-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NTgd9yC5SMVWuA3PQfVhm9OFTD1UTcat7nzt3zpl1W6iovq2O3yIF4XY1CaTD3XW xzT6XB4NagGSd1XsG91Wlg== 0000021212-00-000009.txt : 20000331 0000021212-00-000009.hdr.sgml : 20000331 ACCESSION NUMBER: 0000021212-00-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COACHMEN INDUSTRIES INC CENTRAL INDEX KEY: 0000021212 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR HOMES [3716] IRS NUMBER: 351101097 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07160 FILM NUMBER: 585382 BUSINESS ADDRESS: STREET 1: 601 E BEARDSLEY AVE STREET 2: P O BOX 3300 CITY: ELKHART STATE: IN ZIP: 46514 BUSINESS PHONE: 2192620123 MAIL ADDRESS: STREET 1: 601 E BEARDSLEY AVE CITY: ELKHART STATE: IN ZIP: 46515 10-K 1 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____. Commission file number 1-7160 COACHMEN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Indiana 35-1101097 (State of incorporation (IRS Employer Identification No.) or organization) 2831 Dexter Drive, Elkhart, Indiana 46514 (Address of principal executive offices) (Zip Code) (219) 262-0123 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, Without Par Value New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes _ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment hereto. X While it is difficult to determine the number of shares owned by non-affiliates (within the meaning of such term under the applicable regulations of the Securities and Exchange Commission), the registrant estimates that the aggregate market value of the registrant's Common Stock on March 21, 2000 held by non-affiliates was $197.36 million (based upon the closing price on the New York Stock Exchange and an estimate that 89.4% of such shares are owned by non-affiliates). As of March 21, 2000, 15,560,391 shares of the registrant's Common Stock were outstanding. Documents Incorporated by Reference Parts of Form 10-K into which Document the Document is Incorporated Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 2000 Part III Part I. Item 1. Business Coachmen Industries, Inc. (the "Company" or the "Registrant") was incorporated under the laws of the State of Indiana on December 31, 1964, as the successor to a proprietorship established earlier that year. All references to the Company include its wholly owned subsidiaries and divisions. The Company is one of the largest full-line producers of recreational vehicles ("RVs") and is the largest builder of modular homes in the United States. The Company's RVs are marketed under various brand names including Coachmen, Shasta, and Viking through approximately 1,300 independent dealers located in 49 states and internationally and through six Company-owned dealerships. Modular homes are manufactured by the Company's All American Homes operation which sells homes through approximately 300 builders. The Company maintains approximately 61 trademarks, which are up for renewal from 2000 through 2013, and approximately 9 patents due to expire between 2001 and 2016. There are no material licenses, franchises, or concessions and no material foreign operations. The Company operates primarily in two business segments, vehicles and housing. The vehicle segment consists of the manufacture and distribution of Class A and Class C motorhomes, travel trailers, fifth wheels, camping trailers, truck campers and related parts and supplies. The housing segment consists of factory produced modular homes. The table below sets forth the composition of the Company's net sales for each of the last three years (dollar amounts in thousands): 1999 1998 1997 Amount % Amount % Amount % Vehicles: Motorhomes $455,103 54 $400,953 53 $346,435 52 Travel Trailers and Fifth Wheels 160,531 19 150,632 20 134,045 20 Camping Trailers 26,113 3 25,686 3 22,527 4 Truck Campers 2,204 - 3,673 1 4,593 1 Parts and Supplies 47,222 6 44,804 6 39,941 6 Total Vehicles 691,173 82 625,748 83 547,541 83 Housing 155,851 18 130,282 17 114,050 17 Total $847,024 100 $756,030 100 $661,591 100 Note: See Note 2 of Notes to Consolidated Financial Statements regarding segment information on page 27. 1 Vehicle Segment The Vehicle Segment consists of recreational vehicles and parts and supplies. The recreational vehicles consists of four companies: Coachmen Recreational Vehicle Company, Inc., Georgie Boy Mfg., Inc., Shasta Industries, Inc. and Viking Recreational Vehicles, Inc. Recreational vehicles are either driven or towed and serve as temporary living quarters for camping, travel and other leisure activities. Recreational vehicles may be categorized as motorhomes, travel trailers, camping trailers or truck campers. A motorhome is a self-powered mobile dwelling built on a special heavy-duty chassis. A travel trailer is a mobile dwelling designed to be towed behind another vehicle. Camping trailers are smaller towed units constructed with sidewalls that may be raised up and folded out. Truck campers are designed to be mounted on the bed of a pickup truck. The Company's principal brand names for its recreational vehicles are Coachmen, Shasta, Viking, Travelmaster, Sportscoach, Santara, Catalina Cruise Air, Encounter, Cruise Master, Swinger, Pursuit and Landau. Other brand names the Company has protected and used and anticipates using in the future include Normandy, Cross Country, Pathfinder and Frolic. The Company disposed of its Coachmen Automotive Division, which produced and sold van campers, van and truck conversions, on January 4, 2000 (see Note 12 of Notes to Consolidated Financial Statements). The principal brand names of the Coachmen Automotive Division included Starflyte, Dearborn, Jimmy, Greenbriar and Saratoga. Parts and Supplies, which consists of Prodesign, Inc. and The Lux Company, Inc., provides a variety of products to the recreational vehicle and automotive industries, as well as other industries. Prodesign, Inc. is a diversified manufacturer of fiberglass and thermoplastic parts, including ground effects, flared fenders, running boards and lower front and rear moldings. The Lux Company, Inc. manufactures seating products for the recreational vehicle, office and healthcare industries. The largest portion of Lux's sales are in the recreational vehicle seating category, including sofa beds, convertible pit groups, swivel chairs and ergonomic pilot seats. Lux also manufactures managerial, conference, guest and high-back executive chairs. Lux healthcare products encompass end-opening sofas and task chairs for laboratory and emergency care workers. The Company currently produces recreational vehicles on an assembly line basis in Indiana, Michigan, Georgia and Oregon. Components used in the manufacture of recreational vehicles are primarily purchased from outside sources. However, in some cases (such as cushions, fiberglass products and furniture) where it is profitable for the Company to do so, or where the Company has experienced shortages of supplies, the Company has undertaken to manufacture its own supplies. The Company depends on the availability of chassis from a limited number of manufacturers. Occasionally, chassis availability has limited the Company's production (see Note 13 of Notes to Consolidated Financial Statements on page 35 for information concerning the use of converter pool agreements to purchase vehicle chassis). The Company considers itself as being customer driven. Sales and service representatives regularly visit dealers in their regions, and respond quickly to questions and suggestions. Divisions host dealer advisory groups and conduct informative dealer seminars and specialized training classes in areas such as sales and service. Open forum meetings with owners are held at campouts, providing ongoing focus group feedback for product improvements. Engineers and product development team members are encouraged to travel and vacation in Company RVs to gain a complete understanding and appreciation for the products. 2 The Company believes it has the ability to respond promptly to changes in market conditions. Most of the manufacturing facilities can be changed over to the assembly of other existing products in two to six weeks. In addition, these facilities may be used for other types of light manufacturing or assembly operations. This flexibility enables the Company to adjust its manufacturing capabilities in response to changes in demand for its products. Recreational vehicles are generally manufactured against orders received from the Company's dealers. Sales are seasonal with the highest level of sales occurring during the spring and summer months. Agreements with most of its dealers are cancelable on short notice, provide for minimum inventory levels and establish sales territories. No dealer accounts for more than 5% of the Company's net sales. Most dealers' purchases of RVs from the Company are financed through "floor plan" arrangements. Under these arrangements, a bank or other financial institution agrees to lend the dealer all or most of the purchase price of its RV inventory, collateralized by a lien on such inventory. The Company generally executes repurchase agreements at the request of the financing institution. These agreements provide that, for up to twelve months after a unit is financed, the Company will repurchase a unit which has been repossessed by the financing institution for the amount then due to the financing institution, which is usually less than 100% of the dealer's cost. Risk of loss resulting from these agreements is spread over the Company's numerous dealers and is further reduced by the resale value of the products repurchased (see Note 13 of Notes to Consolidated Financial Statements on page 35). In 1998 the Company terminated its arrangement to guarantee certain obligations of dealers to a financial institution for purchases of the Company's products and no such guarantees existed at December 31, 1999 and 1998. Over the past three years, the Company has not reported any significant losses from the repurchase agreements or the guarantee arrangement. The Company does not finance retail consumer purchases of its products, nor does it generally guarantee consumer financing. Housing Segment The Company's housing segment, which is the largest producer of modular homes in the United States, is composed of five All American Homes ("All American") operations strategically located in Indiana, Iowa, North Carolina, Ohio and Tennessee. Together these plants serve approximately 300 builders in 19 states. The Company's principal brand name for its modular housing units is "All American Homes." Modular homes are built to the same local building codes as site-built homes by skilled craftsmen in a factory environment unaffected by weather conditions. Nearly complete when they leave the plant, modular homes are delivered to their final location, typically in two to five sections, and are crane set onto a waiting basement or crawl space foundation. Production takes place on an assembly line, with components moving from workstation to workstation for framing, electrical, plumbing, drywall, roofing, and cabinet setting, among other operations. An average two-module home can be produced in just a few days. All American regularly conducts builder meetings to review the latest in new design options and component upgrades. These meetings provide an opportunity for valuable builder input and suggestions from their customers at the planning stage. 