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended September 28, 1997. 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 consolidated financial position of Starcraft Corporation and Subsidiaries as of September 28, 1997 and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 28, 1997 in conformity with generally accepted accounting principles.
\s\Ernst & Young
January 12, 1998 Fort Wayne, Indiana
STARCRAFT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 27, 1998 and September 28, 1997
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
CONSOLIDATED BALANCE SHEETS (CONTINUED) September 27, 1998 and September 28, 1997
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended September 27, 1998, September 28, 1997 and September 29, 1996
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended September 27, 1998, September 28, 1997 and September 29, 1996
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
STARCRAFT CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS September 27, 1998 and September 28, 1997 (In thousands, except per share data) - --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Consolidation: Starcraft Corporation and Subsidiaries (Company) are second stage manufacturers of custom van, pickup truck and sport utility vehicle conversions, and shuttle buses. The consolidated financial statements include the accounts of Starcraft Corporation and its wholly owned subsidiaries: Starcraft Automotive Group, Inc., Imperial Automotive Group, Inc. (Imperial), Starcraft Southwest, Inc., and National Mobility Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Additionally the Company has a controlling interest in Tecstar, Inc. which is also included as a part of the consolidated financial statements.
The Company's customers operate in the automotive industry. The Company sells conversion units throughout the United States, and export sales are principally to locations in Japan and northern Europe. Credit is extended to customers based on an evaluation of the customer's financial condition, and when credit is extended collateral generally is not required. Sales to the Company's largest customer were $5,579, $9,541 and $18,526 in 1998, 1997 and 1996, respectively.
Cash Equivalents: Cash equivalents include all highly liquid investments with a maturity when purchased of three months or less.
Inventories: Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for certain inventories ($10,081 and $8,962 at September 27, 1998 and September 28, 1997, respectively) and by the first-in, first-out (FIFO) method for all other inventories.
Property and Equipment: Property and equipment are stated at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The Company is depreciating buildings over periods of 15 to 50 years, building improvements over periods of 5 to 20 years, and equipment over periods of 3 to 12 years.
Goodwill: Goodwill is amortized by the straight-line method over a period of 15 years and is stated net of accumulated amortization of $155 and $57 at September 27, 1998 and September 28, 1997, respectively. The Company evaluates the recoverability based on undiscounted projected operating cash flows when factors indicate that an impairment may exist. During the fourth quarter of 1997, the Company wrote off the remaining goodwill associated with the acquisition of Imperial Industries, Inc. as more fully described in Note 8.
Warranties: The Company follows the policy of accruing an estimated liability for warranties at the time the warranted products are sold.
Revenue Recognition: The Company generally manufactures products based on specific orders from customers. Shipments are generally made by common carrier after receiving authorization from the customer, and revenue is recognized upon shipment. Net sales do not include the cost of consigned chassis (see Note 10).
STARCRAFT CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS September 27, 1998 and September 28, 1997 (In thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation: The Company periodically grants stock options for a fixed number of shares to employees. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Use of Estimates: Preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Earnings Per Common Share: Basic and diluted earnings per common share are computed under an accounting standard effective beginning with the quarter ended December 28, 1997. All prior earnings per common share amounts have been restated to be comparable. Basic earnings per common share is based on net income available to common shareholders divided by the weighted average number of common shares considered to be outstanding during the period. The weighted average number of common shares outstanding were 4,133,600, 4,127,350 and 4,142,402 for the years ended September 27, 1998, September 28, 1997 and September 29, 1996, respectively. Diluted earnings per common share shows the dilutive effect of any additional potential common shares issuable under stock options. The Company's outstanding incentive stock options were not considered in the computations of earnings per share, assuming dilution because the effects of assumed exercise would have been antidilutive.
Seasonality The Company's business is seasonal. Sales are generally higher during the spring and summer months of the year.
Fiscal Year: The Company's fiscal year ends on the Sunday closest to September 30. The years ended September 27, 1998, September 28, 1997 and September 29, 1996 each contain 52 weeks.
NOTE 2 - INVENTORIES
The composition of inventories at September 27, 1998 and September 28, 1997 is as follows:
1998 1997 ---- ----
Raw materials $ 4,631 $ 4,654 Chassis 2,006 - Work-in-process 2,584 1,667 Finished goods 1,636 2,949 ------------ ------------
$ 10,857 $ 9,270 ============ ============
The use of the LIFO method of determining the cost of inventories did not have material effect on inventories at September 27, 1998 and September 28, 1997.
