10-Q 1 form_10q093007.htm 10-Q 9-30-2007 form_10q093007.htm
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007.
OR

o  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
 
COA Logo  
 
 
 
COACHMEN INDUSTRIES, INC.
 
 
 
 
(Exact name of registrant as specified in its charter)
 
 

Indiana
 
35-1101097
(State of incorporation or organization)
 
(IRS Employer Identification No.)
 
2831 Dexter Drive, Elkhart, Indiana
 
46514
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code
 
(574) 262-0123
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Number of shares of Common Stock, without par value, outstanding as of the close of business on September 30, 2007:  15,768,882
 
 
- 2 -
Consolidated Balance Sheets
(in thousands)
 
 
September 30,
 
 
December 31,
 
 
 
2007
 
 
2006
 
Assets
 
(Unaudited)
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,109
 
 
$
2,651
 
Trade receivables, less allowance for doubtful receivables 2007 - $833 and 2006 - $1,134
 
 
24,133
 
 
 
25,874
 
Other receivables
 
 
3,309
 
 
 
2,332
 
Refundable income taxes
 
 
2,912
 
 
 
10,820
 
Inventories
 
 
70,441
 
 
 
83,511
 
Prepaid expenses and other
 
 
4,013
 
 
 
3,957
 
Assets held for sale
 
 
-
 
 
 
288
 
Total current assets
 
 
107,917
 
 
 
129,433
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
 
54,263
 
 
 
57,018
 
Goodwill
 
 
12,993
 
 
 
16,865
 
Cash value of life insurance, net of loans
 
 
34,123
 
 
 
31,119
 
Other
 
 
8,460
 
 
 
8,699
 
TOTAL ASSETS
 
$
217,756
 
 
$
243,134
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
7,427
 
 
$
9,284
 
Accounts payable, trade
 
 
26,176
 
 
 
16,998
 
Accrued income taxes
 
 
15
 
 
 
18
 
Accrued expenses and other liabilities
 
 
30,213
 
 
 
35,116
 
Floorplan notes payable
 
 
3,774
 
 
 
4,156
 
Current maturities of long-term debt
 
 
917
 
 
 
1,077
 
Total current liabilities
 
 
68,522
 
 
 
66,649
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
3,627
 
 
 
3,862
 
Deferred income taxes
 
 
2,865
 
 
 
4,524
 
Postretirement deferred compensation benefits
 
 
7,815
 
 
 
7,768
 
Other
 
 
26
 
 
 
-
 
Total liabilities
 
 
82,855
 
 
 
82,803
 
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
        Common shares, without par value: authorized 60,000 shares; issued 2007 - 21,172 shares and 2006 - 21,156 shares
 
 
92,512
 
 
 
92,382
 
Additional paid-in capital
 
 
7,795
 
 
 
7,648
 
Accumulated other comprehensive loss
 
 
(16
) 
 
 
(10
)
Retained earnings
 
 
93,764
 
 
 
119,623
 
Treasury shares, at cost, 2007 - 5,402 shares and 2006 - 5,433 shares
 
 
(59,154
)
 
 
(59,312
)
Total shareholders' equity
 
 
134,901
 
 
 
160,331
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
217,756
 
 
$
243,134
 
 
- 3 -
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Net sales
 
$
123,854
 
 
$
130,715
 
 
$
403,861
 
 
$
448,590
 
Cost of sales
 
 
116,096
 
 
 
124,734
 
 
 
388,682
 
 
 
428,126
 
        Gross profit
 
 
7,758
 
 
 
5,981
 
 
 
15,179
 
 
 
20,464
 
Operating expenses: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling
 
 
5,720
 
 
 
6,520
 
 
 
17,472
 
 
 
16,946
 
General and administrative
 
 
6,410
 
 
 
6,226
 
 
 
19,621
 
 
 
14,403
 
Gain on sale of assets, net
 
 
(143
)
 
 
(291
)
 
 
(610
)
 
 
(6,340
)
Goodwill impairment charge
 
 
-
 
 
 
-
 
 
 
3,872
 
 
 
-
 
 
 
 
11,987
 
 
 
12,455
 
 
 
40,355
 
 
 
25,009
 
        Operating loss
 
 
(4,229
)
 
 
(6,474
)
 
 
(25,176
)
 
 
(4,545
)
Nonoperating (income) expense: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Interest expense
 
 
808
 
 
 
916
 
 
 
2,595
 
 
 
2,616
 
        Investment income
 
 
(423
)
 
 
(340
)
 
 
(1,376
)
 
 
(1,165
)
        Other income, net
 
 
(271
)
 
 
(654
)
 
 
(486
)
 
 
(897
)
 
 
 
114
 
 
 
(78
)
 
 
733
 
 
 
554
 
        Loss from continuing operations before income taxes
 
 
(4,343
)
 
 
(6,396
)
 
 
(25,909
)
 
 
(5,099
)
Income taxes (credit) 
 
 
1
  
 
 
(3,663
)
 
 
(994
)
 
 
(3,249
)
Net loss from continuing operations 
 
 
(4,344
)
 
 
(2,733
)
 
 
(24,915
)
 
 
(1,850
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Loss from operations of discontinued entities (net of tax credits of $(100) and $(423) in 2006)
 
 
-
 
 
 
(152
)
 
 
-
 
 
 
(657
)
        Gain (loss) on sale of assets of discontinued entities (net of taxes of ($631) and $2,140 in 2006)
 
 
-
 
 
 
(631
)
 
 
-
 
 
 
2,205
 
Income (loss) from discontinued operations
 
 
-
 
 
 
(783
)
 
 
-
 
 
 
1,548
 
               Net loss
 
$
(4,344
)
 
$
(3,516
)
 
$
(24,915
)
 
$
(302
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - Basic 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Continuing operations
 
$
(.28
)
 
$
(.17
)
 
$
(1.58
)
 
$
(.12
)
        Discontinued operations
 
 
-
 
 
 
(.05
)
 
 
-
 
 
 
.10
 
               Net loss per share
 
 
(.28
)
 
 
(.22
)
 
 
(1.58
)
 
 
(.02
)
Earnings (loss) per share - Diluted 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Continuing operations
 
 
(.28
)
 
 
(.17
)
 
 
(1.58
)
 
 
(.12
)
        Discontinued operations
 
 
-
 
 
 
(.05
)
 
 
-
 
 
 
.10
 
               Net loss per share
 
 
(.28
)
 
 
(.22
)
 
 
(1.58
)
 
 
(.02
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of common shares used in the computation of earnings (loss) per share: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Basic
 
 
15,736
 
 
 
15,634
 
 
 
15,725
 
 
 
15,664
 
        Diluted
 
 
15,736
 
 
 
15,634
 
 
 
15,725
 
 
 
15,664
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share 
 
$
-
 
 
$
.03
 
 
$
.06
 
 
$
.15
 
 
- 4 -
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
 
2007
 
 
2006
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 
$
(24,915
)
 
$
(302
)
           Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation
 
 
4,389
 
 
 
4,869
 
Provision for doubtful receivables, net of recoveries
 
 
474
 
 
 
444
 
Net realized and unrealized losses on derivatives
 
 
(6
)
 
 
(4
)
Goodwill impairment charge
 
 
3,872
 
 
 
-
 
Gains on sale of properties and other assets, net
 
 
(610
)
 
 
(10,830
)
Increase in cash surrender value of life insurance policies
 
 
(1,495
)
 
 
(437
)
Deferred income tax provision (benefit)
 
 
(1,659
)
 
 
1,641
 
Other
 
 
1,199
 
 
 
234
  
Changes in certain assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
 
 
 
 
Trade receivables
 
 
74
  
 
 
21,489
 
Inventories
 
 
13,070
 
 
 
5,527
  
Prepaid expenses and other
 
 
(56
)
 
 
(1,944
)
Accounts payable, trade
 
 
9,178
 
 
 
(4,502
)
Income taxes - accrued and refundable
 
 
7,905
 
 
 
(2,755
)
Accrued expenses and other liabilities
 
 
(5,709
)
 
 
(11,735
)
    Net cash provided by operating activities
 
 
5,711
  
 
 
1,695
  
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Proceeds from sale of properties and other assets
 
 
1,499
 
 
 
24,680
 
Investments in life insurance policies
 
 
(1,509
)
 
 
(1,334
)
Purchases of property and equipment
 
 
(2,246
)
 
 
(4,139
)
Other
 
 
466
 
 
 
(276
)
Net cash provided by (used in) investing activities
 
 
(1,790
)
 
 
18,931
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Proceeds from short-term borrowings
 
 
10,659
 
 
 
7,070
 
Payments of short-term borrowings
 
 
(12,898
)
 
 
(8,620
)
Proceeds from long-term debt
 
 
-
 
 
 
255
 
Payments of long-term debt
 
 
(395
)
 
 
(8,570
)
Issuance of common shares under stock incentive plans
 
 
130
 
 
 
192
 
Cash dividends paid
 
 
(944
)
 
 
(1,876
)
Purchases of common shares for treasury
 
 
(15
)
 
 
(129
)
                                    Net cash used in financing activities
 
 
(3,463
)
 
 
(11,678
)
Increase in cash and cash equivalents
 
 
458
 
 
 
8,948
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
 
 
 
 
 
Beginning of period
 
 
2,651
 
 
 
2,780
 
End of period
 
$
3,109
 
 
$
11,728
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information: 
 
 
 
 
 
 
 
 
        Operating cash received during the period related to insurance settlement
 
$
-
 
 
$
2,875
 

- 5 -

Notes to Consolidated Financial Statements
(Unaudited)

1.    BASIS OF PRESENTATION.

The condensed consolidated financial statements have been prepared by Coachmen Industries, Inc. (“the Company”), without audit, in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Management believes the disclosures made in this document are adequate so as not to make the information presented misleading.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements, taken as a whole, contain all adjustments which are of a normal recurring nature necessary to present fairly the financial position of the Company as of September 30, 2007, and the results of its operations and cash flows for the interim periods presented. Operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2006.