3 Business Factors Many RVs produced by the Company require gasoline for their operation. Gasoline has, at various times in the past, been difficult to obtain, and there can be no assurance that the supply of gasoline will continue uninterrupted, that rationing will not be imposed or that the price of, or tax on, gasoline will not significantly increase in the future. Shortages of gasoline and significant increases in gasoline prices have had a substantial adverse effect on the demand for RV's in the past and could have a material adverse effect on demand in the future. The vehicle and housing businesses are dependent upon the availability of and terms of the financing used by dealers and retail purchasers. Consequently, increases in interest rates and the tightening of credit through governmental action or other means have adversely affected the Company's business in the past and could do so in the future. Competition and Regulation The RV and housing industries are highly competitive, and the Company has numerous competitors and potential competitors in each of its classes of products, some of whom have greater financial and other resources. Initial capital requirements for entry into the manufacture of recreational vehicles or housing are comparatively small; however, codes, standards, and safety requirements introduced in recent years may deter potential competitors. The recreational vehicle industry is highly regulated. NHTSA, state lemon law statutes and state legislation protecting motor vehicle dealerships all impact the way the Company conducts its RV business. Recreational vehicles, the largest portion of the Company's business, generally compete in the lower to mid-price range markets. The Company believes it is a leader in the RV industry in its focus on quality. A quality product and a strong commitment to competitive pricing are emphasized by the Company in the markets it serves. The Company estimates that its current share of the recreational vehicle market is in excess of eight percent. The Company continues to recognize its obligations to protect the environment insofar as its operations are concerned. To date, the Company has not experienced any material adverse effect from existing federal, state, or local environmental regulations. Employees At December 31, 1999, Coachmen employed 4,942 persons, of whom 926 were employed in office and administrative capacities. The Company provides group life, dental, vision service, hospitalization, and major medical plans under which the employee pays a portion of the cost. In addition, employees can participate in a stock purchase plan and certain employees can participate in a stock option plan (see Notes 9 and 10 of Notes to Consolidated Financial Statements). The Company considers its relations with employees to be good. Research and Development During 1999, the Company spent approximately $5,727 on research related to the development of new products and improvement of existing products. 4 The amounts spent in 1998 and 1997 were approximately $4,706 and $3,521, respectively. Item 2. Properties The Registrant owns or leases 3,168,810 square feet of plant and office space, located on 1,169.5 acres, of which 2,581,725 square feet are used for manufacturing, 438,269 square feet are used for warehousing and distribution, 46,024 square feet are used for research and development, 93,044 square feet are used for customer service and 178,651 square feet are offices. 146,054 square feet are leased to others and 158,283 square feet are available for sale or lease. The Registrant believes that its present facilities, consisting primarily of steel clad, steel frame or wood frame construction and the machinery and equipment contained therein, are well maintained and in good condition. The following table indicates the location, number and size of the Registrant's properties by segment as of December 31, 1999: No. of Building Area Location Acreage Buildings (Sq. Ft.) Properties Owned and Used by Registrant: Vehicles Elkhart, Indiana 90.7 18 539,361 Middlebury, Indiana 518.6 34 773,639 Fitzgerald, Georgia 17.0 3 67,070 Centreville, Michigan 105.0 4 84,865 Edwardsburg, Michigan 83.1 12 303,254 Colfax, North Carolina 7.0 4 16,400 Stuart, Florida 4.4 1 26,216 Goshen, Indiana 18.0 1 80,000 Melbourne, Florida 8.1 1 32,000 Grants Pass, Oregon 24.5 1 62,563 Marietta, Georgia 5.2 1 17,400 Subtotal 881.6 80 2,002,768 Housing Decatur, Indiana 43.3 4 286,500 Dyersville, Iowa 20.0 1 141,902 Springfield, Tennessee 45.0 1 131,453 Rutherfordton, North Carolina 37.8 1 131,497 Zanesville, Ohio 23.0 1 129,753 Subtotal 169.1 8 821,105 Total owned 1,050.7 88 2,823,873 5 Properties (continued) Properties Leased and Used by Registrant: Vehicles Elkhart, Indiana 4.6 2 29,000 Ft. Myers, Florida 3.1 1 10,400 Colfax, North Carolina 1.5 1 1,200 Grants Pass, Oregon 9.4 - - Subtotal 18.6 4 40,600 Properties Owned by Registrant and Leased to Others: Vehicles Lake Park, Georgia 8.0 1 11,720 Winter Garden, Florida 5.0 1 42,176 Crooksville, Ohio 10.0 2 39,310 Grapevine, Texas 5.0 4 52,848 Subtotal 28.0 8 146,054 Properties Owned by Registrant and Available for Sale or Lease: Vehicles Adelanto, California 1.1 - - Perris, California 15.5 - - Grapevine, Texas 4.0 - - Longview, Texas 9.2 - - Subtotal 29.8 - - Housing Montezuma, Georgia 42.6 2 158,283 Subtotal 72.4 2 158,283 Total 1,169.7 102 3,168,810 6 Item 3. Legal Proceedings From time to time, the Company is involved in certain litigation arising out of its operations in the normal course of business. The Company believes that there are no claims or litigation pending, the outcome of which will have a material adverse effect on the financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the quarter ended December 31, 1999 to a vote of security holders. Executive Officers of the Registrant The following table sets forth the executive officers of the Company, as of December 31, 1999: Name Position *Claire C. Skinner....Chairman of the Board and Chief Executive Officer *Keith D. Corson......President and Chief Operating Officer and Director *James E. Jack........Executive Vice President and Chief Financial Officer *Gene E. Stout........Executive Vice President, Corporate Development * Member of Finance Committee Claire C. Skinner (age 45) has served as Chairman of the Board and Chief Executive Officer since August 1997. Before that, Vice Chairman of the Company since May 1995, and served as Executive Vice President from 1990 to 1995. From 1987 through July 1997, Ms. Skinner served as the President of Coachmen RV, the Company's largest division. Prior to that, she held several management positions in operations and marketing since 1983. Keith D. Corson (age 64) has served as President and Chief Operating Officer of the Company since November 1991. From June 1991 to November 1991 he served in the position of Office of the President after rejoining the Company. Mr. Corson was owner and President of Koszegi Products, a soft case manufacturer for the eight years prior to June 1991. He was a co-founder of the Company in 1964, and served in several senior management positions from 1964 until 1982, including President of the Company from 1978 until 1982. James E. Jack (age 58) has served as Executive Vice President and Chief Financial Officer of the Company since October 1999. From 1997 to September 1999 he served as a Managing Consultant at Towers Perrin and prior to that he held various positions beginning in 1963 at Associates First Capital Corporation, including Director, Senior Executive Vice President and Chief Financial Officer. Gene E. Stout (age 66) has served as Executive Vice President, Corporate Development of the Company since May 1983. From April 1982 to May 1983 he was Senior Vice President Corporate Planning and Industry Relations. Between 1971 and 1982 he held various management positions with the Company. 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The following table discloses the high and low sales prices for Coachmen's common stock during the past two years as reported on the New York Stock Exchange, along with information on dividends paid per share during the same periods. High & Low Sales Prices Dividends Paid 1999 1998 1999 1998 1st Quarter $26.88 - $17.88 $28.75 - $20.38 $.05 $.05 2nd Quarter 24.00 - 18.13 30.00 - 23.44 .05 .05 3rd Quarter 24.00 - 15.38 27.94 - 17.31 .05 .05 4th Quarter 17.63 - 13.25 26.25 - 16.00 .05 .05 The Company's common stock is traded on the New York Stock Exchange: Stock symbol COA. The number of shareholders of record as of January 31, 2000 was 1,944. Item 6. Selected Financial Data Five-Year Summary of Selected Financial Data -Year Ended December 31- (in thousands, except per share amounts) 1999 1998 1997 1996 1995 Net sales $847,024 $756,030 $661,591 $606,474 $515,862 Net income 29,502 33,063 24,763 28,505 17,549 Net income per share: Basic 1.80 1.93 1.44 1.87 1.18 Diluted 1.80 1.92 1.42 1.84 1.17 Cash dividends per share .20 .20 .20 .185 .14 At year end: Total assets 285,766 269,341 259,654 228,040 150,249 Long-term debt 8,346 10,191 12,591 14,841 12,118 *Net income and net income per share for 1996 includes $2,294 and $.15, respectively, for the cumulative effect of an accounting change. In connection with a change in the Company's method of accounting for costs of its self-insured group medical plan (see Note 2 of Notes to Consolidated Financial Statements), prior years' selected financial data has been restated. The restatement decreased net income in 1996 by $1,126, reduced 1996 net income per share by $.07 (both basic and diluted), and increased total assets at December 31, 1996, 1997 and 1998 by $592. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements. OVERVIEW The Company was founded in 1964 as a manufacturer of RVs and began manufacturing modular homes in 1982. Since that time, the Company has evolved into a market leader in both business segments through a combination of internal growth and strategic acquisitions. The Company's new plant openings have been an important component of its internal growth strategy. In 1995, the Company opened a new modular housing plant in Tennessee and in 1996, the Company expanded its modular housing production capacity with the construction of a new facility for the North Carolina housing operation. The construction of a new modular housing facility in Ohio became fully operational in 1998. Increases in production capacity also included additions to the modular housing plant in Iowa with an addition completed in 1998 and one started in 1999 that will be completed in 2000. In 1996, the Company increased its RV production capacity by opening a new fifth wheel and conventional travel trailer plant in Oregon. Additional travel trailer plants in Indiana became operational in 1996 and 1997. These additional plants helped capitalize on the growing market share of value-priced travel trailers. In 1999 a new service building was constructed at the RV production facility in Georgia. In addition, construction was completed in 1999 for a new manufacturing facility in Indiana for class A motorhomes. The Company's business segments are cyclical and subject to certain seasonal demand cycles and changes in general economic and political conditions. Demand in the RV and modular housing industries generally declines during the winter season, while sales and profits are generally highest during the spring and summer months. Inflation and changing prices have had minimal direct impact on the Company in the past in that selling prices and material costs have generally followed the rate of inflation. RESULTS OF OPERATIONS Comparison of 1999 to 1998 Consolidated net sales increased $91.0 million, or 12.0% to $847.0 million in 1999 from $756.0 million in 1998. The Company's vehicle segment, which includes the parts and supply group of companies, experienced a net sales increase of 10.5% while the housing segment had a net sales increase of 18.1%. Sales increases in the vehicle segment are attributable to increased capacity, increased sales of class A motorhomes and the growth in the overall recreation vehicle market. The increased capacity in the Company's housing segment was a factor in its continued sales growth, as well as, increased penetration in the respective markets served. While the vehicle segment experienced an increase in the average sales price per unit the housing segment experienced increases in both unit sales and in the average sales price per unit during 1999. Historically, the Company's first and fourth quarters are the slowest for sales in both segments. 9 Gross profit was $108.0 million and 12.8% of net sales in 1999 compared to $109.9 million and 14.5% net sales reported for 1998. While the housing segment experienced an increase in gross profit as a percentage of net sales, the overall gross profit percentage decrease is attributable to the vehicle segment. The decrease in the gross profit percentage for the vehicle segment reflects the impact of a sales mix with increased motorized products, which has a higher cost of goods sold percentage due to the chassis cost, and the related costs from inefficiencies associated with the Company's investment in new enterprise-wide technology and operating systems. In addition, the Company experienced higher costs associated with the start-up of a new class A production facility in Indiana. Also affecting gross profit for 1999 was the additional accrual of $1.5 million relating to self- insurance for general liability, product liability and workers' compensation due to increased claims expense and a $1.4 million charge resulting from a change in the Company's method of accounting for costs associated with its self-insured group medical plan. In connection with the accounting change, the Company restated retained earnings as of January 1, 1997 (see Note 2 of Notes to Consolidated Financial Statements). Operating expenses, consisting of selling, delivery, general and administrative expenses, were $67.3 million and $64.0 million, or as a percentage of net sales, 8.0% and 8.5% for 1999 and 1998, respectively. Selling and delivery expenses were $39.0 million in 1999, or 4.6% of net sales, compared with $36.0 million, or 4.8% in 1998. General and administrative expenses were $28.4 million in 1999, or 3.3% of net sales, compared with $28.0 million, or 3.7% of net sales, in 1998. The general and administrative percentage decrease in 1999 primarily reflects the capitalization of compensation and related costs with the implementation of the new enterprise-wide technology systems (see Note 2 of Notes to Consolidated Financial Statements). Operating income was $40.6 million in 1999 compared with $45.9 million in 1998, a decrease of 11.5%. This decrease is consistent with the $1.9 million decrease in gross profit and the overall increase of $3.4 million in operating expenses. Interest expense for 1999 and 1998 was $1.8 million and $1.7 million, respectively, or .2% of net sales for both years. Interest expense varies with the amount of long-term debt and the increase in cash surrender value for the Company's investment in life insurance contracts. These life insurance contracts were purchased to fund obligations under deferred compensation agreements with executives and other key employees. The interest costs associated with deferred compensation obligations and with the borrowings against the cash value of the insurance policies are partially offset by the increases in cash surrender value. Investment income for 1999 decreased to $2.7 million from $4.8 million in 1998. The decrease in the investment income was principally due to less funds being invested in 1999 than in 1998. Cash and temporary cash investments were used in investing activities throughout 1999 and the open market purchase of common shares for the treasury. The gain on sale of properties increased $1.9 million in 1999. This increase was substantially due to the sale of real estate in Indiana, which included the corporate administrative building subsequent to the move to a larger facility. Assets are continually analyzed and every effort is made to sell or dispose of properties that are determined to be unproductive. 10 Pretax income for 1999 was $45.0 million compared with $50.3 million for 1998. The Company's vehicle segment produced pretax income of $28.1 million, or 4.1% of vehicle net sales in 1999, compared with pretax income of $36.2 million, or 5.8% of vehicle net sales in 1998. The housing segment generated 1999 pretax income of $14.9 million and in 1998 $11.2 million, or 9.6% and 8.6%, respectively, of housing net sales (see Note 3 of Notes to Consolidated Financial Statements). The provision for income taxes was $15.5 million for 1999 and $17.2 million for 1998, representing an effective tax rate of 34.5% and 34.3%, respectively. The Company's effective tax rate fluctuates based upon the states where sales occur, with the level of export sales and with the mix of nontaxable investment income. Net income for the year ended December 31, 1999 was $29.5 million compared to $33.1 million for 1998. Comparison of 1998 to 1997 Consolidated net sales for 1998 were $756.0 million, an increase of 14.3% over the $661.6 million reported in 1997. The Company's vehicle segment, which includes the parts and supply businesses, experienced a sales increase of 14.3%, while the housing segment increased by 14.2%. Sales increases in the vehicle segment were attributed to improvements in capacity utilization, as well as, additions to capacity. Increased capacity in the Company's housing segment also resulted in continued sales growth. The Company's RV and housing segments experienced increases in both the number of units sold and the average sales price per unit. Gross profit for the year increased to $109.9 million, or 14.5% of net sales, from $92.8 million, or 14.0% of net sales in 1997. The increase in gross profit for 1998 was primarily attributable to the increase in net sales. The increase in the gross profit percentage represents higher gross margins from improvements in 1998 over the higher expenses associated with capacity start-up costs incurred in the vehicle segment and costs associated with the implementation of a 7-day work week production schedule at the Company's largest housing facility in 1997. Operating expenses, which include selling, delivery, general and administrative expenses, were $64.0 million, or 8.5% of net sales in 1998, compared with $57.5 million, or 8.7% of net sales in 1997. Selling and delivery expenses were $36.0 million, or 4.8% of net sales, in 1998 compared with $31.6 million, and 4.8% in 1997. As a percentage of net sales, both selling and delivery expenses remained relatively unchanged. The increase in the cost dollars of selling and delivery expense was substantially due to increased sales. General and administrative expenses were $28.0 million, or 3.7% of net sales in 1998, compared with $25.9 million, or 3.9% of net sales in 1997. The administrative cost percentage decrease was primarily the result of increasing the Company's bad debt expense in 1997 by approximately $1.5 million to reflect a slowdown in the overall van conversion industry. The higher administrative cost dollars for 1998 are associated with three acquired dealerships and to the ongoing implementation of an enterprise-wide technology system. Operating income was $45.9 million in 1998 compared with $35.3 million in 1997, an increase of 30.3%. This increase was consistent with the overall increase in gross profit of $17.2 million which was partially offset by the $6.5 million increase in operating expenses. The 11 Company's vehicle segment produced operating income of $36.1 million, or 5.8% of vehicle net sales, compared with operating income of $26.7 million, or 4.9% of vehicle net sales in 1997. The modular housing segment generated operating income of $11.4 million in 1998 and $9.7 million in 1997, or 8.7% and 8.5%, respectively, of housing net sales. Interest expense decreased in 1998 to $1.7 million from $2.5 million in 1997. Investment income decreased to $4.8 million from $5.0 million in 1997. The decrease in interest expense was substantially due to the settlement of examinations by the Internal Revenue Service during 1997. The slight decrease in investment income was partially due to interest income from the favorable settlement of open state income tax examinations in 1997. The balance of the decrease in investment income is due to decreased cash and temporary cash investments which were used in investing activities throughout 1998 and the open market purchase of common shares for the treasury. The net gain on the sales of properties decreased to $46,302 in 1998 from $137,246 in 1997. The variance reflects the result of the amount of gain or loss recognized upon the disposition of various small properties. Pretax income was $50.3 million in 1998 compared with $38.8 million in 1997, an increase of 29.5%. The Company's vehicle segment produced $36.2 million and $26.5 million of pretax income in 1998 and 1997, respectively. The housing segment produced pretax income of $11.2 million in 1998 and $9.3 million in 1997 (see Note 3 of Notes to Consolidated Financial Statements). The provision for income taxes was $17.2 million for 1998 and $14.1 million for 1997, representing an effective tax rate of 34.3%, and 36.2%, respectively. The lower effective rate in 1998 resulted from a large amount of preferred stock dividend income subject to partial exclusion from taxation and an increase in nontaxable Company-owned life insurance proceeds. Net income for the year ended December 31, 1998 was $33.1 million compared with $24.8 million for the prior year. Liquidity and Capital Resources The Company generally relies on funds from operations as its primary source of working capital and liquidity. In addition, the Company maintains an unsecured committed line of credit, which totaled $30 million at December 31, 1999, to meet its seasonal working capital needs. There were no borrowings against this line of credit during 1999, 1998 and 1997. The Company's operating activities have been the principal source of cash flows in each of the last three years. Operating cash flows were $22.2 million, $14.0 million and $36.7 million for 