NOTE 3 - DEBT ARRANGEMENTS
On October 30, 1998, the Company entered into a new $14,000 credit agreement with a lending institution. The agreement is subject to renewal in November 2001. Revolving advances under the agreement are limited to specified percentages of eligible receivables and inventories and are subject to a maximum limit of $9,200. The credit agreement also includes a $4,800 term loan which is payable in monthly principal installments of $57 beginning December 1, 1998. The note matures in November 2001 at which time any remaining principal balance is due The revolving borrowings bear interest of either 1/2% over prime or 3% over the Eurodollar rate. The term note bears interest at either 3/4% over prime or 3.5% over the Eurodollar rate. The borrowings are secured by substantially all of the Company's assets. There is a fee of .25% of the average unused portion of the maximum borrowing amount. Pursuant to the agreement, the Company must, among other things, maintain a minimum level of tangible net worth of $(3,200) as of January 3, 1999, $(3,200) as of March 28, 1999, $(350) as of June 27, 1999 and $700 as of October 3, 1999. Additionally, the Company must generate earnings before income taxes, depreciation and amortization (EBITDA) of at least $(2,400), $362, $1,518 and $410 for the fiscal quarters ending January 3, 1999, March 28, 1999, June 27, 1999 and October 3, 1999, respectively. If these minimum levels are not maintained, any outstanding balances become payable upon demand of the lending institution. In order to maintain the minimum levels of tangible net worth and EBITDA through 1999, the Company needs to achieve operating results substantially consistent with its 1999 operating plan.
On November 23, 1998, the Company entered into an amended credit agreement with its former primary lender. The agreement called for all borrowings over $3,000 to be paid with proceeds from the $14,000 refinancing described above. The remaining $3,000 is payable in monthly principal installments of $36 beginning December 1, 1998. The note matures in November 2001 at which time any remaining principal balance is due. The note bears interest at 2% over the bank's prime rate and is subordinate to the $14,000 credit agreement described above. The note is partially guaranteed by two individuals, both whom are currently directors and one of whom is an officer of the Company. (See Note 13)
The current and long-term notes payable on the September 27, 1998 balance sheet reflect the above modifications.
On January 12, 1998, the Company entered into an amended credit agreement with its former primary lender which was effective as of December 31, 1997. Borrowings were limited to specified percentages of eligible receivables, inventories and property and equipment, and were subject to maximum limits of $15,000 through March 30, 1998, $12,000 from March 31, 1998 through June 29, 1998 and $10,000 thereafter. Borrowings under this agreement bear interest at 1% over the bank's prime rate and were secured by substantially all of the Company's assets. This credit agreement was further amended on November 23, 1998 (see above).
NOTE 3 - DEBT ARRANGEMENTS (Continued)
The carrying amount of the Company's long-term debt approximates fair value.
Interest expense was approximately $892, $403 and $305 in 1998, 1997 and 1996, respectively.
Long-term debt is due as follows:
Fiscal Year Ending
1999 $ 1,023 2000 1,116 2001 1,023 2002 8,638
NOTE 4 - INCOME TAXES
Federal and state income taxes (credits), all of which were domestic, consist of the following:
1998 1997 1996 ---- ---- ---- Current Federal $ (61) $ (2,770) $ (103) State 159 (627) 55 ------------ ------------ ------------ 98 (3,397) (48) Deferred Federal (154) 508 54 State (23) 75 14 ------------ ------------ ------------ (177) 583 68 ------------ ------------ ------------
$ (79) $ (2,814) $ 20 ============ ============ ============
The provisions for income taxes are different from amounts that would otherwise be computed by applying a federal statutory rate of 34% to income taxes. A reconciliation of the differences is as follows:
NOTE 4 - INCOME TAXES (Continued)
The composition of the deferred tax assets and liabilities at September 27, 1998 and September 28, 1997 is as follows:
The alternative minimum tax carryforward of $220 has no expiration date for income tax purposes. The net operating loss carryforward of $2,231 expires in 2018.