Statement of Operations Classification - Effective January 1, 2007, the Company changed its classification of delivery expenses in the statement of operations to include these expenses as a component of cost of sales.  Prior to January 1, 2007, the Company classified delivery expenses as an operating expense. This change is considered a change in accounting principle pursuant to the provisions of FASB Statement No. 154, Accounting Changes and Error Corrections, and was reported by retrospective application to prior periods' financial statements. This change in accounting principle is considered preferable as it was made to conform the classification of these expenses on the statement of operations to the classification of such expenses by other companies in our industry.  The effect of this change on the three and nine months ended September 30, 2007 was an increase of cost of sales and a decrease of operating expenses by approximately $7.1 million and $23.0 million, respectively. The Company applied the change retrospectively by reclassifying approximately $7.1 million and $23.2 million of delivery expenses from operating expenses to cost of sales for the three and nine-month periods ended September 30, 2006. This change has no effect on income from continuing operations, net income or per share amounts for any period presented.

Reclassifications - Certain reclassifications have been made in the fiscal 2006 consolidated financial statements and related footnotes to conform to the presentation used in 2007.


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 Recreational Vehicles and Housing. The Company evaluates the performance of its segments based primarily on net sales and pre-tax income and allocates resources to them based on performance. There are no inter-segment revenues. The Company allocates certain corporate expenses to these segments based on three dimensions: revenues, subsidiary structure and number of employees. In addition, the data excludes the results of the discontinued operations (see Note 9). Differences between reported segment amounts and corresponding consolidated totals represent corporate income or expenses for administrative functions and income, 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 three and nine-month periods ended September 30 (in thousands):

 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
Recreational vehicles
 
$
91,778
 
 
$
90,490
 
 
$
307,158
 
 
$
321,454
 
Housing
 
 
32,076
 
 
 
40,225
 
 
 
96,703
 
 
 
127,136
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated total
 
$
123,854
 
 
$
130,715
 
 
$
403,861
 
 
$
448,590
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 6 -

2.    SEGMENT INFORMATION, continued.

 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2007
 
2006
 
2007
 
2006
 
Gross profit
 
 
 
 
 
 
 
 
 
 
 
 
Recreational vehicles
 
$
3,501
  
 
$
557
 
 
$
2,566
  
 
$
3,141
 
Housing
 
 
4,257
 
 
 
5,424
 
 
 
12,613
 
 
 
17,322
 
Other reconciling items
 
 
-
 
 
 
-
 
 
 
-
  
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated total
 
$
7,758
 
 
$
5,981
 
 
$
15,179
 
 
$
20,464
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recreational vehicles
 
$
7,758
 
 
$
7,833
 
 
$
27,011
 
 
$
18,091
 
Housing
 
 
4,907
 
 
 
5,079
 
 
 
14,944
 
 
 
14,378
 
Other reconciling items
 
 
(678
)
 
 
(457
)
 
 
(1,600
)
 
 
(7,460
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated total
 
$
11,987
 
 
$
12,455
 
 
$
40,355
 
 
$
25,009
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recreational vehicles
 
$
(4,257
)
 
$
(7,276
)
 
$
(24,445
)
 
$
(14,950
)
Housing
 
 
(650
)
 
 
345
 
 
 
(2,331
)
 
 
2,944
 
Other reconciling items
 
 
678
 
 
 
457
 
 
 
1,600
 
 
 
7,461
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated total
 
$
(4,229
)
 
$
(6,474
)
 
$
(25,176
)
 
$
(4,545
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax income (loss) from continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recreational vehicles
 
$
(4,156
)
 
$
(7,003
)
 
$
(24,471
)
 
$
(15,028
)
Housing
 
 
(690
)
 
 
255
 
 
 
(2,271
)
 
 
2,843
 
Other reconciling items
 
 
503
 
 
 
352
 
 
 
833
 
 
 
7,086
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated total
 
$
(4,343
)
 
$
(6,396
)
 
$
(25,909
)
 
$
(5,099
)
 
 
 
September 30,
 
 
December 31,
 
 
 
2007
 
 
2006
 
Total assets
 
 
 
 
 
 
Recreational vehicles
 
$
94,188
 
 
$
113,627
 
Housing
 
 
55,864
 
 
 
57,968
 
Other reconciling items
 
 
67,704
 
 
 
71,539
 
                 
Total                                       
 
$
217,756
 
 
$
243,134
 
 
- 7 -

3.    INVENTORIES.
 
Inventories consist of the following (in thousands):
 
 
September 30,
 
 
December 31,
 
 
 
2007
 
 
2006
 
 Raw materials
 
 
 
 
 
 
 Recreational vehicles
 
$
14,118
 
 
$
13,874
 
 Housing
 
 
5,382
 
 
 
6,065
 
 Total
 
 
19,500
 
 
 
19,939
 
 
 
 
 
 
 
 
 
 
Work in process
 
 
 
 
 
 
 
 
 Recreational vehicles
 
 
14,415
 
 
 
15,661
 
         Housing
 
 
4,120
 
 
 
3,466
 
         Total
 
 
18,535
 
 
 
19,127
 
 
 
 
 
 
 
 
 
 
         Improved lots
 
 
 
 
 
 
 
 
         Housing
 
 
204
 
 
 
221
 
         Total
 
 
204
 
 
 
221
 
 
 
 
 
 
 
 
 
 
         Finished goods
 
 
 
 
 
 
 
 
         Recreational vehicles
 
 
24,106
 
 
 
35,079
 
         Housing
 
 
8,096
 
 
 
9,145
 
         Total
 
 
32,202
 
 
 
44,224
 
 
 
 
 
 
 
 
 
 
Total
 
$
70,441
 
 
$
83,511
 

4.    PROPERTY, PLANT AND EQUIPMENT.

Property, plant and equipment consist of the following (in thousands):

 
 
September 30,
2007
 
 
December 31,
2006
 
 
 
 
 
 
 
 
Land and improvements
 
$
11,651
 
 
$
11,562
 
Buildings and improvements
 
 
60,879
 
 
 
61,043
 
Machinery and equipment
 
 
25,061
 
 
 
24,798
 
Transportation equipment
 
 
14,524
 
 
 
14,310
 
Office furniture and fixtures
 
 
17,268
 
 
 
17,481
 
 
 
 
 
 
 
 
 
 
Total
 
 
129,383
 
 
 
129,194
 
Less, accumulated depreciation
 
 
75,120
 
 
 
72,176
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
$
54,263
 
 
$
57,018
 
 
- 8 -

5.    ACCRUED EXPENSES AND OTHER LIABILITIES.

Accrued expenses and other liabilities consist of the following (in thousands):

 
 
September 30,
2007
 
 
December 31,
2006
 
 
 
 
 
 
 
 
Wages, salaries, bonuses and commissions
 
$
3,620
 
 
$
3,135
 
Dealer incentives, including volume bonuses, dealer trips, interest reimbursement, co-op advertising and other rebates
 
 
1,367
 
 
 
4,140
 
Warranty
 
 
9,537
 
 
 
11,099
 
Insurance-products and general liability, workers compensation, group health and other
 
 
7,437
 
 
 
7,593
 
Customer deposits and unearned revenues
 
 
3,570
 
 
 
3,865
 
Litigation
 
 
625
 
 
 
345
 
Interest
 
 
714
 
 
 
955
 
Sales and property taxes
 
 
1,626
 
 
 
1,226
 
Other current liabilities
 
 
1,717
 
 
 
2,758
 
 
 
 
 
 
 
 
 
 
Total
 
$
30,213
 
 
$
35,116
 
 
Changes in the Company's warranty liability during the three and nine-month periods ended September 30, 2007 and 2006 were as follows (in thousands): 

 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance of accrued warranty at beginning of period
 
$
9,766
 
 
$
13,359
 
 
$
11,099
 
 
$
20,005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warranties issued during the period and changes in liability for pre-existing warranties
 
 
4,074
 
 
 
4,411
 
 
 
14,184
 
 
 
15,576
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Settlements made during the period
 
 
(4,303
)
 
 
(6,251
)
 
 
(15,746
)
 
 
(24,062
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance of accrued warranty at September 30
 
$
9,537
 
 
$
11,519
 
 
$
9,537
 
 
$
11,519
 

The decrease in the warranty accrual for 2006 and 2007 was primarily the result of specific reserves established in the latter half of 2005 related to the recall of defective camping trailer lift systems and the repair of defective material used in laminated sidewalls of certain of the Company’s recreational vehicles. Most of the claims against these reserves were paid during 2006 and the first three months of 2007.
 