1999, 1998 and 1997, respectively. For each of these years, net income, adjusted by certain noncash items such as depreciation, was a significant factor in generating operating cash flows. In 1999, cash flows from net income, depreciation and increases in trade accounts payable, accrued expenses and other liabilities were significantly offset by increases in receivables and inventories. This increase in receivables was directly related to the 12.0% increase in annual sales and the 11.6% increase in fourth quarter sales volume. In 1998, cash flows from net income and depreciation were partially offset by an $18.8 million increase in inventories. This increase in inventories was 13 remedy the Year 2000 issue with regard to these areas, the Company began devoting substantial resources to replace the affected software with a new enterprise-wide technology system which would also significantly improve the Company's overall information systems. As of December 31, 1999, the implementation status of general accounting systems and payroll was 100% complete for the entire Company. The implementation of the manufacturing and distribution portions of the enterprise-wide technology system was also complete for five divisions of the vehicle segment. The implementation of these systems for the remaining divisions in the vehicle and housing segments were delayed until the year 2000. For those divisions, the Company's existing software was reprogrammed to be Year 2000 compliant prior to December 31, 1999. The Company also initiated a senior management focus team in 1998 to identify and review other possible business system failures that could occur and to assess the need for contingency plans. The focus team determined that the Company's equipment with embedded systems was Year 2000 compliant and the Company's equipment was not, for the most part, calendar-date sensitive. The focus team also concluded that the key risk factors associated with Year 2000 were those from outside the Company such as the readiness of its key material suppliers, dealers, customers, financial institutions and public infrastructure suppliers. The focus team prioritized and communicated with third-party suppliers about the status of their compliance with Year 2000 issues and was assured by 100% of its high priority mission critical suppliers that they were Year 2000 compliant. Despite their assurances, due to the uncertainty of the Year 2000 readiness of third parties, the Company continued to be cautious of the consequences of Year 2000 failures of third parties that could have had a material impact on the Company's operations, such as the worst case scenario where production would be halted by the inability of a single source supplier to deliver critical product or component. While the Company obtained assurance from its mission critical third parties that they would be compliant, there was no assurance that the systems of any third party on which the Company's operations relied would be compliant. Nevertheless, based on their assurances, the Company did not anticipate a material impact on its operations from direct interfaces with third parties. The Company has not experienced any problems related to the Year 2000 issue and at this date the Company has no reason to believe there will be any significant problems in the future in connection with the year 2000 issue. The Company accomplished its principal objective of having all of its significant business systems, including those that would affect facilities and manufacturing activities, functioning properly with respect to Year 2000, before January 1, 2000. The total cost of the new enterprise-wide technology is currently estimated to be in excess of $14.2 million. Approximately $13.3 million has been incurred as of December 31, 1999. Of the amount incurred, $3.4 million has been expensed and $9.9 million has been capitalized for new systems and equipment. During 1999, the Company capitalized $2.6 million of internal labor costs as required by a new accounting pronouncement (see Note 2 of Notes to Consolidated Financial Statements). The Company estimates it incurred approximately $2.1 million in uncapitalized internal labor costs during 1997 and 1998 which were expensed. All costs have been funded through operating cash flows. 14 Forward Looking Statements This annual report contains certain statements that are "forward- looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements involve risks and uncertainties, and are dependent on factors which may include, but are not limited to, the availability and price of gasoline, which can impact sales of recreational vehicles; availability of chassis, which are used in the production of many of the Company's recreational vehicle products; interest rates, which affect the affordability of the Company's products; the functioning of the Company's enterprise-wide technology system, which can impact the Company's day-to-day operations; legislation governing the relationships of the Company with its recreational vehicle dealers, which may affect the Company's options and liabilities in the event of a general economic downturn; and also on the state of the recreational vehicle and modular housing industries in the United States. Other factors affecting forward-looking statements include competition in these industries and the Company's ability to maintain or increase gross margins which are critical to the profitability whether there are or are not increased sales. At times, the Company's actual performance differs materially from its projections and estimates regarding the economy, the recreational vehicle and housing industries and other key performance indicators. Readers of this Report are cautioned that reliance on any forward- looking statements involves risks and uncertainties. Although the Company believes that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. There can be no assurance that the forward-looking statements contained in this Report will prove to be accurate. The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's objectives will be achieved. Item 7A. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, operations of the Company are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing and investing yields. The Company has not utilized its line of credit facilities during the past three years and, accordingly, changes in interest rates would only impact the Company's long-term debt. At December 31, 1999, the Company had $9.9 million of long-term debt, including current maturities. Long-term debt consists of industrial development revenue bonds and promissory notes, all of which have variable or floating rates. The Company's marketable securities consist of public utility preferred stocks which pay quarterly fixed rate dividends. These financial instruments are subject to market risk in that changes in interest rates would impact the market value of the preferred stocks. Outstanding options are marked to market with market value changes recognized in current earnings. The U.S. Treasury bond futures options generally have terms ranging from 90 to 180 days. Based on the Company's overall interest rate exposure at December 31, 1999, including variable or floating rate debt and derivatives used to hedge the fair value of fixed rate preferred stocks, a hypothetical 10 percent change in interest rates applied to the fair value of the financial instruments as of December 31, 1999, would have no material impact on earnings, cash flows or fair values of interest rate risk sensitive instruments over a one-year period. 15 Item 8. Financial Statements and Supplementary Data Index to Financial Statements Page Financial Statements: Report of Independent Accountants 17 Consolidated Balance Sheets at December 31, 1999 and 1998 18 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 19 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 20 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 21-22 Notes to Consolidated Financial Statements 23-37 Financial Statement Schedule: II - Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and 1997 40 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 16 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Coachmen Industries, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Coachmen Industries, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note 2 to the consolidated financial statements, effective January 1, 1999, the Company adopted Statement of Position No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". Also, as discussed in Note 2, during the fourth quarter of 1999 the Company changed its method of accounting for costs associated with its self-insured group medical plan. /s/PricewaterhouseCoopers LLP South Bend, Indiana February 3, 2000 17 Coachmen Industries, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 1999 and 1998 (in thousands) Assets 1999 1998 CURRENT ASSETS Cash and temporary cash investments $ 4,269 $ 23,009 Marketable securities 32,550 31,279 Trade receivables, less allowance for doubtful receivables 1999 - $850 and 1998 - $768 39,398 27,585 Other receivables 2,892 1,838 Refundable income taxes 4,748 4,480 Inventories 100,008 93,350 Prepaid expenses and other 2,214 1,341 Deferred income taxes 4,743 3,973 Total current assets 190,822 186,855 Property and equipment, net 74,678 63,072 Intangibles, less accumulated amortization 1999 - $644 and 1998 - $517 4,426 4,553 Other 15,840 14,861 TOTAL ASSETS $285,766 $269,341 Liabilities and Shareholders' Equity CURRENT LIABILITIES Current maturities of long-term debt $ 1,543 $ 2,125 Accounts payable, trade 25,041 18,997 Accrued income taxes 1,096 1,622 Accrued expenses and other liabilities 28,039 24,805 Total current liabilities 55,719 47,549 Long-term debt 8,346 10,191 Deferred income taxes 1,489 160 Other 6,566 7,109 Total liabilities 72,120 65,009 COMMITMENTS AND CONTINGENCIES (Note 13) SHAREHOLDERS' EQUITY Common shares, without par value: authorized 60,000 shares; issued 1999 - 20,971 shares and 1998 - 20,843 shares 90,405 89,105 Additional paid-in capital 4,623 3,867 Retained earnings 170,716 144,488 Treasury shares, at cost, 1999 - 5,443 shares and 1998 - 4,258 shares ( 52,098) (33,128) Total shareholders' equity 213,646 204,332 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $285,766 $269,341 The accompanying notes are a part of the consolidated financial statements. 18 Coachmen Industries, Inc. and Subsidiaries Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 (in thousands, except per share amounts) 1999 1998 1997 Net sales $847,024 $756,030 $661,591 Cost of goods sold 739,034 646,119 568,836 Gross profit 107,990 109,911 92,755 Operating expenses: Selling and delivery 38,972 35,974 31,606 General and administrative 28,375 28,009 25,889 67,347 63,983 57,495 Operating income 40,643 45,928 35,260 Nonoperating income (expense): Interest expense (1,829) (1,738) (2,544) Investment income 2,747 4,831 4,975 Gain on sale of properties, net 1,962 46 137 Other income, net 1,518 1,224 997 4,398 4,363 3,565 Income before income taxes 45,041 50,291 38,825 Income taxes 15,539 17,228 14,063 Net income $ 29,502 $ 33,063 $24,762 Earnings per common share: Basic $ 1.80 $ 1.93 $ 1.44 Diluted 1.80 1.92 1.42 Shares used in the computation of earnings per common share: Basic 16,370 17,132 17,238 Diluted 16,421 17,261 17,401 The accompanying notes are a part of the consolidated financial statements. 