EX-99.2 5 l91759aex99-2.txt EXHIBIT 99.2 Exhibit 99.2 Keystone RV Company Financial Statements Years ended December 31, 2000, 1999, and 1998 CONTENTS Reports of Independent Auditors..............................................1 Financial Statements Balance Sheets...............................................................3 Statements of Income.........................................................5 Statements of Shareholders' Equity (Deficit) and Redeemable Preferred Stock..6 Statements of Cash Flows.....................................................7 Notes to Financial Statements................................................8 Report of Independent Auditors Board of Directors Keystone RV Company We have audited the accompanying balance sheets of Keystone RV Company as of December 31, 2000 and 1999, and the related statements of income, shareholders' equity (deficit) and redeemable preferred stock, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Keystone RV Company for the year ended December 31, 1998 were audited by other auditors, whose report dated January 18, 1999 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Keystone RV Company at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP February 16, 2001, except as to Note 12, as to which the date is November 9, 2001 1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors KEYSTONE RV COMPANY Goshen, Indiana We have audited the statements of income, shareholders' equity (deficit) and redeemable preferred stock, and cash flows of KEYSTONE RV COMPANY for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of KEYSTONE RV COMPANY for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP Elkhart, Indiana January 18, 1999 2 Keystone RV Company Balance Sheets
DECEMBER 31, 2000 1999 --------------------------- Assets Current assets: Cash $ 450 $ 200 Accounts receivable: Trade, less allowance for doubtful accounts (2000--$110,000; 1999--$20,000) 21,467,563 8,560,900 Other 1,277,807 527,811 --------------------------- 22,745,370 9,088,711 Inventories 15,562,347 7,268,031 Prepaid expenses 419,034 220,862 Deferred income taxes 1,290,525 545,162 --------------------------- Total current assets 40,017,726 17,122,966 Property and equipment: Land and improvements 508,874 423,080 Leasehold improvements 419,441 186,801 Machinery and equipment 2,782,729 1,532,398 --------------------------- Total cost 3,711,044 2,142,279 Accumulated depreciation and amortization 801,481 405,771 --------------------------- Property--net 2,909,563 1,736,508 Goodwill less accumulated amortization of $71,117 1,528,883 - Other assets 268,993 309,027 --------------------------- Total assets $44,725,165 $19,168,501 ===========================
3
DECEMBER 31, 2000 1999 ------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable to redeemed shareholders $ 500,000 $ 1,000,000 Current maturities of long-term debt 3,000,000 3,000,446 Excess of outstanding checks over bank balance 5,395,336 1,217,582 Accounts payable 11,935,688 4,134,423 Accrued expenses: Income taxes 2,522,460 763,515 Compensation and related items 871,003 365,340 Warranty costs 2,147,854 797,986 Other 2,592,414 1,307,511 ------------------------------ Total current liabilities 28,964,755 12,586,803 Long-term debt, less current portion 9,885,000 7,750,000 Deferred income taxes 133,707 90,132 Commitments and contingencies Series A redeemable preferred stock, $.01 par value (stated at redemption value of $100 per share plus accrued dividends): authorized--1,000,000 shares; issued and outstanding--99,000 shares 11,413,243 10,601,320 Series B redeemable convertible preferred stock, $.01 par value (stated at redemption value): authorized--1,000,000 shares; issued and outstanding--13,564 shares 16,490,094 2,186,587 Shareholders' equity (deficit): Common stock, $.01 par value: Authorized--10,000,000 shares; issued and outstanding-- (2000--14,275; 1999--14,695); shares subscribed--(2000--496; 1999--0) 148 147 Additional paid-in capital 824,198 805,721 Stock subscriptions and shareholder notes receivable (241,654) - Retained earnings (deficit) (22,744,326) (14,852,209) ------------------------------ Total shareholders' equity (deficit) (22,161,634) (14,046,341) ------------------------------ Total liabilities and shareholders' equity (deficit) $ 44,725,165 $ 19,168,501 ==============================
See accompanying notes. 4 Keystone RV Company Statements of Income