NOTE 5 - COMPENSATION PLANS
The Company sponsors a qualified profit-sharing plan, more commonly known as a 401(k) plan, for all of its employees with over six months of service. The plan provides for a discretionary matching contribution by the Company of the employee's salary deduction, up to 6% of compensation. Also, the plan provides for an additional discretionary contribution annually as determined by the Board of Directors. The amounts charged to expense for this plan were approximately ($250), $361 and $107 in 1998, 1997 and 1996, respectively.
NOTE 6 - STOCK OPTION PLANS
The Company maintains two stock incentive plans under which stock options are granted to key employees and directors. The plans authorize the grant of stock options for up to 630,000 shares of the Company's common stock. The options in these two plans have five year terms and become fully exercisable after six months. The Company also sponsors a qualified stock option plan with 40,000 shares of common stock reserved for options to certain sales representatives who are not employees of the Company. These options have five year terms.
Under the three plans, options may not be granted at prices below 85% of the current market value of the stock at the date of grant. All options awarded through September 27, 1998 have been at fair market value on the date of grant. For each of the three years in the period ended September 27, 1998, the effect of the stock options in computing earnings per common share was antidilutive.
A summary of the Company's stock option activity and related information for the years ended September 27, 1998, September 28, 1997 and September 29, 1996 follows:
As of September 27, 1998, there were 267,349 options outstanding with exercise prices which ranged from $1.625 to $4.00. The weighted-average exercise price of these options is $2.34, and the weighted-average remaining contractual life is 4.1 years. As of September 27, 1998, there were 185,500 options outstanding with exercise prices which ranged from $4.25 to $7.75. The weighted-average exercise price of these options is $6.32, and the weighted-average remaining contractual life is 1.8 years.
NOTE 6 - STOCK OPTION PLANS (Continued)
The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options. Under APB 25 no compensation expense has been recognized because the exercise price of the Company's stock options has equaled the market price of the underlying stock on the date of grant. Proforma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") and has been determined as if the Company had accounted for its stock options issued in 1998 and 1997 under the fair value method of FAS 123. The fair value was estimated as of the date of grant using a Black-Sholes option pricing model with the following assumptions:
1998 1997 ---- ----
Risk-free interest rate 4.52% - 5.63% 6.04% - 6.77% Dividend yield 0% 0% Volatility factor 54.8% - 59.8% 40.9% - 48.8% Expected option life 4 years 4 years
For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's proforma information follows:
1998 1997 1996 ---- ---- ----
Proforma net income (loss) $(6,912) $(11,469) $13 Proforma net income (loss) per share $(1.67) $ (2.78) $0.00
NOTE 7 - SHAREHOLDER RIGHTS PLAN
In August 1997 the Company adopted a Shareholders Rights Plan issuing one right for each outstanding share. Each right entitles the registered holder to purchase from the Company one share of common stock at $15 per share, subject to adjustment. The rights become exercisable if a person or group (other than certain related persons) acquires or announces a tender offer for prescribed percentages of the Company's shares or is declared an "adverse person" by the Company's Board of Directors. In these events, each right holder may purchase shares with a value equal to twice the exercise price. Furthermore, if the Company engages in certain mergers or similar business combinations a right holder may purchase shares of the acquiring company with a value to two times the purchase price of the right. The rights expire on August 12, 2007.
NOTE 8 - RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT
In December 1996 the Company consolidated its Imperial manufacturing operation located in Elkhart, Indiana into the Company's facility in Goshen, Indiana. In June 1997 the Company closed its McGregor, Texas plant and sold the assets of that plant. The Company recorded $1,010 of restructuring charges related to such activities primarily for employee termination and other costs ($179), leasehold asset write-offs ($326) and the recognition of remaining contractual lease obligations ($505). The contractual lease obligations primarily pertain to remaining rent and associated contractual costs at the former Imperial location. The remaining liability for contractual lease obligations at September 27, 1997 was paid during fiscal 1998.
Operating losses at Imperial, together with a strategic review of the conversion industry, resulted in an evaluation of the goodwill related to the acquisition of Imperial Industries, Inc. The July 1994 acquisition of Imperial Industries, Inc. was viewed at that time as a strategic expansion of the Company's production capacity, conversion products lines, and sales and dealer network. The operating strategy was to allow Imperial to remain an independent manufacturing and operating subsidiary focused exclusively on the price sensitive, entry level domestic conversion market. However, subsequent to the acquisition, the domestic market has contracted, gross margins have deteriorated, and Imperial has experienced operating losses. In 1997, the manufacturing operations of Imperial were consolidated into the Starcraft manufacturing facility to reduce excess capacity. Further integration of the manufacturing operations, as well as integration and reduction of the sales, dealer and general and administration functions, have occurred since this consolidation.