- 9 -

6.    COMPREHENSIVE LOSS.

The changes in the components of comprehensive loss for the three and nine-month periods ended September 30 are as follows (in thousands):

 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(4,344
)
 
$
(3,516
)
 
$
(24,915
)
 
$
(302
)
Unrealized losses on cash flow hedges, net of taxes
 
 
(16
)
 
 
(28
)
 
 
(6
)
 
 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(4,360
)
 
$
(3,544
)
 
$
(24,921
)
 
$
(306
)

As of September 30, 2007 and 2006, the accumulated other comprehensive loss, net of tax, relating to deferred losses on cash flow hedges was ($16,000) and ($10,000), respectively.
 
7.    EARNINGS PER SHARE AND COMMON STOCK MATTERS.

Basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earnings per common share is based on the weighted average number of shares outstanding during the period, after consideration of the dilutive effect of stock options and awards and shares held in deferred compensation plans. Basic and diluted earnings per share for the three and nine-month periods ended September 30 were calculated using the average shares as follows (in thousands):

 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss available to common stockholders
 
$
(4,344
)
 
$
(3,516
)
 
$
(24,915
)
 
$
(302
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares outstanding, end of period:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares used in basic EPS
 
 
15,736
 
 
 
15,634
 
 
 
15,725
 
 
 
15,664
 
Effect of dilutive securities
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Weighted average number of common shares used in dilutive EPS
 
 
15,736
 
 
 
15,634
 
 
 
15,725
 
 
 
15,664
 
  
As the Company reported a net loss for the three and nine-month periods ended September 30, 2007 and 2006, the dilutive effect of stock options and awards did not enter into the computation of diluted earnings per share because their inclusion would have been antidilutive.
 
Share Repurchase Programs

Periodically, the Company has repurchased its common stock as authorized by the Board of Directors. Under the repurchase program, common shares are purchased from time to time, depending on market conditions and other factors, on the open market or through privately negotiated transactions. During August 2006, the Company announced that the Board of Directors had authorized a share repurchase of up to one million shares. During the second quarter of 2007, the Company repurchased 1,500 shares for a total cost, including commissions, of $15,050. At September 30, 2007, there are 986,800 shares remaining authorized for repurchase by the Board of Directors.
 
- 10 -

8.    INCOME TAXES.

Prior to recognizing a valuation allowance, the effective tax rate for the three and nine-month periods ended September 30, 2007 was a credit of  (39.1%) and (38.2%), respectively, compared with a 2006 three and nine-month period effective tax credits from continuing operations of  (57.3%) and (63.7%), respectively. The Company’s effective tax rate fluctuates based upon estimated annual pre-tax income amounts, the states where sales occur, nontaxable increases in cash value of life insurance contracts, other permanent tax differences, increases or decreases in tax reserves and valuation allowances and recognized federal and state tax credits.  Due to the Company’s cumulative losses in recent years, valuation allowances of $1.7 million and $8.2 million were recognized to offset potential net operating loss tax benefits associated with the losses from the three and nine-month periods of 2007.  Additionally, during the second quarter of 2007, income tax expense (credit) was impacted by $1.0 million of tax benefit resulting from the elimination of deferred tax liabilities associated with goodwill that was determined to be impaired as of June 30, 2007 net of tax expense resulting from an increase in valuation reserves.  After these adjustments, the effective tax rate for the nine-month period ended September 30, 2007 was a credit of (3.8%).  As with the deferred tax valuation allowance taken at the end of 2006, the tax benefit associated with the three and nine-month period losses may be utilized to offset future taxable income.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007.  The implementation of FIN 48 did not have a significant impact on the Company’s financial position or results of operations.

As of the beginning of fiscal year 2007, the Company had unrecognized tax benefits of $4.1 million including interest and penalties. There has been no significant change in the unrecognized tax benefits through September 30, 2007.  If recognized, the effective tax rate would be affected by approximately $0.5 million of the unrecognized tax benefits.

The Company recognizes interest and penalties related to unrecognized tax benefits through interest and operating expenses, respectively.  The amounts accrued for interest and penalties as of September 30, 2007 and the amount of interest and penalties recorded during the three and nine-month periods ended September 30, 2007 were not considered to be significant.

The Company is subject to periodic audits by U.S. federal and state taxing authorities.  Currently, the Company is undergoing an audit by the Internal Revenue Service for a claim for research and development credits.  It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months as a result of the audit.  Based on the current audit in process, the entire amount of the unrecognized tax liability of $3.5 million which was recorded to offset the research and development tax benefits claimed in previously filed tax returns could be reversed or an additional liability of $1.1 million could be recorded.
 
For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2003.
 
 
During 2005, the Company’s Board of Directors approved a comprehensive operational and cost structure realignment and restructuring plan (the Intensive Recovery Plan), which is intended to improve operating performance and ensure financial strength. When describing the impact of these restructuring plans, determinations of the fair value of long-lived assets were based upon comparable market values for similar assets.

During the third quarter of 2007, two smaller properties were sold for a net pre-tax gain of approximately $0.1 million.
 
During the first three months of 2007, the Company completed the sale of two parcels of the former Georgie Boy Manufacturing complex for approximately $0.6 million, resulting in a pre-tax gain of approximately $0.3 million. Also during the first three months, the Company completed the sale of vacant farmland in Middlebury, Indiana for cash of approximately $0.1 million, resulting in a pre-tax gain of approximately $0.1 million.

On March 31, 2006, the Company completed the sale of a property located in Grapevine, Texas for approximately $2.0 million, consisting of cash of $1.7 million and a note receivable of $0.3 million and resulting in a pre-tax gain of approximately $1.8 million. Also during the first quarter of 2006, the Company completed the sale of vacant farmland in Middlebury, Indiana for cash of approximately $1.0 million, resulting in a pre-tax gain of approximately $0.8 million. During the third quarter of 2006, a number of smaller properties were sold for a net pre-tax gain of approximately $0.3 million. On June 8, 2006, the Company completed the sale of its corporate aircraft for approximately $2.3 million, which resulted in a pre-tax gain of approximately $1.7 million. On June 30, 2006, the Company sold property located in Palm Shores, Florida for $2.5 million, which resulted in a pre-tax gain of approximately $1.2 million. During June 2006, the Company also sold two parcels of the former Georgie Boy Manufacturing complex for total proceeds of $0.7 million, which resulted in a pre-tax gain of approximately $0.4 million. 

- 11 -

9.    RESTRUCTURING CHARGES AND DISCONTINUED OPERATIONS, continued.
 
Housing Segment

On March 31, 2006, the Company sold 100% of its interest in the capital stock of Miller Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and a $2.5 million secured note. The note, which is included in other long-term assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest payments beginning September 30, 2006. Principal payments of $125,000 per quarter commence on June 30, 2009 and continue through the maturity date of March 31, 2011. In addition, the Company accepted a $2.0 million contingent earn-out note which will be paid to the Company if certain income metrics are achieved by the acquiring entity. In October 2007, a subsequent agreement with Miller Building Systems waived the interest on the secured $2.5 million note for two years; hence no interest will be earned from March 31, 2007 to March 31, 2009.  The subsequent agreement with Miller Building Systems also canceled the $2.0 million contingent earn-out note. There is no financial impact as a result of this cancellation.  In accordance with Statement of Financial Accounting Standard No. 144, the division qualified as a separate component of the Company’s business and as a result, the 2006 operating results of the division have been accounted for as a discontinued operation. In connection with this sale, $1.7 million of industrial revenue bonds were paid off as of March 31, 2006. During April 2006, the Company terminated the $1.5 million and $235,000 interest rate swaps that had been associated with these revenue bonds.