19 Coachmen Industries, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 (in thousands, except per share amounts) Total Additional Share- Common Shares Paid-In Retained Treasury Shares holders' Number Amount Capital Earnings Number Amount Equity Balance, January 1, 1997(Note 2) 20,528 $86,248 $2,314 $ 93,545 (3,341) $(15,577) $166,530 Net income - - - 24,762 - - 24,762 Issuance of common shares upon the exercise of stock options 147 1,023 - - - - 1,023 Issuance of common shares under employee stock purchase plan 14 249 - - - - 249 Issuance of common shares from treasury - - 44 - 3 23 67 Acquisition of common shares for treasury - - - - (50) (827) (827) Tax benefit from exercise of stock options - - 655 - - - 655 Cash dividends of $.20 per common share - - - (3,449) - - (3,449) Balance, December 31, 1997 20,689 87,520 3,013 114,858 (3,388) (16,381) 189,010 Net income - - - 33,063 - - 33,063 Issuance of common shares upon the exercise of stock options 139 1,272 - - - - 1,272 Issuance of common shares under employee stock purchase plan 15 313 - - - - 313 Issuance of common shares from treasury - - 40 - 3 17 57 Acquisition of common shares for treasury - - - - (873) (16,764) (16,764) Tax benefit from exercise of stock options - - 814 - - - 814 Cash dividends of $.20 per common share - - - (3,433) - - (3,433) Balance, December 31, 1998 20,843 89,105 3,867 144,488 (4,258) (33,128) 204,332 Net income - - - 29,502 - - 29,502 Issuance of common shares upon the exercise of stock options 107 981 - - - - 981 Issuance of common shares under employee stock purchase plan 21 319 - - - - 319 Issuance of common shares from treasury - - 318 - 21 151 469 Acquisition of common shares for treasury - - - - (1,206) (19,121) (19,121) Tax benefit from exercise of stock options - - 438 - - - 438 Cash dividends of $.20 per common share - - - (3,274) - - (3,274) Balance, December 31, 1999 20,971 $90,405 $4,623 $170,716 (5,443) $(52,098) $213,646 The accompanying notes are a part of the consolidated financial statements. 20 Coachmen Industries, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 (in thousands) 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,502 $ 33,063 $ 24,762 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,146 7,574 6,697 Amortization and write-off of intangibles 127 374 136 Provision for (recovery of) doubtful receivables 117 (175) 1,617 Net realized and unrealized losses on marketable securities and derivatives 825 902 195 Gain on sale of properties, net (1,962) (46) (137) Increase in cash surrender value of life insurance policies (750) (956) (1,017) Deferred income taxes 559 388 171 Other 175 (203) 236 Changes in certain assets and liabilities, net of effects of acquisitions and dispositions: Receivables, excluding current portion of notes (13,199) (1,545) (7,280) Inventories (9,908) (18,848) 394 Prepaid expenses and other (873) (93) (317) Accounts payable, trade 6,044 (3,821) 8,285 Income taxes - accrued and refundable (794) (2,626) 1,005 Accrued expenses and other liabilities 3,234 16 1,987 Net cash provided by operating activities 22,243 14,004 36,734 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Sale of marketable securities 186,794 152,126 36,535 Sale of properties 2,596 4,104 1,645 Sale of businesses 3,298 - - Acquisitions of: Marketable securities (188,890) (168,455) (52,082) Property and equipment (21,400) (22,196) (14,203) Businesses - (9,002) - Other (297) 1,331 970 Net cash (used in) investing activities (17,899) (42,092) (27,135) CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (2,427) (2,533) (2,270) Issuance of common shares under stock option and stock purchase plans 1,300 1,586 1,271 Tax benefit from stock options exercised 438 814 655 Cash dividends paid (3,274) (3,433) (3,449) Purchases of common shares for treasury (19,121) (16,764) (827) Net cash (used in) financing activities (23,084) (20,330) (4,620) 21 Consolidated Statements of Cash Flows, Concluded for the years ended December 31, 1999, 1998 and 1997 (in thousands) 1999 1998 1997 Increase (decrease) in cash and temporary cash investments (18,740) (48,418) 4,979 CASH AND TEMPORARY CASH INVESTMENTS Beginning of year 23,009 71,427 66,448 End of year $ 4,269 $ 23,009 $ 71,427 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,305 $ 1,709 $ 1,272 Income taxes 15,716 19,071 13,142 The accompanying notes are a part of the consolidated financial statements. 22 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands, except per share amounts) 1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES. Nature of Operations - Coachmen Industries, Inc. and its subsidiaries (the "Company") manufacture a full line of recreational vehicles and van conversions (see Note 12) through seven divisions with manufacturing facilities located in Indiana, Georgia, Michigan and Oregon. These products are marketed through a nationwide dealer network. The Company's housing segment, with locations in Indiana, Iowa, North Carolina, Ohio and Tennessee, supply modular housing to builder/dealers in nineteen adjoining states. Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Coachmen Industries, Inc. and its subsidiaries, all of which are wholly owned. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - Sales are recognized as revenue upon shipment. Cash Flows and Noncash Activities - For purposes of the consolidated statements of cash flows, cash and temporary cash investments include cash, cash investments and any highly liquid investments purchased with original maturities of three months or less. For each of the three years in the period ended December 31, 1999, the Company issued common shares with a market value of $469, $57 and $67, respectively, in lieu of cash compensation. See Note 12 for noncash investing and financing activities related to business acquisitions and dispositions. Concentrations of Credit Risk - Financial instruments which potentially subject the Company to credit risk consist primarily of cash and temporary cash investments and trade receivables. At December 31, 1999 and 1998, cash and temporary cash investments include $3.8 million and $9.6 million, respectively, invested in a money market mutual fund. In addition, at December 31, 1998, cash and temporary cash investments also included approximately $11.5 million invested in variable rate demand notes with a seven-day put option. The Company has a concentration of credit risk in the recreational vehicle industry, although there is no geographic concentration of credit risk. The Company performs ongoing credit evaluations of its customers' financial condition and sales to its recreational vehicle dealers are generally subject to preapproved dealer floor plan financing whereby the Company is paid upon delivery or shortly thereafter. The Company generally requires no collateral from its customers. Future credit losses are provided for currently through the allowance for doubtful receivables and actual credit losses are charged to the allowance when incurred. 23 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued. Marketable Securities - Marketable securities consist of public utility preferred stocks which pay quarterly cash dividends. The preferred stocks are part of a dividend capture program whereby preferred stocks are bought and held for the purpose of capturing the quarterly preferred dividend. The securities are then sold and the proceeds reinvested again in preferred stocks. The Company's dividend capture program is a tax planning strategy to maximize dividend income which is 70% excludable from taxable income under the Internal Revenue Code and related state tax provisions. As a result, a dividend capture program generally provides a higher after-tax return than other short-term investment alternatives. The Company accounts for its marketable securities under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires certain securities to be categorized as either trading, available-for-sale or held-to-maturity. The Company's marketable securities at December 31, 1999 and 1998 are classified as available-for-sale and, accordingly, are carried at fair value with net unrealized appreciation (depreciation) recorded as a separate component of shareholders' equity. At December 31, 1999 and 1998, the cost of marketable securities approximated their fair value and, accordingly, the Company recognized no unrealized appreciation (depreciation). The cost of securities sold is determined by the specific identification method. The Company utilizes U.S. Treasury bond futures options as protection against the impact of increases in interest rates on the fair value of the Company's investments in marketable securities (fixed rate preferred stocks). The options are marked to market with market value changes recognized in the statements of income in the period of change. Investment income consists of the following: 1999 1998 1997 Interest income $1,029 $3,184 $4,602 Dividend income on preferred stocks 2,543 2,549 568 Net realized gains (losses) on sale of preferred stocks (1,220) (120) 206 Net realized gains (losses) on closed U.S. Treasury bond futures options 314 (597) (401) Unrealized gains (losses) on open U.S. Treasury bond futures options 81 (185) - Total $2,747 $4,831 $4,975 Fair Value of Financial Instruments - The carrying amounts of cash and temporary cash investments, receivables and accounts payable approximated fair value as of December 31, 1999 and 1998, because of the relatively short maturities of these instruments. The carrying amount of long-term debt, including current maturities, approximated fair value as of December 31, 1999 and 1998, based upon terms and conditions currently available to the Company in comparison to terms and conditions of the existing long-term debt. The Company has investments in life insurance contracts to fund obligations under deferred compensation agreements (see Note 10). At December 31, 1999 and 1998, the carrying amount of these 24 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued. policies, which equaled their fair value, was $11.3 million and $10.6 million, respectively (cash surrender values of $26.2 million and $24.3 million, net of $14.9 million and $13.7 million of policy loans, respectively). At December 31, 1999 and 1998, the carrying amounts of U.S. Treasury bond futures options aggregated $558 and $131, respectively. The carrying amounts represented fair value since these futures options are marked to market at the end of each reporting period. Inventories - Inventories are valued at the lower of cost (first-in, first-out method) or market. Property and Equipment - Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed by the straight-line method on the costs of the assets, at rates based on their estimated useful lives as follows: land improvements 3-15 years; buildings and improvements 10-30 years; machinery and equipment 3-10 years; transportation equipment 2-7 years; and office furniture and fixtures, including capitalized computer software, 2-10 