As a result of the change in the domestic market, abandonment of the original strategic operating plan for Imperial, cumulative operating losses and continued weakness in the domestic vehicle conversion market, it was determined that the goodwill was not recoverable, and therefore, a goodwill impairment loss of $4,916 was recorded in the fourth quarter of 1997 to write off the remaining goodwill associated with this acquisition.
NOTE 9 - BUSINESS COMBINATION
On February 28, 1997, the Company acquired the assets and assumed certain liabilities of National Mobility Corporation, a manufacturer of conversion vehicles for the physically challenged. The purchase price of the acquired assets was $1,200 in cash, assumption of certain bank debt, and issuance of 15,000 shares of the Company's common stock. The excess of the total acquisition cost over the fair value of the net assets acquired is recorded as goodwill and is being amortized over 15 years using the straight-line method.
NOTE 9 - BUSINESS COMBINATION (Continued)
The acquisition was recorded using the purchase method of accounting, and accordingly, the results of operations of National Mobility Corporation for the year ended September 27, 1998 and for the seven months ended September 28, 1997 are included in the consolidated financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The allocation of the purchase price is summarized as follows:
Current assets $ 2,448 Property and equipment 200 Goodwill 1,510 Current liabilities (2,357) ------------
$ 1,801 ============
On the basis of a proforma consolidation of the results of operations as if the acquisition had taken place at the beginning of 1996, consolidated net sales would have been $102,978 for 1996 and $73,771 for 1997. Consolidated proforma income (loss) and earnings (loss) per share would not have been materially different from the reported amounts for 1998 and 1997. The proforma information is not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1996.
NOTE 10 - CONSIGNMENT ARRANGEMENTS
The Company obtains vehicle chassis for modification from major vehicle manufacturers (OEMs) under consignment and restricted sales agreements. These agreements generally provide that (i) the Company may not obtain certificates of origin or other evidence of ownership of chassis, (ii) modification must conform to standards specified by OEMs, and (iii) modifications generally are performed only after a sale has been negotiated with an OEM approved dealer. The Company generally ships converted chassis only after dealer acceptance has been approved by the OEM. The OEMs bill the dealer and provide warranty for the chassis.
Consistent with the practice in the industry, the Company accounts for chassis as consignment inventory. Accordingly, the Company records chassis inventory and related obligations only in the event they are required to purchase chassis from the OEM. Provisions for decline in chassis value are recognized when, in management's estimation, such provisions are necessary. Provisions for decline in chassis value, chassis inventory, and chassis sales are not material to the accompanying financial statements.
NOTE 10 - CONSIGNMENT ARRANGEMENTS (Continued)
At September 27, 1998, the Company has possession of chassis in the aggregate amount of $8,720 (of which $2,960 related to chassis on consignment for periods exceeding 90 days) and has total chassis line availability between $34,500 and $44,000 based on the time of year. Carrying charges on consignment chassis, which are presented in cost of goods sold, were approximately $1,030, $2,740 and $1,729 in 1998, 1997 and 1996, respectively. The OEMs have also instituted incentive rebates to second-stage manufacturers based on the number of chassis delivered to dealers. Those incentives reduced cost of goods sold by approximately $731, $751 and $1,135 in 1998, 1997 and 1996, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment. The total rental expense for 1998, 1997 and 1996 is $270, $688 and $490, respectively. Rental commitments at September 27, 1998 for long-term noncancelable operating leases are as follows:
1999 $ 204 2000 96 2001 5 ------------
$ 305 ============
The Company is subject to various legal proceedings and claims with respect to such matters as product liabilities and other actions which arise out of the normal course of its business. Management and its legal counsel periodically review the probable outcome of pending proceedings and the costs reasonably expected to be incurred. The Company accrues for these costs when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the opinion of management, any ultimate cost to the Company in excess of amounts accrued will not materially affect its consolidated financial position, cash flows or results of operations.
The Company's commitments with respect to its chassis arrangements are described in Note 10.