In conjunction with the sale of Miller Building Systems, Inc., during the fourth quarter of 2005 management allocated goodwill of $0.6 million to Miller Building Systems from the Housing Segment, based on the relative fair value of the discontinued operations to the entire Segment. The $0.6 million allocated goodwill was written off as part of the 2005 loss from discontinued operations. During the first quarter of 2006, an additional $0.3 million of goodwill was allocated to Miller Building Systems based on the final sales price relative to the fair value of the entire Housing Segment. The additional $0.3 million of allocated goodwill was written off as part of the 2006 gain on sale of assets of discontinued operations.

Recreational Vehicle Segment
 
On January 13, 2006, the Company sold all operating assets of Prodesign, LLC. The total sales price was $8.2 million, of which the Company received $5.7 million in cash, a $2.0 million promissory note and $0.5 million to be held in escrow to cover potential warranty claims and uncollectible accounts receivable, as defined in the sale agreement. The promissory note is to be repaid over a period of 10 years, using an amortization period of 15 years, and bears interest at 6% per annum with interest only payments being required in the first three years. The funds remaining in the escrow account reverted to the Company in February 2007 per the sales agreement. In accordance with Statement of Financial Accounting Standard No. 144, Prodesign qualified as a separate component of the Company’s business and as a result, the 2006 operating results of Prodesign have been accounted for as a discontinued operation. In conjunction with the classification of Prodesign as a discontinued operation, management allocated goodwill of $0.3 million to the discontinued operations from the Recreational Vehicle Segment goodwill based on the relative fair value of the discontinued operations to the Recreational Vehicle Segment. The $0.3 million of allocated goodwill was included in the calculation of the final gain on sale of assets in the first quarter of 2006.


Obligation to Purchase Consigned Inventories

The Company obtains vehicle chassis for its recreational 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 assigned to a unit in the production process. At that point, the Company is obligated to purchase the chassis and it is recorded as inventory. At September 30, 2007 and December 31, 2006, chassis inventory, accounted for as consigned inventory, approximated $12.7 million and $11.4 million, respectively.
 
- 12 -

10.  COMMITMENTS AND CONTINGENCIES, continued.

Repurchase Agreements

The Company was contingently liable at September 30, 2007 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 financing institution in the event that they have repossessed them upon a dealer's default. Products repurchased from dealers under these agreements are accounted for as a reduction in revenue and cost of sales at the time of repurchase. Although the estimated contingent liability approximates $183.3 million at September 30, 2007 ($187.0 million at December 31, 2006), 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. Based on losses previously experienced under these obligations, the Company has established a reserve for estimated losses under repurchase agreements. At both September 30, 2007 and December 31, 2006, $0.3 million was recorded as an accrual for estimated losses under repurchase agreements.

The Company was also contingently liable at September 30, 2007 to a financial institution on repurchase agreements in connection with financing provided by the institution to certain of the Company's independent home builders in connection with their purchase of the Company's housing products. This agreement provides for the Company to repurchase its products from the financing institution in the event that they have repossessed them upon a builder's default. Products repurchased from builders under this agreement are accounted for as a reduction in revenue and cost of sales at the time of repurchase. Although the estimated contingent liability approximates $14.6 million at September 30, 2007 ($16.2 million at December 31, 2006), the risk of loss resulting from these agreements is spread over the Company's numerous builders and is further reduced by the resale value of the products repurchased. The Company has evaluated the potential for losses under this agreement and has recorded an accrual of $0.2 million as of both September 30, 2007 and December 31, 2006 for estimated losses under the repurchase agreement.

Corporate Guarantees

The Company was contingently liable under guarantees to a financial institution of their loans to independent dealers for amounts totaling approximately $3.5 million at September 30, 2007 and $3.9 million at December 31, 2006. The Company has an agreement with a financial institution to form a private-label financing program to provide wholesale inventory financing to the Company's dealers in the Recreational Vehicle Segment. The agreement provides for a preferred program that provides financing that is subject to the standard repurchase agreement described above. In addition, the agreement provides for a reserve pool whereby the financial institution makes available an aggregate line of credit not to exceed $40 million that will provide financing for dealers that may not otherwise qualify for credit approval under the preferred program.

No dealer being provided financing from the reserve pool can receive an aggregate line of credit exceeding $5 million. In addition to the standard repurchase agreement described above, annually the Company is contingently liable to the financial institution up to a maximum of $2.0 million of aggregate losses, as defined by the agreement, incurred by the financial institutions on designated dealers with higher credit risks that are accepted into the reserve pool financing program. The Company has recorded a loss reserve of $0.1 million at both September 30, 2007 and December 31, 2006 associated with these guarantees.
 
The Company is liable under an agreement to guarantee the indebtedness incurred by a recreational vehicle dealer towards the purchase of a dealership facility. The guarantee is in the principal amount of $1 million for a period of five years or until all indebtedness has been fully paid, whichever occurs first. The Company has evaluated the potential for losses under this agreement and has determined that the resolution of any claims that may arise in the future would not materially affect the Company's financial statements.

In addition, the Company is liable under a guarantee to a financial institution for model home financing provided to certain independent builders doing business with the Company's Housing Segment. The amount outstanding under this agreement at September 30, 2007 is $0.4 million ($0.4 million at December 31, 2006). Any losses incurred under this guarantee would be offset by the proceeds from the resale of the model home and losses are limited to 20% of the original contract price, and cannot exceed a total of $2.0 million.
 
- 13 -

10.  COMMITMENTS AND CONTINGENCIES, continued.

Financing Obligation

During the second quarter of 2004, the Company entered into an agreement to provide financing of up to $4.9 million to a developer for the construction of a hotel for which the Company was to provide modular units. As of September 30, 2007, the Company provided $2.3 million in financing to the developer under this arrangement. The loans are collateralized by a first priority interest in all tangible and intangible property of the borrower. The developer was unable to obtain a building permit, so the Company is pursuing its legal remedies through litigation to recoup the financing extended to date. No additional funding has been provided since December 2005. During the fourth quarter of 2006, the Company obtained title to the real estate that was partial collateral for this note. In the event the sale of the property does not generate proceeds sufficient to cover the financing previously provided, the Company will continue pursuing its legal remedies to recover any shortfall. As of September 30, 2007, the Company has reserved an amount that Management believes the Company may not recover; however, there is a potential for exposure in excess of the amount reserved.

Litigation

On November 21, 2006 the Company received a summons from the Internal Revenue Service which requires the Company to produce various documents relating to its research and development claims filed with the Internal Revenue Service for the tax years 1999 through 2004. On March 6, 2007 the Company received an additional summons from the Internal Revenue Service related to this matter regarding tax years 1984 through 1988.

The Company is involved in various other legal proceedings, most of which are ordinary disputes incidental to the industry and most of which are covered in whole or in part by insurance. Management believes that the ultimate outcome of these matters and any liabilities in excess of insurance coverage and self-insurance accruals will not have a material adverse impact on the Company's consolidated financial position, future business operations or cash flows.

11.  STOCK-BASED COMPENSATION.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under SFAS 123R, the Company is required to measure compensation cost for all stock-based awards at fair value on date of grant and recognize compensation expense over the period that the awards are expected to vest. Restricted stock and stock options issued under the Company’s equity plans, as well as, stock purchases under the employee stock purchase plan are subject to the provisions of SFAS 123R. Since the adoption of SFAS 123R, there have been no modifications to outstanding stock-based awards.
 
Stock options generally vest over a four-year service period. The Company has not granted any stock option awards since 2003. Compensation expense related to the Company's Employee Stock Purchase Plan was not significant for the three or nine-month periods ended September 30, 2007 or 2006.

On January 10, 2007, the Company granted Restricted Stock Awards to certain key employees as a means of retaining and rewarding them for performance and to increase their ownership in the Company. The awards are governed by the Company’s 2000 Omnibus Stock Plan. Participants will earn the restricted shares awarded to them based on attainment of certain performance goals for the calendar year 2007. If the Company meets the minimum, threshold and maximum target levels of pre-tax profits, the participants will earn corresponding levels of awards. To the extent the Company meets the performance goals for the year, and the participant remains employed by the Company during the vesting period, the earned restricted shares will vest and be delivered to the participants over a three-year vesting period: one-third on January 1, 2009, one-third on January 1, 2010 and one-third on January 1, 2011. Compensation expense is recognized on a straight-line basis over the requisite service period as the awards contingently vest over the performance and service periods. A total of 139,500 shares, assuming 100% of the performance goal is achieved, were granted with a weighted-average grant-date fair value of $10.80 per share. At September 30, 2007, the Company determined that it was not yet probable that the minimum target of the performance goal would be achieved; therefore, no compensation expense was recorded related to this plan for the three or nine-month periods ended September 30, 2007.
 