YEAR ENDED DECEMBER 31, 2000 1999 1998 --------------------------------------------------- Net sales $ 255,683,796 $ 140,174,714 $ 74,790,013 Cost of goods sold 225,841,369 121,473,988 65,356,031 --------------------------------------------------- Gross profit 29,842,427 18,700,726 9,433,982 Selling, general, and administrative expenses 15,736,121 7,205,914 4,404,225 --------------------------------------------------- Operating income 14,106,306 11,494,812 5,029,757 Other income (expense): Interest income 42,063 31,351 22,960 Interest expense (1,117,176) (917,184) (110,279) Loss from investment in and write off of notes receivable from DK Investments, LLC - (220,933) (122,076) Other (74,885) (316,013) - --------------------------------------------------- (1,149,998) (1,422,779) (209,395) --------------------------------------------------- Income before income taxes 12,956,308 10,072,033 4,820,362 Provision for income taxes 5,232,995 3,610,851 - --------------------------------------------------- Net income $ 7,723,313 $ 6,461,182 $ 4,820,362 ===================================================
See accompanying notes. 5 Keystone RV Company Statements of Shareholders' Equity (Deficit) and Redeemable Preferred Stock Years ended December 31, 2000, 1999, and 1998
SHAREHOLDERS' EQUITY (DEFICIT) -------------------------------------------------------------------------------- STOCK SUBSCRIPTIONS AND COMMON STOCK ADDITIONAL SHAREHOLDER RETAINED -------------------------- PAID-IN NOTES EARNINGS VOTING NONVOTING CAPITAL RECEIVABLE (DEFICIT) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $893,332 $ 50,000 $ 40,000 $ - $ 1,765,017 Net income - - - - 4,820,362 Dividends - - - - (3,291,493) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 893,332 50,000 40,000 - 3,293,886 Net income - - - - 6,461,182 Dividends on common stock - - - - (325,446) Distributions to shareholders and repurchase of stock in connection with recapitalization (893,222) (50,000) 56,668 - (21,493,924) Issuance of common stock 37 - 709,053 - - Issuance of Series A redeemable preferred stock - - - - - Issuance of Series B redeemable convertible preferred stock - - - - - Accrued dividends on preferred stock - - - - (708,400) Accretion of increase in value of redeemable convertible preferred stock - - - - (2,079,507) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 147 - 805,721 - (14,852,209) Net income - - - - 7,723,313 Repurchase of stock in connection with recapitalization - - - - (500,000) Purchase of treasury stock - - - - - Issuance of treasury stock and additional common stock 1 - 18,477 (241,654) - Accrued dividends on preferred stock - - - - (820,489) Accretion of increase in value of redeemable convertible preferred stock - - - - (14,294,941) -------------------------------------------------------------------------------- Balance at December 31, 2000 $ 148 $ - $ 824,198 $(241,654) $ (22,744,326) ================================================================================ SHAREHOLDERS' EQUITY (DEFICIT) ------------------------------------- REDEEMABLE REDEEMABLE CONVERTIBLE TREASURY PREFERRED PREFERRED STOCK TOTAL STOCK STOCK ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ - $ 2,748,349 $ - $ - Net income - 4,820,362 - - Dividends - (3,291,493) - - ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 - 4,277,218 - - Net income - 6,461,182 - - Dividends on common stock - (325,446) - - Distributions to shareholders and repurchase of stock in connection with recapitalization - (22,380,478) - - Issuance of common stock - 709,090 - - Issuance of Series A redeemable preferred stock - - 9,900,000 - Issuance of Series B redeemable convertible preferred stock - - - 100,000 Accrued dividends on preferred stock - (708,400) 701,320 7,080 Accretion of increase in value of redeemable convertible preferred stock - (2,079,507) - 2,079,507 ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 - (14,046,341) 10,601,320 2,186,587 Net income - 7,723,313 - - Repurchase of stock in connection with recapitalization - (500,000) - - Purchase of treasury stock (344,000) (344,000) - - Issuance of treasury stock and additional common stock 344,000 120,824 - - Accrued dividends on preferred stock - (820,489) 811,923 8,566 Accretion of increase in value of redeemable convertible preferred stock - (14,294,941) - 14,294,941 ----------------------------------------------------------------------- Balance at December 31, 2000 $ - $(22,161,634) $11,413,243 $16,490,094 =======================================================================
See accompanying notes. 6 Keystone RV Company Statements of Cash Flows