NOTE 12 - RESEARCH AND DEVELOPMENT
The Company incurs costs to improve the appeal and safety of its products. Research and development costs are charged to operations when incurred. Amounts charged to operations were approximately $520, $824 and $893 in 1998, 1997 and 1996, respectively.
NOTE 13 - SUBSEQUENT EVENT
On November 20, 1998 the Company issued warrants to purchase shares of Common stock to two individuals as incentive for their partial guarantee of the Company's long-term debt (See Note 3). The individuals can both purchase up to 200,000 shares of Common stock of the Company for $2.20 per share which was the ten day average market price preceding the date of grant. The warrants have a five year term and are exercisable at the date of grant.
NOTE 14 - UNAUDITED FINANCIAL INFORMATION
Presented below is certain unaudited quarterly financial information for 1998 and 1997.
Adjustments in the fourth quarter of the fiscal year ended September 27, 1998 included the start up loss related to Tecstar, Inc. and certain accruals. Adjustments in the fourth quarter of the fiscal year ended September 28, 1997 included a goodwill impairment loss.
NOTE 15 - MANAGEMENT'S PLAN REGARDING CONTINUING OPERATIONS
At September 27, 1998 and for the year then ended, the Company had negative cash flow from operations, recurring losses from operations and no additional funds available under its prior loan agreement.
Future operations of the Company are intended to continue. The Company has refinanced its existing debt with a new lending institution (see Note 3). The new agreement gives the Company availability of funds for near term operating losses and working capital needs (subject to borrowing base limitations). The new agreement also includes financial covenants that are less restrictive than similar covenants with its former lender. Management intends to reduce operating losses and ultimately return the Company to profitability through diversification of their products and markets, and through continued cost reductions. If future actual results fail to meet management's plan, additional losses could occur.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Previously reported.
Page 22 of 25
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Registrant's proxy statement filed with the Securities and Exchange Commission on January 8, 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Registrant's proxy statement filed with the Securities and Exchange Commission on January 8, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Registrant's proxy statement filed with the Securities and Exchange Commission on January 8, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Registrant's proxy statement filed with the Securities and Exchange Commission on January 8, 1999.
Page 23 of 25
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of the report:
Financial Statements (as of September 27, 1998 and September 28, 1997 and for the fiscal periods ended September 27, 1998, September 28, 1997, and September 29, 1996):
Reports of Independent Auditors Balance Sheets Statements of Operations Statements of Cash Flows Statements of Shareholders' Equity Notes to Financial Statements
(b) Reports on Form 8-K
Registrant filed a report on Form 8-K on July 24, 1998, reporting a change of its independent auditors.
(c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index immediately following the signature page.
(d) The following financial statement schedule is filed as part of this report:
(i) Schedule II -- Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have been omitted.
Page 24 of 25
STARCRAFT CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in Thousands)
(a) Write-off of bad debts, less recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized.
STARCRAFT CORPORATION
DATE: January 11, 1999 By: /s/ Kelly L. Rose -------------------------------- Kelly L. Rose, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 28th day of December, 1998.