- 14 -

12.  GOODWILL AND INTANGIBLE ASSETS.

At December 31, 2006, the Company had $16.9 million of goodwill, $13.0 million attributable to the Housing reporting unit and $3.9 million attributable to the RV reporting unit.  The RV reporting unit goodwill originated from the Company’s purchase of recreational vehicle assets.  The Company conducted its annual goodwill impairment test as required by FASB Statement No. 142, Goodwill and Other Intangible Assets, during the fourth quarter of 2006 and the results indicated that the estimated fair value of each of the Company’s reporting units exceeded their carrying value.

As a result of the continued weakness in the RV market, combined with continuing losses incurred by the RV reporting unit, SFAS No. 142 required the Company to perform an interim goodwill impairment evaluation during the quarter ended June 30, 2007.  Because the carrying value of the RV reporting unit exceeds its fair value as calculated using the expected present value of future cash flows, the Company concluded that the goodwill was impaired as of June 30, 2007.  Accordingly, the Company recorded a non-cash goodwill impairment charge of $3.9 million in the quarter ended June 30, 2007.  There was no impairment of goodwill during the three months ended September 30, 2007.
 
- 15 -

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following is management’s discussion and analysis of certain significant factors, which have affected the Company’s financial condition, results of operations and cash flows during the periods included in the accompanying consolidated financial statements.

A summary of the changes in the principal items included in the consolidated statements of operations is shown below (dollar amounts in thousands).

 
 
Three Months Ended
 
 
Percentage Change
 
 
 
 
 
 
Percentage
 
 
 
 
 
Percentage
 
 
2007
 
 
 
September 30,
 
 
of
 
 
September 30,
 
 
of
 
 
to
 
 
 
2007
 
 
Net Sales
 
 
2006
 
 
Net Sales
 
 
2006
 
Net sales: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Recreational vehicles
 
$
91,778
 
 
 
74.1
%
 
$
90,490
 
 
 
69.2
%
 
 
1.4
%
  Housing
 
 
32,076
 
 
 
25.9
 
 
 
40,225
 
 
 
30.8
 
 
 
(20.3
)
Consolidated total
 
 
123,854
 
 
 
100.0
 
 
 
130,715
 
 
 
100.0
 
 
 
(5.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Recreational vehicles
 
 
3,501
  
 
 
2.8
 
 
 
557
 
 
 
0.4
 
 
 
528.5
  
  Housing
 
 
4,257
 
 
 
3.4
 
 
 
5,424
 
 
 
4.2
 
 
 
(21.5
)
Consolidated total
 
 
7,758
 
 
 
6.2
 
 
 
5,981
 
 
 
4.6
 
 
 
29.7
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Selling 
 
 
5,720
 
 
 
4.6
 
 
 
6,520
 
 
 
4.9
 
 
 
(12.3
) 
  General and administrative 
 
 
6,410
 
 
 
5.2
 
 
 
6,226
 
 
 
4.8
 
 
 
3.0
 
  Gain on sale of assets, net 
 
 
(143
)
 
 
(0.1
) 
 
 
(291
)
 
 
(0.2
)
 
 
(50.9
)
  Goodwill impairment charge
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Consolidated total
 
 
11,987
 
 
 
9.7
 
 
 
12,455
 
 
 
9.5
 
 
 
(3.8
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating expense 
 
 
114
 
 
 
-
 
 
 
(78
)
 
 
-
  
 
 
n/m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations before income taxes 
 
 
(4,343
)
 
 
(3.5
)
 
 
(6,396
)
 
 
(4.9
) 
 
 
32.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes (credit) 
 
 
1
  
 
 
-
  
 
 
(3,663
)
 
 
(2.8
) 
 
 
(100.0
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations 
 
 
(4,344
)
 
 
(3.5
)
 
 
(2,733
)
 
 
(2.1
) 
 
 
(58.9
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Loss from operations of discontinued entities, net
 
 
-
 
 
 
-
 
 
 
(152
)
 
 
(0.1
)
 
 
100.0
 
  Loss on sale of assets of discontinued entities, net
 
 
 -
 
 
 
-
 
 
 
 (631
)
 
 
 (0.5
) 
 
 
 100.0
 
  Loss from discontinued operations
 
 
-
 
 
 
-
 
 
 
(783
)
 
 
(0.6
)
 
 
100.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss 
 
$
(4,344
)
 
 
(3.5
)%
 
$
(3,516
)
 
 
(2.7
)%
 
 
(23.5
)% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 n/m - not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 16 -
  
  
 
Nine Months Ended
 
 
Percentage Change
 
 
 
 
 
 
Percentage
 
 
 
 
 
Percentage
 
 
2007
 
 
 
September 30,
 
 
of
 
 
September 30,
 
 
of
 
 
to
 
 
 
2007
 
 
Net Sales
 
 
2006
 
 
Net Sales
 
 
2006
 
Net sales: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Recreational vehicles
 
$
307,158
 
 
 
76.1
%
 
$
321,454
 
 
 
71.7
%
 
 
(4.4
)%
  Housing
 
 
96,703
 
 
 
23.9
 
 
 
127,136
 
 
 
28.3
 
 
 
(23.9
)
Consolidated total
 
 
403,861
 
 
 
100.0
 
 
 
448,590
 
 
 
100.0
 
 
 
(10.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Recreational vehicles
 
 
2,566
  
 
 
0.7
  
 
 
3,141
 
 
 
0.7
 
 
 
(18.3
)
  Housing
 
 
12,613
 
 
 
3.1
 
 
 
17,322
 
 
 
3.9
 
 
 
(27.2
)
  Other
 
 
-
  
 
 
-
 
 
 
1
 
 
 
-
 
 
 
(100.0
) 
Consolidated total
 
 
15,179
 
 
 
3.8
 
 
 
20,464
 
 
 
4.6
 
 
 
(25.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Selling 
 
 
17,472
 
 
 
4.3
 
 
 
16,946
 
 
 
3.8
 
 
 
3.1
 
  General and administrative 
 
 
19,621
 
 
 
4.9
 
 
 
14,403
 
 
 
3.2
 
 
 
36.2
 
  Gain on sale of assets, net 
 
 
(610
)
 
 
(0.2
)
 
 
(6,340
)
 
 
(1.4
)
 
 
(90.4
)
  Goodwill impairment charge
 
 
3,872
 
 
 
1.0
 
 
 
-
 
 
 
-
 
 
 
100.0
 
Consolidated total
 
 
40,355
 
 
 
10.0
 
 
 
25,009
 
 
 
5.6
 
 
 
61.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating expense 
 
 
733
 
 
 
0.2
 
 
 
554
  
 
 
0.1
 
 
 
32.3
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations before income taxes 
 
 
(25,909
)
 
 
(6.4
)
 
 
(5,099
)
 
 
(1.1
) 
 
 
(408.1
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax credit
 
 
(994
)
 
 
(0.2
)
 
 
(3,249
)
 
 
(0.7
) 
 
 
69.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss from continuing operations 
 
 
(24,915
)
 
 
(6.2
)
 
 
(1,850
)
 
 
(0.4
) 
 
 
n/m
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Loss from operations of discontinued entities, net
 
 
-
 
 
 
-
 
 
 
(657
)
 
 
(0.2
)
 
 
100.0
 
  Gain on sale of assets of discontinued entities, net
 
 
-
 
 
 
-
 
 
 
2,205
 
 
 
0.5
 
 
 
(100.0
)
  Income from discontinued operations
 
 
 
 
 
 
 
 
 
 
1,548
 
 
 
0.3
 
 
 
(100.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(24,915
)
 
 
(6.2
)%
 
$
(302
)
 
 
(0.1
)%
 
 
n/m
 % 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 n/m - not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 17 -

The following table presents key items impacting the results of operations for the periods presented (in thousands): 
  
 
 
Three Months
 
 
Three Months
 
 
Nine Months
 
 
Nine Months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
 
2007
 
 
2006
 
 
2007
 
 
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Gain) loss on sale of assets:
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
 
 
 
Texas property (Grapevine, TX)
 
$
-
 
 
$
146
 
 
$
-
 
 
$
(1,678
)
Michigan property (Edwardsburg, MI)
 
 
(75
)
 
 
(122
)
 
 
(380
)
 
 
(597
)
Indiana property (various)
 
 
-
 
 
 
(72
)
 
 
(122
)
 
 
(870
)
Florida property (Palm Shores, FL)
 
 
-
 
 
 
-
  
 
 
-
 
 
 
(1,180
)
Corporate aircraft
 
 
-
  
 
 
-
  
 
 
-
 
 
 
(1,772
)
North Carolina property (various)
    
-
      
(57
)
    
-
      
(57
)
Tennessee property (Springfield, TN)
    
-
      
37
      
-
      
37
  
Virginia property (Rocky Mount, VA)
    
(71
)
    
(223
)
    
(71
)
    