YEAR ENDED DECEMBER 31, 2000 1999 1998 ----------------------------------------------------- OPERATING ACTIVITIES Net income $ 7,723,313 $ 6,461,182 $ 4,820,362 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 522,138 263,142 117,870 Gain on sale of fixed assets (10,107) - - Deferred income taxes (701,788) (455,030) - Loss from investment in and write off of notes receivable from DK Investments, LLC - 220,933 122,076 Other non-cash expenses - 201,758 - Change in operating assets and liabilities: Receivables (13,656,659) (3,327,947) (3,852,125) Inventories (4,276,014) (3,365,644) (2,298,866) Prepaid expenses (198,172) (147,620) 23,792 Excess of outstanding checks over bank balance 4,177,754 (637,783) - Accounts payable 7,801,265 2,781,891 830,312 Accrued expenses 3,140,434 1,256,201 906,982 Accrued income taxes 1,758,945 763,515 - Other assets 1,135 (77,575) (42,151) ----------------------------------------------------- Net cash provided by operating activities 6,282,244 3,937,023 628,252 INVESTING ACTIVITIES Purchase of operating division (5,896,672) - - Investment in DK Investments, LLC - - (25,000) Issuance of notes receivable - (221,427) (244,542) Purchase of property and equipment (1,479,129) (721,257) (915,724) Proceeds from sale of property and equipment 182,429 - - ----------------------------------------------------- Net cash used in investing activities (7,193,372) (942,684) (1,185,266) FINANCING ACTIVITIES Net borrowings on revolving credit agreements 2,135,000 10,060,000 1,496,147 Principal payments on long-term debt (446) (318,649) 690,000 Payments on debt issuance cost - (191,467) 319,133 Proceeds from issuance of preferred stock - 10,000,000 (6,289) Proceeds from sale of treasury shares and issuance of common stock 120,824 509,090 - Purchase of treasury shares (344,000) - - Payments for recapitalization and redemption of common stock (1,000,000) (21,380,478) - Payments of dividends - (1,672,835) (1,944,104) ----------------------------------------------------- Net cash provided by (used in) financing activities 911,378 (2,994,339) 554,887 ----------------------------------------------------- Net increase (decrease) in cash 250 - (2,127) Cash at beginning of year 200 200 2,327 ----------------------------------------------------- Cash at end of year $ 450 $ 200 $ 200 =====================================================
See accompanying notes. 7 Keystone RV Company Notes to Financial Statements December 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS Keystone RV Company (the Company) manufactures recreational vehicle products for sale to customers throughout the United States and Canada, generally on terms of 15 days or normal floor-plan arrangements. USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH The Company maintains cash with two financial institutions in amounts which, at times, may be in excess of FDIC insurance limits. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. DEPRECIATION Depreciation of property and equipment is computed by the straight-line method over the estimated useful lives (ranging from 3 to 15 years) of the assets. Maintenance and repairs are charged to expense as incurred. INVESTMENTS The Company had a 47.4% investment in a recreational vehicle dealership, DK Investments, LLC (DK), an unconsolidated affiliate which was accounted for under the equity method. During 1999, DK ceased operations and was liquidated in 2000. As of December 31, 1999, the Company had written off any remaining investment in or receivable from DK. WARRANTY EXPENSE The Company accrues an estimated liability for warranty expense at the time the warranted products are sold. 8 Keystone RV Company Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLES AND LONG-LIVED ASSETS Goodwill is being amortized using the straight-line method over fifteen years. The Company re-evaluates intangibles and long-lived assets based on fair values or undiscounted operating cash flows whenever significant events or changes occur which might impair recovery of recorded costs, and it writes down recorded costs of the assets to fair value when recorded costs, prior to impairment, are higher. REVENUE RECOGNITION The Company generally manufactures products based on the specific orders from customers and generally ships completed products only after receiving credit approval from financial institutions. Revenue is recognized upon shipment. Charges for the delivery of products to customers are reported as revenue. Costs to ship products to customers are reported as part of cost of goods sold. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, receivables, accounts payable, notes payable to redeemed shareholders, short-term debt, long-term debt, redeemable preferred stock, and accruals that meet the definition of a financial instrument approximate fair value. RECLASSIFICATIONS Certain items in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. These reclassifications had no effect on net income. 