years. Upon sale or retirement of property and equipment, including real estate held for sale and rental properties, the asset cost and related accumulated depreciation is removed from the accounts and any resulting gain or loss is included in income. Intangibles - Intangibles represent the excess of cost over the fair value of net assets of businesses acquired ("goodwill"), and are being amortized over a 40-year period by the straight-line method. Evaluation of Impairment of Long-Lived Assets - In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long- Lived Assets to be Disposed Of," the Company evaluates the carrying value of long-lived assets whenever significant events or changes in circumstances indicate the carrying value of these assets may be impaired. The Company evaluates potential impairment of long-lived assets by comparing the carrying value of the assets to the expected net future cash inflows resulting from use of the assets. During the year ended December 31, 1998, the Company determined because of recurring losses and a forecast of negative undiscounted future cash flows that the carrying value of goodwill of one of its Company-owned dealerships was impaired. Accordingly, the Company charged-off the $239 of remaining unamortized goodwill. Income Taxes - The provision for income taxes is based on income recognized for financial statement purposes and includes the effects of temporary differences between such income and that recognized for tax return purposes. Deferred tax assets and liabilities are established for the expected future tax consequences of events that have been included in the financial statements or tax returns using enacted tax rates in effect for the years in which the differences are expected to reverse. Research and Development Expenses - Research and development expenses charged to operations were approximately $5,727, $4,706 and $3,521 for the years ended December 31, 1999, 1998 and 1997, respectively. 25 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Concluded. Warranty Expense - The Company accrues an estimated warranty liability at the time the warranted products are sold. Stock-Based Compensation - The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and, accordingly, accounts for its stock option plan under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." New Accounting Pronouncement - On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company utilizes U.S. Treasury bond futures options, which are derivative instruments, and changes in market value are recognized in current earnings. Accordingly, management of the Company anticipates that, due to its limited use of derivative instruments and the fact that changes in fair value are currently recognized in earnings, that the adoption of SFAS No. 133 will not have a significant effect on the Company's financial statements. 2. ACCOUNTING CHANGES. Effective January 1, 1999, the Company adopted American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". For years beginning after December 15, 1998, SOP 98-1 requires internal and external costs incurred to develop internal-use computer software during the application development stage to be capitalized and amortized over the software's useful life. Prior to January 1, 1999, these costs were expensed as incurred. During the year ended December 31, 1999, the Company capitalized $2,591 of internal costs which previously would have been expensed under generally accepted accounting principles. These capitalized costs are related to the Company's new enterprise computer system which is currently being implemented. The effect of this change in accounting principle for the year ended December 31, 1999 was to increase net income by approximately $1,399 or $.09 per share (basic and diluted). In the fourth quarter of 1999, the Company changed its method of accounting for costs associated with its self-insured group medical plan. Previously, the Company accounted for costs associated with its self- insured group medical plan on a "pay-as-you-go" basis and capitalized advances to the medical trust when additional Company contributions were required to fund claims in excess of expected levels. This accounting method was not in accordance with generally accepted accounting principles ("GAAP"), although the variance from GAAP was not material to the Company's consolidated financial statements. With the issuance of Securities and Exchange Commission's Staff Accounting Bulletin No. 99 on materiality, the Company elected to change its accounting method to conform with GAAP. In connection with this accounting change, the 26 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 2. ACCOUNTING CHANGES, Concluded. Company restated retained earnings as of January 1, 1997, and the effect of the adjustment was to decrease retained earnings by $1,126. The restatement had no significant effect on previously reported results of operations or cash flows for the years ended December 31, 1998 and 1997, since the unrecorded accrual for incurred but not reported claims and the amount advanced to the medical trust had remained relatively constant in 1997 and 1998. The effect of this accounting change for the year ended December 31, 1999 was to decrease net income by approximately $996, or $.06 per share (basic and diluted). 3. SEGMENT INFORMATION. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its business by product category. The Company's two reportable segments are: Vehicles (recreational, vans and specialized), including related parts and supplies, and Housing (modular). The Company evaluates the performance of its segments and allocates resources to them based on pretax income. The accounting policies of the segments are the same as those described in Note 1 and there are no inter-segment revenues. Differences between reported segment amounts and corresponding consolidated totals represent corporate expenses for administrative functions and costs or expenses relating to property and equipment that are not allocated to segments. The table below presents information about segments used by the chief operating decision maker of the Company for the years ended December 31: 1999 1998 1997 Net sales: Vehicles $691,173 $625,747 $547,541 Housing 155,851 130,283 114,050 Consolidated total $847,024 $756,030 $661,591 Pretax income: Vehicles $ 28,148 $ 36,156 $ 26,489 Housing 14,870 11,164 9,332 Other reconciling items 2,023 2,971 3,004 Consolidated total $ 45,041 $ 50,291 $ 38,825 Total assets: Vehicles $166,288 $141,657 $114,171 Housing 37,837 38,948 30,161 Other reconciling items 81,641 88,736 115,322 Consolidated total $285,766 $269,341 $259,654 27 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 3. SEGMENT INFORMATION, Concluded. The following specified amounts are included in the measure of segment pretax income or loss reviewed by the chief operating decision maker: 1999 1998 1997 Interest expense: Vehicles $ 794 $ 474 $ 555 Housing 324 354 424 Other reconciling items 711 910 1,565 Consolidated total $ 1,829 $ 1,738 $ 2,544 Depreciation: Vehicles $ 4,649 $ 4,216 $ 3,657 Housing 2,902 2,583 2,478 Other reconciling items 1,595 775 562 Consolidated total $ 9,146 $ 7,574 $ 6,697 4. INVENTORIES. Inventories consist of the following: 1999 1998 Raw materials $ 39,926 $29,692 Work in process 11,131 11,512 Finished goods 48,951 52,146 Total $100,008 $93,350 5. PROPERTY AND EQUIPMENT. Property and equipment consists of the following: 1999 1998 Land and improvements $ 12,858 $ 11,017 Buildings and improvements 58,199 53,761 Machinery and equipment 22,351 19,713 Transportation equipment 12,534 11,176 Office furniture and fixtures 16,242 8,850 122,184 104,517 Less, Accumulated depreciation 47,506 41,445 Property and equipment, net $ 74,678 $ 63,072 6. SHORT-TERM BORROWINGS. At December 31, 1999 and 1998, the Company has an unsecured bank line of credit aggregating $30 million with interest on outstanding borrowings payable monthly at a rate of LIBOR plus a margin of .50% to .75%. There were no borrowings under this bank line of credit during 1999, 1998 and 1997. 28 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 7: LONG-TERM DEBT. Long-term debt consists of the following: 1999 1998 Obligations under industrial development revenue bonds, variable rates, with various maturities through 2011 $ 7,400 $ 8,500 Promissory notes payable, issued or assumed in the acquisition of a business, principal payable in annual installments through January 2001, interest payable monthly at the prime rate (8.5% and 7.75% at Decem- ber 31, 1999 and 1998, respectively), unsecured 2,489 3,816 Total 9,889 12,316 Less, Current maturities 1,543 2,125 Long-term debt $ 8,346 $10,191 Aggregate maturities of long-term debt for each of the next five years ending December 31 are as follows: 2000 - $1,543; 2001 - $1,746; 2002 - $400; 2003 - $400 and 2004 - $400. In connection with four of its industrial development revenue bond obligations, the Company obtained, as a credit enhancement for the bondholders, irrevocable letters of credit in favor of the bond trustees. The agreements relating to these letters of credit contain, among other provisions, certain covenants relating to required amounts of working capital and net worth and the maintenance of certain required financial ratios. 8. ACCRUED EXPENSES AND OTHER LIABILITIES. Accrued expenses and other liabilities consist of the following: 1999 1998 Wages, salaries and commissions $ 5,338 $ 4,358 Dealer incentives 4,307 3,784 Warranty 7,195 6,138 Insurance 5,291 3,581 Other current liabilities 5,908 6,944 Total $28,039 $24,805 9. COMMON STOCK MATTERS AND EARNINGS PER SHARE. Stock Award Program On October 19, 1998, the Board of Directors approved a Stock Award Program which provides for the awarding to key employees of up to 109 shares of common stock from shares reserved under the Company's stock option plan. On December 1, 1998, the Company awarded 64 shares to certain employees, subject to the terms, conditions and restrictions of the award program. The shares are issuable in four annual installments of 29 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 25% beginning one year from the date of grant. The Company recognizes compensation expense over the term of the awards and compensation expense of $208 was recognized for the year ended December 31, 1999. Stock Option Plan The Company's stock option plan provides for the granting of options to eligible key employees to purchase common shares. Under terms of the plan, the Company may grant incentive stock options or non-qualified stock options. The option price for options granted to key employees is an amount per share of not less than the fair market value per share on the date of granting the option. No such options may be exercised during the first year after grant, and are exercisable cumulatively in four installments of 25% each year thereafter. The following table summarizes stock option activity: Weighted- Average Number Exercise of Shares Price Outstanding, January 1, 1997 647 $ 9.36 Granted 223 19.53 Canceled (48) 11.81 Exercised (147) 6.94 Outstanding, December 31, 1997 675 13.07 Granted 177 24.46 Canceled (52) 11.05 Exercised (139) 9.19 Outstanding, December 31, 1998 