1) Principal Executive Officer:
By: /s/ Kelly L. Rose Chairman, Chief Executive Officer Kelly L. Rose
2) Principal Financial/ Accounting Officer:
By: /s/ Michael H. Schoeffler President, Chief Financial Officer, Michael H. Schoeffler Treasurer, Secretary
3) The Board of Directors:
By: /s/ Kelly L. Rose Director Kelly L. Rose
By: /s/ Frank K. Martin Director Frank K. Martin
By: /s/ G. Raymond Stults Director G. Raymond Stults
By: /s/ David J. Matteson Director David J. Matteson
By: /s/ Allen H. Neuharth Director Allen H. Neuharth
Page 25 of 25
PART IV
EXHIBIT INDEX
Reference to Sequential Regulation S-K Page Exhibit Number Document Number
3.1 Registrant's Articles of Incorporation, as amended. Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for the year ending October 1, 1995. *
3.2 Registrant's Code of By-Laws, as amended. Incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-K for the fiscal year ending September 29, 1996. *
4.1 Article 6 - "Terms of Shares" and Article 9 - "Provisions for Certain Business Combinations" of the Registrant's Articles of Incorporation, as amended. Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for the year ending October 1, 1995. *
4.2 Article III - "Shareholder Meetings", Article VI - "Certificates for Shares" and Article VII - "Corporate Books and Records - Section 3" of the Registrant's Code of By-Laws, as amended. Incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-K for the fiscal year ending September 29, 1996. *
4.3 Amended and Restated Credit Agreement between the Registrant and Bank One Indianapolis, N.A., dated November 30, 1994. Incorporated by reference to Exhibit 4.6 of the Registrant's Form 10-K for the fiscal year ending October 2, 1994. *
4.4 First Amendment to Amended and Restated Credit Agreement between the Registrant and Bank One, Indianapolis, N.A. dated March 7, 1995. Incorporated by reference to Exhibit 10(2) to the Registrant's Form 10-Q for the quarter ending April 2, 1995. *
4.5 Second Amendment to Amended and Restated Credit Agreement dated April 6, 1996, among Starcraft Corporation, Starcraft Automotive Group, Inc. Imperial Automobile Group, Inc. and Bank One, Indianapolis, N.A. Incorporated by reference to the Registrant's Form 10-Q for the Quarter Ended March 31, 1997. *
4.6 Third Amendment to Amended and Restated Credit Agreement, effective January 31, 1997, among Starcraft Corporation, Starcraft Automotive Group, Inc., Imperial Automobile Group, Inc. and Bank One, Indianapolis, N.A. Incorporated by reference to the Registrant's Form 10-Q for the Quarter Ended March 31, 1997. *
4.7 Fourth Amendment to Amended and Restated Credit Agreement, effective June 29, 1997, among Starcraft Corporation, Starcraft Automotive Group, Inc., Imperial Automobile Group, Inc. and Bank One, Indianapolis, N.A. Incorporated by reference to Exhibit [ ] of the Registrant's Form 10-K for the fiscal year ending September 28, 1997. *
4.8 Fifth Amendment to Amended and Restated Credit Agreement, effective December 31, 1997, among Starcraft Corporation, Starcraft Automotive Group, Inc., Imperial Automobile Group, Inc. and Bank One, Indianapolis, N.A. Incorporated by reference to Exhibit [ ] of the Registrant's Form 10-K for the fiscal year ending September 28, 1997. *
4.9 Seventh Amendment to Amended and Restated Credit Agreement, dated as of February 27, 1998 , among Starcraft Corporation, Starcraft Automotive Group, Inc., Imperial Automotive Group, Inc. and Bank One, Indiana, N.A. Incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the quarter ending March 29, 1998. *
4.10 Eighth Amendment to Amended and Restated Credit Agreement, effective November 23, 1998, among Starcraft Corporation, Starcraft Automotive Group, Inc., Imperial Automobile Group, Inc. and Bank One, Indianapolis, N.A. [ ]
4.11 Rights Agreement, dated as of August 12, 1997, between Registrant and Harris Trust and Savings Bank, as Rights Agent. Incorporated by reference to the Registrant's 8-A filed September 9, 1997. *
4.12 Promissory Note from Starcraft Automotive Group, Inc. to Bank One, Indiana, N.A. dated November 23, 1998. [ ]
4.13 Guaranty of Kelly L. Rose to the obligations of Starcraft Automotive Group, Inc. to Bank One, Indiana, N.A. dated November 23, 1998. [ ]
4.14 Guaranty of Gerald R. Stults to the obligations of Starcraft Automotive Group, Inc. to Bank One, Indiana, N.A. dated November 23, 1998. [ ]
4.15 Loan and Security Agreement by and among Starcraft Automotive Group, Inc., National Mobility Corporation, Starcraft Corporation, Imperial Automotive Group, Inc. and Foothill Capital Corporation, dated October 30, 1998. [ ]
4.16 Secured Promissory Note from Starcraft Automotive Group, Inc. and National Mobility Corporation to Foothill Capital Corporation dated October 30, 1998. [ ]
10.1(a) The Starcraft Automotive Corporation Stock Incentive Plan. **
10.1(b) The Starcraft Corporation 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1(b) to the Registrant's From 10-K for the fiscal year ending September 29, 1996. *
10.2 Form of Tax indemnification agreement among the Registrant, Mr. Kash, Mr. Rose, Mr. Newberry and Mr. Hardin, dated as of July 21, 1993. Incorporated by reference to Exhibit 10.7 of the Registrant's registration statement on Form S-1, Reg. No. 33- 63760. *
10.3(a) Employment Agreement with Kelly L. Rose dated June 2, 1993. Incorporated by reference to Exhibit 10.10(a) of the Registrant's Form S-1. **
10.3(b) Employment Agreement with Kelly L. Rose dated December 12, 1996. Incorporated by reference to Exhibit 10.3(b) to the Registrant's From 10-K for the fiscal year ending September 29, 1996.