(223
)
Miscellaneous assets
    
3
      
-
      
(37
)
    
-
  
Total
 
$
(143
)
 
$
(291
)
 
$
(610
)
 
$
(6,340
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Miller
 
$
-
 
 
$
    
 
$
-
 
 
$
(2,522
)
Prodesign
 
 
-
 
 
 
    
 
 
-
 
 
 
(1,899
)
All American Homes – Kansas
 
 
-
 
 
 
    
 
 
-
 
 
 
76
 
Total
 
 
-
 
 
 
    
 
 
-
 
 
 
(4,345
)
Taxes
 
 
-
 
 
 
(631
)
 
 
-
 
 
 
2,140
 
Total, net of taxes
 
$
-
 
 
$
(631
)
 
$
-
 
 
$
(2,205
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal expense recoveries
 
$
-
 
 
$
-
 
 
$
-
 
 
$
(3,620
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment charge
 
$
-
  
 
$
-
 
 
$
3,872
 
 
$
-
 
 
- 18 -

NET SALES

Consolidated net sales from continuing operations for the quarter ended September 30, 2007 were $123.9 million, a decrease of $6.8 million, or 5.2%, from the $130.7 million reported for the corresponding quarter last year. Net sales for the nine months ended September 30, 2007 were $403.9 million, representing a decrease of $44.7 million, or 10.0%, from that reported for the same period of 2006. The Company’s Recreational Vehicle Segment experienced a net sales increase of 1.4% for the quarter and a decrease of 4.4% for the nine-month period, even as the weakness in the RV industry continued in the third quarter. Through August 31, 2007 the latest data available, total industry shipments of all types of recreational vehicles declined 11.8%.  For the quarter, RV Segment wholesale unit shipments of all product types decreased by 3.2% to 2,794 units and decreased 7.4% to 10,732 units for the nine-month period when compared to prior year periods. RV sales in dollars increased while unit shipments decreased for the three months ended September 30, 2007 due to a shift in product mix to higher priced motorized units.  It is important to note that in early 2006, the RV Segment shipped 1,132 trailers for temporary housing in hurricane affected areas.  Excluding the hurricane relief shipments in 2006, total RV Segment unit shipments for the nine months ended September 30, 2007 would have increased over 2006 by 2.6%.  Shipments of motorized products increased 9.8% in the third quarter and towable shipments declined 8.1%, while year-to-date motorized unit shipments increased 2.0% and towables declined 10.7% when compared to prior year periods.

Total RV backlogs decreased from the third quarter of 2006 by 10 units to a total of 734 units at September 30, 2007.  

The Company’s Housing Segment experienced a net sales decrease for the quarter ended September 30, 2007 of 20.3%, from $40.2 million during the third quarter of 2006 to $32.1 million for the third quarter of 2007. Net sales for the nine months ended September 30, 2007 were $96.7 million, representing a decrease of $30.4 million, or 23.9%, from net sales of $127.1 million for the same period of 2006. Wholesale unit shipments were down 25.4% and 29.2% for the three and nine-month periods ended September 30, 2007, respectively.  The weakness in the national housing market continues as evidenced by the September 2007 U.S. Census Bureau data showing year-to-date single-family housing starts declining 27.7% from September 2006. Housing starts in the Midwest and South declined similarly, as evidenced by declines of 28.3% and 27.8%, respectively, for the first nine months of 2007. 

The Housing Segment continues its efforts to grow its traditional business by pursuing a number of avenues to enhance the design and marketing of single-family homes, with new products and national and regional marketing campaigns such as the “All American Welcome Home” program for military personnel, providing $5,000 off the purchase of a new home to active or honorably discharged military service personnel.  The Company also introduced a new program offering a free generator with the purchase of a house.  The Housing Segment continues to pursue opportunities for larger projects in multi-family residential, military and commercial markets. In the third quarter, the remaining units were shipped and revenue recognized for the military housing project at Fort Bliss in Texas.  The Company expects that production for the military housing project at Fort Carson will commence late in the fourth quarter.
  
COST OF SALES

Cost of sales decreased 6.9%, or $8.6 million, for the three months ended September 30, 2007, and 9.2% or $39.4 million for the nine months ending September 30, 2007.  As a percentage of net sales, cost of sales was 93.8% and 96.2% for the three and nine-month periods ending September 30, 2007 compared to 95.4% for each of the comparable time periods of 2006. The change in the dollar amount of cost of sales in the current quarter is partially attributable to the decrease in sales dollars. The improvement in the percentage of cost of sales and the corresponding gross profit in the third quarter compared to 2006 are attributable to pricing improvements, cost savings realized in raw materials as a result of ongoing strategic sourcing actions and a reduction in warranty expenses. The year-to-date change in the percentage of cost of sales and the corresponding gross profit is attributable to a shift in RV product mix, changes in discounts and the changes in operating leverage resulting from varied production levels. Consolidated production volumes declined 4.5% compared to the third quarter of 2006, and are down 14.0% for the nine months ended September 30, 2007.
 
During July 2007, the Company announced plans to consolidate RV production facilities and reduce overhead costs in the second half of 2007 by consolidating Class A production into a single facility, relocating a paint facility to the main complex, and mothballing at least one other assembly plant in order to reduce expenses and improve profitability through improved capacity utilization of fewer facilities. The consolidation of the Class A assembly plants was substantially completed in the third quarter. The consolidation and subsequent mothballing of a towable plant will be completed in the fourth quarter.  The Company does not anticipate eliminating any product lines or any delays in the ability to timely fulfill current orders as a result of these actions. In addition, no impairment charges are expected to result from these consolidation plans, although there will be expenses associated with these actions which will be recognized as incurred.

- 19 -
 
The Company announced on September 21, 2007 that it would consolidate its All American Homes production facility located in Zanesville, Ohio with its larger facility located in Decatur, Indiana. This will increase production backlogs and capacity utilization at the Indiana plant as all builders previously served by the Ohio plant will now be served from Indiana.  The Company anticipates that production will cease at the plant during the fourth quarter.
 
Effective January 1, 2007, the Company changed its classification of delivery expenses in the statement of operations to include these expenses as a component of cost of sales.  Prior to January 1, 2007, the Company classified delivery expenses as an operating expense. This change is considered a change in accounting principle pursuant to the provisions of FASB Statement No. 154, Accounting Changes and Error Corrections, and will be reported by retrospective application to prior periods' financial statements.  This change in accounting principle is considered preferable as it was made to conform the classification of these expenses on the statement of operations to the classification of such expenses by other companies in our industry.  The effect of this change on the three and nine months ended September 30, 2007 was an increase of cost of sales and a decrease of operating expenses by approximately $7.1 million and $23.0 million, respectively. The Company applied the change retrospectively by reclassifying approximately $7.1 million and $23.2 million of delivery expenses from operating expenses to cost of sales for the three and nine-month periods ended September 30, 2006.  This change has no effect on income from continuing operations, net income or per share amounts for any period presented.
  
OPERATING EXPENSES

As a percentage of net sales, operating expenses, which include selling, general and administrative expenses, were 9.8% and 9.2% for the three and nine-month periods ended September 30, 2007, respectively, and 9.7% and 7.0% for the corresponding periods in 2006.

Selling expenses were 4.6% and 4.3% of net sales for the 2007 three and nine-month periods compared to 4.9% and 3.8% for the 2006 corresponding periods. The $0.8 million decrease for the three-month period of 2007 versus 2006 was primarily the result of decreased promotional expenses incurred, while the $0.5 million increase for the nine-month period of 2007 versus 2006 was primarily the result of increased promotional expenses incurred in the first half of the year.

General and administrative expenses were 5.2% and 4.9% of net sales for the 2007 three and nine-month periods compared to 4.9% and 3.2% for the 2006 corresponding periods. The increase in general and administrative expenses for the three-month period ended September 30, 2007 compared to 2006 was mainly due to legal expenses associated with the Company’s efforts to recover costs related to the camping trailer lift system and sidewall panel issues that occurred in 2005. The increase of $5.2 million in general and administrative expenses for the nine-month period of 2007 versus 2006 was primarily the result of two legal settlements received during the first quarter of 2006 totaling $3.6 million which reduced general and administrative expenses in that period and $0.8 million of consulting fees incurred in 2007 in connection with a strategic sourcing project.