661 16.77 Granted 395 20.39 Canceled (83) 7.44 Exercised (107) 9.18 Outstanding, December 31, 1999 866 18.94 Options outstanding at December 31, 1999 are exercisable at prices ranging from $7.44 to $27.13 per share and have a weighted average remaining contractual life of 3.07 years. The following table summarizes information about stock options outstanding at December 31, 1999. Options Outstanding Options Exercisable Weighted- Number Average Weighted- Number Weighted- Outstanding at Remaining Average Exercisable at Average Range of December 31, Contractual Exercise December 31, Exercise Exercise Price 1999 Life Price 1999 Price $ 7.44 - $12.00 123 .7 $ 9.12 106 $ 8.98 12.01 - 17.00 238 3.9 15.00 46 15.71 17.01 - 22.00 170 2.4 20.06 84 20.09 22.00 - 27.13 335 3.7 24.77 34 24.62 866 270 At December 31, 1998 and 1997, there were exercisable options to purchase 243 and 209 shares at weighted-average exercise prices of $11.94 and $8.97, respectively. The weighted-average grant-date fair value of options granted during the years ended December 31, 1999, 1998 and 1997 were $5.92, $6.99 and $4.81, respectively. As of December 31, 1999, 112 30 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) shares were reserved for the granting of future stock options and awards, compared with 424 shares at December 31, 1998. On February 3, 2000, the Board of Directors approved, subject to ratification by the Company's shareholders, an additional one million common shares to be reserved for grant under the Company's stock option and award programs. Had the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net income and net income per share would have been: 1999 1998 1997 Pro forma net income $29,013 $32,656 $24,533 Pro forma net income per share: Basic 1.77 1.91 1.42 Diluted 1.77 1.89 1.41 The pro forma amounts and the weighted-average grant-date fair-value of options granted were estimated using the Black-Scholes option-pricing model with the following assumptions: 1999 1998 1997 Risk free interest rate 5.49% 5.04% 6.00% Expected life 2.75 years 2.75 years 2.75 years Expected volatility 39.8% 37.9% 30.7% Expected dividends 1.1% 1.0% 1.2% Stock Purchase Plan The Company has an employee stock purchase plan under which a total of 526 shares of the Company's common stock are reserved for purchase by full-time employees through payroll deductions, cash payments, or a combination of both at a price equal to 90% of the market price of the Company's common stock on the purchase date. As of December 31, 1999, there were 307 employees actively participating in the plan. Since its inception, a total of 274 shares have been purchased by employees under the plan. Certain restrictions in the plan limit the amount of payroll deductions and cash payments an employee may make in any one quarter. There are also limitations as to the amount of ownership in the Company an employee may acquire under the plan. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the dilutive effect of stock options and stock awards. Shareholder Rights Plan On October 21, 1999, the Company's Board of Directors adopted a new shareholder rights plan to replace an existing rights plan that was due to expire on February 15, 2000. The new rights plan, which became effective January 12, 2000 (the "Record Date"), provides for a dividend distribution of one common share purchase right (the "Rights") for each outstanding common share to each shareholder of record on the Record Date. The Rights will be represented by common share certificates and will not be exercisable or transferable apart from the common shares 31 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) public announcement that a person or group of persons (an "Acquiring Person") has acquired, obtained the right to acquire, beneficial ownership of 20% or more of the outstanding common shares or (ii) ten (10) business days following the commencement of (or announcement of an intention to make) a tender offer or exchange offer if, upon consummation thereof, such an Acquiring Person would be the beneficial owner to 20% or more of the outstanding common shares. Upon the occurrence of the certain events and after the Rights become exercisable, each right would entitle the rightholder (other than the Acquiring Person) to purchase one fully paid and nonaccessable common share of the Company at a purchase price of $75 per share, subject to anti-dilutive adjustments. The Rights are nonvoting and expire February 1, 2010, and at any time prior to a person or a group of persons becoming an Acquiring Person, the Company's Board of Directors may redeem the Rights in whole, but not in part, at a purchase price $.01 per Right. 10. COMPENSATION AND BENEFIT PLANS. Incentive Compensation The Company has incentive compensation plans for its officers and other key management personnel. The amounts charged to expense for the years ended December 31, 1999, 1998 and 1997 aggregated $3,344, $3,346 and $2,870, respectively. Deferred Compensation The Company has established a deferred compensation plan for executives and other key employees. The plan provides for benefit payments upon termination of employment, retirement, disability, or death. The Company recognizes the cost of this plan over the projected service lives of the participating employees based on the present value of the estimated future payments to be made. The plan is funded by insurancecontracts on the lives of the participants, and investments in insurance contracts (included in other assets) aggregated $11.3 million and $10.6 million as of December 31, 1999 and 1998, respectively. The deferred compensation obligations, which aggregated $6,782 and $7,323 at December 31, 1999 and 1998, respectively, are included in other noncurrent liabilities, with the current portion ($342 and $335 at December 31, 1999 and 1998, respectively) included in other current liabilities. Employee Benefit Plans The Company sponsors a Coachmen Assisted Retirement For Employees (C.A.R.E.) program which provides a mechanism for each eligible employee to establish an individual retirement account and receive matching contributions from the Company based on the amount contributed by the employee, the employee's years of service and the profitability of the Company. Company matching contributions charged to expense under the C.A.R.E. program aggregated $735, $857 and $725 for the years ended December 31, 1999, 1998 and 1997, respectively. Effective January 1, 2000, the Company established a retirement plan (the "Plan") under Section 401(k) of the Internal Revenue Code that covers all eligible employees. The Plan, which will replace the benefit provided by the C.A.R.E. program, is a defined contribution plan and 32 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) allows employees to make voluntary contributions up to 20% of annual compensation. Under the Plan, the Company may make discretionary matching contributions up to 6% of participants' compensation. 11. INCOME TAXES. Income taxes are summarized as follows: 1999 1998 1997 Federal: Current $13,591 $15,492 $12,765 Deferred 489 339 150 14,080 15,831 12,915 State: Current 1,389 1,348 1,127 Deferred 70 49 21 1,459 1,397 1,148 Total $15,539 $17,228 $14,063 Although not affecting the total provision, the amounts previously reported for the allocation of federal and state income taxes between current and deferred for 1998 have been revised based upon determinations made when the related tax returns were filed. The following is a reconciliation of the provision for income taxes computed at the federal statutory rate (35%) to the reported provision for income taxes: 1999 1998 1997 Computed federal income tax at federal statutory rate $15,765 $17,602 $13,589 Changes resulting from: Increase in cash surrender value of life insurance contracts (150) (245) (356) Foreign Sales Corporation subject to lower tax rate (368) (315) (396) State income taxes, net of federal income tax benefit 948 908 746 Preferred stock dividend exclusion (622) (548) (139) Other, net (34) (174) 619 Total $15,539 $17,228 $14,063 33 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) The components of the net deferred tax assets are as follows: 1999 1998 Current deferred tax asset: Accrued warranty expense $ 2,971 $2,557 Receivables 227 138 Other 1,545 1,278 Net current deferred tax asset $ 4,743 $3,973 Noncurrent deferred tax asset (liability): Receivables $ (225) $ (335) Deferred compensation 2,713 2,929 Property and equipment (3,256) (2,086) Intangible assets (721) (668) Net noncurrent deferred tax liability $(1,489) $ (160) 12. ACQUISITIONS AND DISPOSITIONS. On January 12, 2000, the Company sold certain assets and the business operations of its automotive division (converter of vans and specialty vehicles). The sales price consisted of cash of $2.3 million and the buyer's assumption of certain liabilities. Since the sales price approximated the carrying values of the tangible assets sold, the Company will recognize no gain or loss on the sale transaction. Net sales of the automotive division, which is reported as a part of the Company's vehicle segment, aggregated $28,025, $23,417 and $25,972 for the years ended December 31, 1999, 1998 and 1997, respectively. Pretax income (loss) of the automotive division approximated $222, ($480) and $302 for the years ended December 31, 1999, 1998 and 1997, respectively. During the year ended December 31, 1999, the Company sold the business operations and certain assets of two of its Company-owned dealerships. The sales proceeds consisted of $3,298 cash and a promissory note receivable of $650 (noncash investing and financing activity). The Company recognized a $650 gain on the sale of these businesses which is included in other nonoperating income. Net sales and operating results of these two businesses were not significant to the Company's consolidated net sales and operating income. On February 3, 1998, the Company acquired certain assets and the operations of three retail recreational vehicle dealerships, two located in Florida and one in Georgia. The assets acquired consisted of new and used unit inventories, parts inventories, real and personal property and other miscellaneous assets. The purchase price, which aggregated $9.8 million and approximated the fair value of the acquired assets, consisted of $9.0 million in cash and the assumption of certain liabilities of the sellers. The acquisitions were accounted for as a purchase and the operating results of the acquired businesses are included in the Company's consolidated financial statements from the date of acquisition. Pro forma financial information has not been presented as it is not materially different from the Company's historical results. 