10.3(c) Form of First Addendum to Employment Agreement with Kelly L. Rose, December 31, 1997. Incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the fiscal year ending March 29, 1998. *
10.3(d) Second Addendum to Employment Agreement with Kelly L. Rose, effective December 15, 1997. [ ]
10.3(e) Consulting Agreement with Allen H. Neuharth dated September 15, 1993. Incorporated by reference to Exhibit 10.3(k) of the Registrant's Form 10-K for the fiscal year ending October 2, 1994. *
10.3(f) Employment Agreement between the Registrant and Michael H. Schoeffler dated January 16, 1995. Incorporated by reference to Exhibit 10.3(m) of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.3(g) Employment Agreement between the Registrant and Michael H. Schoeffler dated December 12, 1996. Incorporated by reference to Exhibit 10.3(e) to the Registrant's Form 10-K for the fiscal year ending September 29, 1996. *
10.4 Inventory Loan and Security Agreement by and between the Registrant and General Motors Acceptance Corporation, as amended. Incorporated by reference to Exhibit 10.13 of the Registrant's Form S-1. **
10.5 Agreement by and between the Registrant and General Motors Acceptance Corporation dated February 7, 1991. Incorporated by reference to Exhibit 10.14 of the Registrant's Form S-1. **
10.6 Intercreditor Agreement between General Motors Acceptance Corporation and Bank One, Indianapolis, N.A. dated July 21, 1992. Incorporated by reference to Exhibit 10.16 of the Registrant's Form S-1. **
10.7 Authorized Converter Pool Agreement between the Registrant and Ford Motor Company dated May 7, 1991 and amended May 7, 1991. Incorporated by reference to Exhibit 10.17 of the Registrant's Form S-1. **
10.8 Wholesale Financing and Security Agreement between the Registrant and Ford Motor Credit Company dated April 17, 1991. Incorporated by reference to Exhibit 10.18 of the Registrant's Form S-1. **
10.9 Intercreditor Agreement between Ford Motor Credit Company and Bank One, Indianapolis, N.A. dated July 17, 1992. Incorporated by reference to Exhibit 10.20 of the Registrant's Form S-1. **
10.10 Truck Consignment Agreement between the Registrant and Chrysler Corporation dated August 29, 1991. Incorporated by reference to Exhibit 10.21 of the Registrant's Form S-1. **
10.11 License Agreement by and between the Registrant and AlliedSignal, Inc. dated February 18, 1993. Incorporated by reference to Exhibit 10.22 of the Registrant's Form S-1. **
10.12 Agent Agreement by and between the Registrant, Mitsui & Co. (U.S.A.), Inc. and Mitsui & Co., Ltd. dated March 1, 1993. Incorporated by reference to Exhibit 10.23 of the Registrant's Form S-1. **
10.13 License Agreement by and between the Registrant and Starcraft RV, Inc. dated September 12, 1991. Incorporated by reference to Exhibit 10.24 of the Registrant's Form S-1. **
10.14 License Agreement by and between the Registrant and Starcraft Recreational Products, Ltd. dated January 18, 1991. Incorporated by reference to Exhibit 10.25 of the Registrant's Form S-1. **
10.15 Contract for Conditional Sale of Real Estate by and between the Registrant and the Harold A. Schrock Revocable Trust dated December 20, 1991 and amended February 28, 1992. Incorporated by reference to Exhibit 10.26 of the Registrant's Form S-1. **
10.16(a) Directors' Share Plan, restated effective October 1, 1995. Incorporated by reference to exhibit 10.16(a) of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.16(b) Directors' Compensation Deferral Plan effective October 1, 1995. Incorporated by reference to Exhibit 10.16(b) of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.17 Ford Authorized Convertor Pool Agreement between Imperial Automotive Group, Inc. and Ford Motor Co. dated June 29, 1994. Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-K for the fiscal year ending October 2, 1994. *
10.18 Inventory Loan and Security Agreement between Imperial Automotive Group, Inc. and General Motors Acceptance Corporation dated June 20, 1994. Incorporated by reference to Exhibit 10.20 of the Registrant's Form 10-K for the fiscal year ending October 2, 1994. *