GAIN ON THE SALE OF ASSETS, NET

For the three months ended September 30, 2007, the gain on the sale of assets was approximately $0.1 million, as compared to $0.3 million in the same quarter of 2006. For the nine-month period ended September 30, 2007, the gain on the sale of assets was $0.6 million compared to $6.3 million in the same period of 2006.  During the third quarter of 2007, two smaller properties were sold for a net pre-tax gain of approximately $0.1 million. During the first quarter of 2007, the Company completed the sale of two parcels of the former Georgie Boy Manufacturing complex for approximately $0.6 million, resulting in a pre-tax gain of approximately $0.3 million. Also during the quarter, the Company completed the sale of vacant farmland in Middlebury, Indiana for cash of approximately $0.1 million, resulting in a pre-tax gain of approximately $0.1 million. On June 8, 2006, the Company completed the sale of its Cessna Jet for approximately $2.3 million, which resulted in a pre-tax gain of approximately $1.7 million. On June 30, 2006, the Company sold property located in Palm Shores, Florida for $2.5 million, which resulted in a pre-tax gain of approximately $1.2 million. During June 2006, the Company also sold two parcels of the former Georgie Boy Manufacturing complex for total proceeds of $0.7 million, which resulted in a pre-tax gain of approximately $0.4 million.  On March 31, 2006, the Company completed the sale of a property located in Grapevine, Texas for $2.0 million, which resulted in a gain of $1.8 million. Also during the first quarter of 2006, the Company completed the sale of vacant farmland in Middlebury, Indiana for $1.0 million, which resulted in a gain of $0.8 million.

- 20 -

GOODWILL IMPAIRMENT CHARGE

At December 31, 2006, the Company had $16.9 million of goodwill, $13.0 million attributable to the Housing reporting unit and $3.9 million attributable to the RV reporting unit.  The RV reporting unit goodwill originated from the Company’s purchase of recreational vehicle assets.  The Company conducted its annual goodwill impairment test as required by FASB Statement No. 142, Goodwill and Other Intangible Assets, during the fourth quarter of 2006 and the results indicated that the estimated fair value of each of the Company’s reporting units exceeded their carrying value.

As a result of the continued weakness in the RV market, combined with continuing losses incurred by the RV reporting unit, SFAS No. 142 required the Company to perform an interim goodwill impairment evaluation during the quarter ended June 30, 2007.  Because the carrying value of the RV reporting unit exceeds its fair value as calculated using the expected present value of future cash flows, the Company concluded that the goodwill was impaired as of June 30, 2007.  Accordingly, the Company recorded a non-cash goodwill impairment charge of $3.9 million in the quarter ended June 30, 2007.  There was no impairment of goodwill during the three months ended September 30, 2007.

INTEREST EXPENSE

Interest expense was $0.8 million and $2.6 million for the three and nine-month periods ended September 30, 2007 compared to $0.9 million and $2.6 million for the three and nine-month periods ended September 30, 2006, respectively.

INVESTMENT INCOME

There was net investment income of $0.4 and $1.4 million for the three and nine-month periods ended September 30, 2007 compared to $0.3 million and $1.2 million in the same periods of 2006. Investment income is principally attributable to earnings of the life insurance policies held. 
 
OTHER INCOME, NET

Other income, net, represents income of $0.3 million and $0.5 million for the three and nine-month periods of 2007 and income of $0.7 million and $0.9 million for the same periods of the previous year. No items of significance were earned.
 
PRE-TAX LOSS

Pre-tax loss from continuing operations for the three and nine-month periods ended September 30, 2007 was $4.3 million and $25.9 million compared with pre-tax loss from continuing operations of $6.4 million and $5.1 million in the corresponding periods of 2006. The Company's RV Segment generated a pre-tax loss from continuing operations of $4.2 million, or 4.5% of recreational vehicle net sales in the third quarter of 2007, compared with a pre-tax loss from continuing operations of $7.0 million, or 7.7% of the RV Segment's net sales in the third quarter of 2006.  The Housing Segment recorded a pre-tax loss from continuing operations of $0.7 million in the third quarter of 2007 or 2.2% of segment net sales compared with pre-tax income from continuing operations of $0.3 million in the third quarter of 2006 or 0.6% of segment net sales (see Note 2 of Notes to Consolidated Financial Statements).

INCOME TAXES

Prior to recognizing a valuation allowance, the effective tax rate for the three and nine-month periods ended September 30, 2007 was a credit of  (39.1%) and (38.2%), respectively, compared with a 2006 three and nine-month period effective tax credits from continuing operations of  (57.3%) and (63.7%), respectively. The Company’s effective tax rate fluctuates based upon estimated annual pre-tax income amounts, the states where sales occur, nontaxable increases in cash value of life insurance contracts, other permanent tax differences, increases or decreases in tax reserves and valuation allowances and recognized federal and state tax credits.  Due to the Company’s cumulative losses in recent years, valuation allowances of $1.7 million and $8.2 million were recognized to offset potential net operating loss tax benefits associated with the losses from the three and nine-month periods of 2007.  At September 30, 2007, the cumulative valuation allowance for deferred tax assets totals $37.9 million.  Additionally, during the second quarter of 2007, income tax expense (credit) was impacted by $1.0 million of tax benefit resulting from the elimination of deferred tax liabilities associated with goodwill that was determined to be impaired as of June 30, 2007 net of tax expense resulting from an increase in valuation reserves.  After these adjustments, the effective tax rate for the nine-month period ended September 30, 2007 was a credit of (3.8%).  As with the deferred tax valuation allowance taken at the end of 2006, the tax benefit associated with the three and nine-month period losses may be utilized to offset future taxable income.

- 21 -

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007.  The implementation of FIN 48 did not have a significant impact on the Company’s financial position or results of operations.

As of the beginning of fiscal year 2007, the Company had unrecognized tax benefits of $4.1 million including interest and penalties. There has been no significant change in the unrecognized tax benefits through September 30, 2007.  If recognized, the effective tax rate would be affected by approximately $0.5 million of the unrecognized tax benefits.

The Company recognizes interest and penalties related to unrecognized tax benefits through interest and operating expenses, respectively.  The amounts accrued for interest and penalties as of September 30, 2007 and the amount of interest and penalties recorded during the three and nine-month periods ended September 30, 2007 were not considered to be significant.

The Company is subject to periodic audits by U.S. federal and state taxing authorities.  Currently, the Company is undergoing an audit by the Internal Revenue Service for a claim for research and development credits.  It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months as a result of the audit.  Based on the current audit in process, the entire amount of the unrecognized tax liability of $3.5 million which was recorded to offset the research and development tax benefits claimed in previously filed tax returns could be reversed or an additional liability of $1.1 million could be recorded.
 
For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2003.

DISCONTINUED OPERATIONS
 
On March 31, 2006, the Company sold 100% of its interest in the capital stock of Miller Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and a $2.5 million secured note. The note, which is included in other long-term assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest payments beginning September 30, 2006. Principal payments of $125,000 per quarter commence on June 30, 2009 and continue through the maturity date of March 31, 2011. In addition, the Company accepted a $2.0 million contingent earn-out note which will be paid to the Company if certain income metrics are achieved by the acquiring entity. In October 2007, a subsequent agreement with Miller Building Systems waived the interest on the secured $2.5 million note for two years; hence no interest will be earned from March 31, 2007 to March 31, 2009.  The subsequent agreement with Miller Building Systems also canceled the $2.0 million contingent earn-out note. There is no financial statement impact as a result of this cancellation. In accordance with Statement of Financial Accounting Standard No. 144, the division qualified as a separate component of the Company’s business and as a result, the 2006 operating results of the division have been accounted for as a discontinued operation. In connection with this sale, $1.7 million of industrial revenue bonds were paid off as of March 31, 2006. During April 2006, the Company terminated the $1.5 million and $235,000 interest rate swaps that had been associated with these revenue bonds.

In conjunction with the sale of Miller Building Systems, Inc., during the fourth quarter of 2005 management allocated goodwill of $0.6 million to Miller Building Systems from the Housing Segment goodwill based on the relative fair value of the discontinued operations to the entire Housing Segment. The $0.6 million allocated goodwill was written off as part of the 2005 loss from operations of discontinued operations. During the first quarter of 2006, an additional $0.3 million of goodwill was allocated to Miller Building Systems based on the final sales price relative to the fair value of the entire Housing Segment. The additional $0.3 million of allocated goodwill was written off as part of the 2006 gain on sale of assets of discontinued operations.
   
On January 13, 2006, the Company sold all operating assets of Prodesign, LLC. The total sales price was $8.2 million, of which the Company received $5.7 million in cash, a $2.0 million promissory note and $0.5 million to be held in escrow to cover potential warranty claims and uncollectible accounts receivable, as defined in the sale agreement. The promissory note is to be repaid over a period of 10 years, using an amortization period of 15 years, and bears interest at 6% per annum with interest only payments being required in the first three years. The funds remaining in the escrow account reverted to the Company in February 2007 per the sales agreement. In accordance with Statement of Financial Accounting Standard No. 144, Prodesign qualified as a separate component of the Company’s business and as a result, the 2006 operating results of Prodesign have been accounted for as a discontinued operation. In conjunction with the classification of Prodesign as a discontinued operation, management allocated goodwill of $0.3 million to the discontinued operations from the Recreational Vehicle Segment goodwill based on the relative fair value of the discontinued operations to the Recreational Vehicle Segment. The $0.3 million of allocated goodwill was included in the calculation of the final gain on sale of assets in the first quarter of 2006.