34 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) 13. COMMITMENTS AND CONTINGENCIES. Lease Commitments The Company leases various manufacturing and office facilities under noncancelable agreements which expire at various dates through November 2006. Several of the leases contain renewal options and options to purchase and require the payment of property taxes, normal maintenance and insurance on the properties. Certain office and delivery equipment are also leased under various noncancelable agreements. The above described leases are accounted for as operating leases. Future minimum annual lease commitments at December 31, 1999 aggregated $1,066 and are payable as follows: 2000 - $437; 2001 - $249; 2002 - $184; 2003 - $128; 2004 - $56 and thereafter - $12. Total rental expense for the years ended December 31, 1999, 1998 and 1997 aggregated $1,179, $1,149 and $1,472, respectively. Obligation to Purchase Consigned Inventories The Company obtains vehicle chassis for its recreational and specialized vehicle products directly from automobile manufacturers under converter pool agreements. The agreements generally provide that the manufacturer will provide a supply of chassis at the Company's various production facilities under the terms and conditions as set forth in the agreement. Chassis are accounted for as consigned inventory until either assigned to a unit in the production process or 90 days have passed. At the earlier of these dates, the Company is obligated to purchase the chassis and it is recorded as inventory. At December 31, 1999 and 1998, chassis inventory, accounted for as consigned inventory, approximated $17.8 million and $9.5 million, respectively. Repurchase Agreements The Company is contingently liable to banks and other financial institutions on repurchase agreements in connection with financing provided by such institutions to most of the Company's independent dealers in connection with their purchase of the Company's recreational vehicle products. These agreements provide for the Company to repurchase its products from the financial institution in the event that they have repossessed them upon a dealer's default. Although the estimated contingent liability approximates $239 million at December 31, 1999($250 million at December 31, 1998), the risk of loss resulting from these agreements is spread over the Company's numerous dealers and is further reduced by the resale value of the products repurchased. There have been no significant losses under these agreements in prior years. Share Repurchase Programs During 1999, 1998 and 1997, the Company repurchased common shares for its treasury under share repurchase programs authorized by the Board of Directors. Under the repurchase programs, common shares are purchased from time to time, depending on market conditions and other factors, on the open market or through privately negotiated transactions. As of December 31, 1999, the Company has authorization to repurchase up to 871 additional common shares. 35 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) Self-Insurance The Company is self-insured for a portion of its product liability and certain other liability exposures. Depending on the nature of the claim and the date of occurrence, the Company's maximum exposure ranges from $250 to $500 per claim. The Company accrues an estimated liability based on various factors, including sales levels and the amount of outstanding claims. Management believes the liability recorded is adequate to cover the Company's self-insured risk. Litigation The Company is involved in various legal proceedings which are ordinary routine litigations incidental to the industry and which are covered in whole or in part by insurance. Management believes that any liability which may result from these proceedings will not be significant. 14: UNAUDITED INTERIM FINANCIAL INFORMATION. Certain selected unaudited quarterly financial information for the years ended December 31, 1999 and 1998 is as follows: 1999 Quarter Ended March 31 June 30 September 30 December 31 Net sales $211,025 $203,199 $226,114 $206,686 Gross profit 27,573 27,872 31,090 21,455 Net income 7,217 9,014 9,525 3,746 Net income per common share: Basic .43 .54 .58 .24 Diluted .43 .54 .58 .24 1998 Quarter Ended March 31 June 30 September 30 December 31 Net sales $175,638 $201,069 $202,593 $176,730 Gross profit 23,376 30,195 31,015 25,325 Net income 6,299 9,323 10,187 7,254 Net income per common share: Basic .36 .54 .59 .44 Diluted .36 .53 .59 .43 The second quarter of 1999 has been restated from amounts previously reported to record $1.0 million of additional costs under the Company's self-insured group medical plan. The restatement increased cost of sales by $836, which correspondingly decreased gross profit by the same amount, increased operating expenses by $164, decreased net income by $655 and reduced both basic and diluted earnings per share from $.58 to $.54. 36 Coachmen Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements, Continued (in thousands, except per share amounts) adjustments, including (i) a $1.5 million pretax charge to increase accruals for self-insured product liability, general liability and workers' compensation which resulted from increased claims experience in 1999 and (ii) a $660 charge associated with an accounting change for the Company's self-insured group medical plan (see Note 2 of Notes to Consolidated Financial Statements). 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable Part III. Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors Information for Item 10(a) is contained on page 4 of the Company's Proxy Statement dated March 27, 2000 and is incorporated herein by reference. (b) Executive Officers of the Company See "Executive Officers of the Registrant" on page 7. Item 11. Executive Compensation Information for Item 11 is contained under the heading "Compensation of Executive Officers and Directors" in the Company's Proxy Statement dated March 27, 2000 and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information for Item 12 is contained on pages 3 and 4 of the Company's Proxy Statement dated March 27, 2000 and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Not Applicable 38 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following financial statements and financial statement Schedule are included in Item 8 herein. 1. Financial Statements Report of Independent Accountants Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements for the years ended December 31, 1999, 1998 and 1997 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 3. Exhibits See Index to Exhibits (b) Reports on Form 8-K No reports on Form 8-K were required to be filed during the last quarter of the period covered by this report. 39 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Balance At Charged Balance Beginning To Costs Deductions- At End Description Of Period And Expenses Describe Of Period Allowance for doubtful receivables - deducted from trade receivables in the consolidated balance sheets: For the year ended December 31, 1999 $ 768,000 $ 117,000 $ (35,000)(A) $ 850,000 For the year ended December 31, 1998 $1,354,000 $ (175,000)$ (411,000)(A) $ 768,000 For the year ended December 31, 1997 $ 919,000 $1,617,000 $(1,182,000)(A) $1,354.000 (A) Write-off of bad debts, less recoveries. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COACHMEN INDUSTRIES, INC. Date: March 30, 2000 /s/ R. M. LAVERS ----------------------------- R. M. Lavers (General Council and Secretary) /s/ J. E. JACK /s/ W. M. ANGELO ----------------------------- ----------------------------- J. E. Jack W. M. Angelo (Executive Vice President and (Vice President and Chief Chief Financial Officer) Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities as of March 30, 2000. /s/ C. C. SKINNER /s/ K. D. CORSON - ------------------------------- ------------------------------ C. C. Skinner K. D. Corson (Director) (Director) (Chief Executive Officer) /s/ T. H. CORSON /s/ W. P. JOHNSON - ------------------------------- ------------------------------ T. H. Corson W. P. Johnson (Director) (Director) /s/ F. M. MILLER /s/ E. W. MILLER - ------------------------------- ------------------------------ F. M. Miller E. W. Miller (Director) (Director) /s/ P. G. LUX /s/ R. J. DEPUTY - ------------------------------- ------------------------------ P. G. Lux R. J. Deputy (Director) (Director) /s/ G. B. BLOOM /s/ D. W. HUDLER - ------------------------------- ------------------------------ G. B. Bloom D. W. Hudler (Director) (Director) 41 INDEX TO EXHIBITS Number Assigned In Regulation S-K, Item 601 Description of Exhibit (3) No exhibit (4) No exhibit (9) No exhibit (10) No exhibit (11) No exhibit - See Consolidated Statements of Income (on page 19 herein) and Note 9 of Notes to Consolidated Financial Statements (on pages 29-32 herein). (12) No exhibit (13) No exhibit (16) No exhibit (18) No exhibit (21) Registrant and Subsidiaries of the Registrant (22) No exhibit (23) Consent of Independent Accountants (24) No exhibit (27) Financial Data Schedule (EDGAR filing only) (99) No exhibit EX-21 2 REGISTRANT AND SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Registrant and Subsidiaries of the Registrant Percent of Voting State of Securities Owned Incorporation By the Registrant Coachmen Industries, Inc. (Registrant) Indiana Coachmen Recreational Vehicle Company, Inc. Indiana 100% Prodesign, Inc. Indiana 100% Shasta Industries, Inc. Indiana 100% The Lux Co., Inc. Indiana 100% Michiana Easy Livin' Country, Inc. Indiana 100% All American Homes, Inc. Indiana 100% Clarion Motors Corporation Indiana 100% Coachmen Foreign Sales Corporation U.S. Virgin Islands 100% Viking Recreational Vehicles, Inc. Michigan 100% Northwoods RV Country, Inc. Michigan 100% Georgie Boy Mfg., Inc. Indiana 100% GBMD, Inc. Indiana 100% Coachmen Industries of Texas, Inc. Texas 100% Coachmen Industries of Oregon, Inc. Oregon 100% Coachmen Industries of California, Inc. California 100% Freeway Easy Livin' Country, Inc. California 100% Gulf Coast Easy Livin' Country, Inc. Florida 100% VFP Composites, Inc. Florida 100% Rover, Inc. Ohio 100% All American Homes of Iowa, Inc. Iowa 100% Southern Ambulance Builders, Inc. Georgia 100% Colfax Country RV, Inc. North Carolina 100% All American Homes of North Carolina, Inc. North Carolina 100% All American Homes of Tennessee, Inc. Tennessee 100% All American Homes of Ohio, Inc. Ohio 100% EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 (Letterhead of PricewaterhouseCoopers LLP) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Coachmen Industries, Inc. on Form S-8 (File No. 33-59251, No. 2-45373, No. 2-47923, No. 2-56027 and No. 2-64572) and in the related Prospectus of our report dated February 3, 2000, on our audits of the consolidated financial statements and financial statement schedule of Coachmen Industries, Inc. and subsidiaries at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP South Bend, Indiana March 30, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated statement of income and consolidated balance sheet and is qualified in its entirety by reference to such financial statements. 0000021212 COACHMEN INDUSTRIES, INC. 1000 YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 4,269 23,009 32,550 31,279 47,888 34,671 850 768 100,008 93,350 190,822 186,855 122,184 104,517 47,506 41,445 285,766 269,341 55,719 47,549 8,346 10,191 38,307 55,977 0 0 0 0 175,339 148,355 285,766 269,341 847,024 756,030 847,024 756,030 739,034 646,119 806,381 710,102 4,398 4,363 117 (175) 1,829 1,738 45,041 50,291 15,539 17,228 29,502 33,063 0 0 0 0 0 0 29,502 33,063 1.80 1.93 1.80 1.92 RESTATED.
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