10.19 Ford Authorizing Converter Pool Agreement between Ford Motor Co. and Imperial Automotive Group, Inc. dated June 29, 1994. Incorporated by reference to Exhibit 10.21 of the Registrant's Form 10-K for the fiscal year ending October 2, 1994. *
10.20 Intercreditor Agreement between General Motors Acceptance Corporation and Bank One Indianapolis, N.A. dated July 15, 1994. Incorporated by reference to Exhibit 10.24 of the Registrant's Form 10-K for the fiscal year ending October 2, 1994. *
10.21 GMC Truck Special Vehicle Manufacturers Agreement by and between Starcraft Automotive Group, Inc. and GMC Truck Division, Truck & Bus Group, General Motors Corporation dated February 1, 1995. Incorporated by reference to Exhibit 10.21 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.22 GMC Truck Special Vehicle Manufacturer's Agreement between Imperial Automotive Group, Inc. and the GMC division of General Motors Corporation effective February 1, 1995. Incorporated by reference to Exhibit 10.22 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.23 Lease between Imperial Automotive Group, Inc. and Beck Real Estate Corporation dated February 3, 1995. Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q for the quarter ending January 1, 1995. *
10.24 Guaranty of Starcraft Automotive Group, Inc. to the obligations of Starcraft Corporation to General Motors Acceptance Corporation dated February 9, 1995. Incorporated by reference to Exhibit 10.23 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.25 Guaranty of Starcraft Automotive Group, Inc. to the obligations of Imperial Automotive Group, Inc.to General Motors Acceptance Corporation dated February 9, 1995. Incorporated by reference to Exhibit 10.25 of the Registrants Form 10-K for the year ending October 1, 1995. *
10.26 Promissory Note from the Registrant to Imperial Industries, Inc. dated April 1, 1995. Incorporated by reference to Exhibit 10(3) to the Registrant's Form 10-Q for the quarter ending April 2, 1995. *
10.27 Chevrolet Quality Approved Converters Program Agreement by and between Starcraft Automotive Group, Inc. and Chevrolet Motor Division, General Motors Corporation dated April 10, 1995. Incorporated by reference to Exhibit 10.27 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.28 Chevrolet Quality Approved Converters Program between Imperial Automotive Group, Inc. and Chevrolet division of General Motors Corporation dated April 10, 1995. Incorporated by reference to Exhibit 10.28 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.29 Agreement between Chrysler Corporation and Starcraft Automotive Group, Inc. dated July 1, 1995. Incorporated by reference to Exhibit 10.29 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.30 Pool Company Wholesale Finance Plan and Security Agreement between Chrysler Credit Corporation and Starcraft Automotive Group, Inc. dated July 1, 1995. Incorporated by reference to Exhibit 10.30 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.31 Agreement between Chrysler Corporation and Imperial Industries, Inc. dated July 1, 1995. Incorporated by reference to Exhibit 10.31 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.32 Pool Company Wholesale Finance Plan and Security Agreement between Chrysler Credit Corporation and Imperial Industries, Inc. dated July 1, 1995. Incorporated by reference to Exhibit 10.32 of the Registrant's Form 10-K for the year ending October 1, 1995. *
10.33 Warrant to Purchase 200,000 Shares of Common Stock of Starcraft Corporation, issued to Kelly L. Rose, dated November 23, 1998. [ ]
10.34 Warrant to Purchase 200,000 Shares of Common Stock of Starcraft Corporation, issued to G. Ray Stults, dated November 23, 1998. [ ]
11 Computation of Earnings Per Share. [ ]
21 Subsidiaries of the Registrant. [ ]
23.1 Consent of Crowe, Chizek and Company LLP. [ ]
23.2 Consent of Ernst & Young LLP. [ ]
27 Financial Data Schedule [ ] - ---------------
* Incorporated by reference as indicated in the description.
** Incorporated by reference to the exhibit, bearing the corresponding exhibit number to the Registrant's registration statement on Form S-1, Reg. No. 33-63760, unless another exhibit number is listed in the above description.