- 22 -

NET LOSS
 
Net loss from continuing operations for the three and nine months ended September 30, 2007 was $4.3 million (a loss of $0.28 per diluted share) and $24.9 million (a loss of $1.58 per diluted share) compared to a net loss from continuing operations for the three and nine months ended September 30, 2006 of $2.7 million (a loss of $0.17 per diluted share) and $1.9 million (a loss of $0.12 per diluted share). Net loss for the three and nine-month periods ended September 30, 2007 was $4.3 million (a loss of $0.28 per diluted share) and $24.9 million (a loss of $1.58 per diluted share) compared to a net loss of $3.5 million (a loss of $0.22 per diluted share) and $0.3 million (a loss of $0.02 per diluted share) for 2006.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

The Company generally relies on funds from operations as its primary source of working capital and liquidity. In addition, the Company maintains a $55.0 million secured line of credit to meet its seasonal working capital needs. At September 30, 2007 there was $7.4 million in outstanding borrowings and $10.8 million outstanding on September 30, 2006. At September 30, 2007, $37.3 million was available for future borrowings under the line of credit.  As of September 30, 2007 and December 31, 2006, $17.7 million and $16.7 million, respectively, had been borrowed against the cash surrender value of Company-owned life insurance contracts.  The Company has paid the premiums on these contracts in 2007 with borrowings against the cash surrender value of the contracts, resulting in the $1.0 million increase.  At September 30, 2007, the availability to borrow against the cash surrender value of these contracts was $31.5 million.
 
At September 30, 2007, working capital decreased to $39.4 million from $62.8 million at December 31, 2006. Current assets decreased $21.5 million at September 30, 2007 versus December 31, 2006 primarily due to a decrease in inventories of $13.1 million and refundable income taxes of $7.9 million. Current liabilities increased $1.9 million at September 30, 2007 versus December 31, 2006 primarily due to an increase in accounts payable of $9.2 million, offset by decreases in borrowings, accrued expenses, notes payable and current maturities of long-term debt.

Management believes that the Company’s existing cash and cash equivalents as of September 30, 2007, together with its available revolving credit facility and cash expected to be generated from future operations, will be sufficient to fund future planned capital expenditures and other operating cash requirements for the foreseeable future.

CRITICAL ACCOUNTING POLICIES
 
The preparation of the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Historically, actual results have not been materially different from the Company's estimates. However, actual results may differ from these estimates under different assumptions or conditions. A summary of the Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Company’s 10-K report for the year ended December 31, 2006. During the first nine months of fiscal 2007, there was no material change in the accounting policies and assumptions previously disclosed. 
 
- 23 -

FORWARD-LOOKING STATEMENTS

This Form 10-Q 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 are based on management’s expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risks and uncertainties, and are dependent on various factors, many of which are outside the control of the Company. These uncertainties and other factors include, but are not limited to:
 
•
the ability of the new management team to achieve desired results;
•
interest rates, which affect the affordability of the Company's products;
•
consumer confidence and the availability of credit;
•
the Company’s ability to utilize manufacturing resources efficiently;
•
the Company’s ability to introduce new models that achieve consumer acceptance;
•
the margins associated with the mix of products the Company sells in a particular period;
•
the availability of floorplan financing for the Company's recreational vehicle dealers and corresponding availability of cash to the Company;
•
oil supplies and the availability and price of gasoline and diesel fuel, which can impact the sale of recreational vehicles;
•
the Company's dependence on chassis and other suppliers;
•
potential liabilities under repurchase agreements and guarantees;
•
consolidation of distribution channels in the recreational vehicle industry;
•
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;
•
the price volatility of materials used in production and the ability to pass on rapidly increasing costs of product components and raw materials to end buyers;
•
the availability and cost of real estate for residential housing;
•
the increased size and scope of work of military housing projects, and other major projects, as compared to the Company's traditional single-family homes business, with increased reliance on third parties for performance which could impact the Company; 
•
the ability to perform in new market segments or geographic areas where it has limited experience;
•
the impact of performance on the valuation of intangible assets;
•
the supply of existing homes within the Company’s markets;
•
the impact of home values on housing demand;
•
uncertainties and timing with respect to sales resulting from recovery efforts in the Gulf Coast;
•
adverse weather conditions affecting home deliveries;
•
changing government regulations, including those covering accounting standards;
•
environmental matters or product warranties and recalls, which may affect costs of operations, revenues, product acceptance and profitability;
•
the state of the recreational vehicle and housing industries in the United States;
•
changes in property taxes and energy costs;
•
changes in federal income tax laws and federal mortgage financing programs;
•
competition in the industries in which the Company operates;
•
further developments in the war on terrorism and related international crises;
•
uncertainties of matters in litigation and other risks and uncertainties;
•
the ability of the Company to generate taxable income in future years to utilize deferred tax assets and net operating loss carryforwards that are available;
•
the availability of financing under the Company’s letter of credit especially in the sub-prime climate;
•
the Company’s ability to increase gross margins which are critical whether or not there are increased sales;
•
the Company’s use of incentives at either the wholesale or retail level;
•
the impact of sub-prime lending on the availability of credit for the broader housing market;
•
the dependence on key customers within certain product types;
•
the potential fluctuation in the Company’s operating results;
•
uncertainties regarding the impact of the disclosed restructuring steps in both the Recreational Vehicle and Housing Segments.
 
- 24 -

In addition, investors should be aware that generally accepted accounting principles prescribe when a company must disclose or reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods. The foregoing lists are not exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.

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.
 
- 25 -

 
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. During the first nine months of 2007, the Company has utilized its secured line of credit to meet short-term working capital needs. The Company had $7.4 million outstanding against the revolving credit facility on September 30, 2007 and had $10.8 million outstanding on September 30, 2006.

At September 30, 2007, the Company had one interest rate swap agreement with a notional amount of $3.0 million that was used to convert the variable interest rates on an industrial development revenue bond to a fixed rate. In accordance with the terms of the swap agreement, the Company pays a 3.71% interest rate, and receives the Bond Market Association Index (BMA), calculated on the notional amount, with net receipts or payments being recognized as adjustments to interest expense. This swap agreement, along with those terminated in 2006, is designated as a cash flow hedge for accounting purposes and effectively converts a portion of the Company's variable-rate borrowing to a fixed-rate basis through November of 2011, thus reducing the impact of changes in interest rates on future interest expense. The fair value of the Company's interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreements. A cumulative loss of approximately $16,000, net of taxes, attributable to changes in the fair value of interest rate swap agreements was recorded as a component of accumulated other comprehensive income (loss) for the quarter ended September 30, 2007. Total accumulated loss on the swap agreement for the nine-month period ending September 30, 2007 was approximately $6,000.  If in the future the interest rate swap agreement was determined to be ineffective or was terminated before the contractual termination date, or if it became probable that the hedged variable cash flows associated with the variable-rate borrowings would stop, the Company would be required to reclassify into earnings all or a portion of the unrealized losses on cash flow hedges included in accumulated other comprehensive income (loss). 


The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2007. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2007.

There have been no changes during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 
 
- 26 -


Item 6. Exhibits

 
See Index to Exhibits incorporated by reference herein.

- 27 -


Pursuant to the requirements of the Securities and 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.
(Registrant)




Date: October 31, 2007
By:
/s/ Richard M. Lavers
 
 
Richard M. Lavers, Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: October 31, 2007
By:
/s/ Colleen A. Zuhl
 
 
Colleen A. Zuhl, Chief Financial Officer
 
 
 
 
 
 
     
     
     
Date: October 31, 2007
By:
/s/ Martin L. Miranda
 
 
Martin L. Miranda, Vice President, Treasurer and
   
Corporate Controller
 
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Number Assigned
In Regulation
S-K, Item 601
Description of Exhibit
 
 
(3)(a)(i)
Articles of Incorporation of the Company as amended on May 30, 1995 (incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
 
 
(3)(a)(ii)
Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 4.2 to the Company's Form S-3 Registration Statement, File No. 333-14579).
 
 
By-Laws as modified through August 22, 2007.
   
(3)(b)(ii)
Amendment to Section 6.2 of the By-Laws, as amended effective August 22, 2007 (incorporated by reference to the Company’s Form 8-K filed August 28, 2007).
 
 
Rule 13a-14(a) Certification of Chief Executive Officer.
 
 
Rule 13a-14(a) Certification of Chief Financial Officer.
 
 
Section 1350 Certification of Chief Executive Officer.
 
 
Section 1350 Certification of Chief Financial Officer.
 
 
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