9 Keystone RV Company Notes to Financial Statements (continued) 2. RECAPITALIZATION In February 1999, the Company effected a leveraged recapitalization whereby the Company (1) redeemed common stock of existing shareholders, (2) entered into a revolving line of credit of $25,000,000 (see Note 4), and (3) issued shares of common stock to certain members of management and preferred stock to Summit Partners (see Note 5). In connection with the redemption of common stock, the shareholders received a special dividend distribution approximately equal to their undistributed S Corporation earnings and then redeemed a substantial portion of the common shares issued and outstanding. Total consideration paid to the shareholders in 1999 was $20,372,738. The terms of the redemption agreement required that additional consideration of up to $1,500,000 be paid to the redeeming shareholders if the Company achieved certain earnings targets in 1999 and 2000. The Company achieved the 1999 and 2000 earnings targets and therefore, in accordance with the agreement, the additional consideration of $1,500,000 has been recorded. 3. INVENTORIES Major classifications of inventories are as follows: DECEMBER 31 2000 1999 ----------------- ---------------- Raw materials $ 8,495,243 $ 4,585,373 Work-in-process 1,266,263 1,098,641 Finished goods 5,800,841 1,584,017 ----------------- ---------------- $ 15,562,347 $ 7,268,031 ================= ================ 10 Keystone RV Company Notes to Financial Statements (continued) 4. DEBT Long-term debt is as follows: DECEMBER 31 2000 1999 ----------------------------- Revolving line of credit loan $ 12,885,000 $ 10,750,000 Other - 446 ----------------------------- 12,885,000 10,750,446 Less current maturities 3,000,000 3,000,446 ----------------------------- $ 9,885,000 $ 7,750,000 =============== ============= Aggregate maturities of long-term debt are as follows: 2001 $ 3,000,000 2004 9,885,000 The Company has a revolving line of credit agreement with a bank totaling $22,500,000, of which $12,885,000 was outstanding at December 31, 2000. The agreement matures on January 31, 2004 and substantially all assets of the Company are pledged as collateral to the revolving line of credit. Interest is payable on amounts borrowed under the revolving line of credit at, based on the election of the Company, the prime rate or LIBOR plus a factor up to 2.25%, based on the Company's funded debt ratio as defined. The interest rate on borrowings under the agreement was 8.98% at December 31, 2000. The terms of the agreement require the Company to, among other things, meet minimum cash flow, interest coverage, and leverage ratio requirements. The agreement also has restrictive covenants limiting repurchase of stock, dividends, additional investments, acquisitions, additional debt, fixed asset additions and disposals, sale and leasebacks, and leases. As of December 31, 2000, the Company was in compliance with these requirements. At December 31, 2000, the Company had letters of credit outstanding of $400,000. 11 Keystone RV Company Notes to Financial Statements (continued) 5. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK In February 1999, the Company issued 3,674 new shares of Class A Common Stock, 99,000 shares of Series A Redeemable Preferred Stock ("Series A Preferred Stock") and 13,564 shares of Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock"). During 2000, the Company purchased 1,413 shares of common stock as treasury shares and reissued those treasury shares plus 76 new common shares. The Series A Preferred Stock accrues dividends at 8% and is redeemable, at the option of the holder, beginning February 11, 2005 at cost plus accrued dividends. The Series B Preferred Stock accrues dividends at 8% and is redeemable, at the option of the holder, beginning February 11, 2005 at the higher of (a) cost plus accrued dividends or (b) fair market value. In addition, under certain circumstances such as a liquidity event or a default pursuant to the provisions of the Stock Purchase and Redemption Agreement, the holders of the Series A and B Preferred Stock may require redemption at an earlier date. The terms of the Stock Purchase and Redemption Agreement require the Company to, among other things, meet certain financial covenants and limit capital expenditures, investments, and dividends while the Series A and Series B Preferred Stock is outstanding. The preferred shares have liquidation amounts equal to the redemption amounts stated above and have liquidation preference over any common shares outstanding. Each share of the Series B Preferred Stock has voting rights equal to one share of Class A Common Stock. In addition, each share of the Series B Preferred Stock is convertible at any time by the holder into .6926 shares of Class A Common Stock. In accordance with United States generally accepted accounting principles, the carrying value of the Series B Preferred Stock has been increased based on changes in the fair market value and has been shown as a liability. Accordingly, during the years ended December 31, 1999 and 2000, the Company recorded a charge to retained earning (deficit) of $1,979,507 and $14,294,941, respectively, for the increase in the value of the Series B Preferred Stock. The Company has reserved for issuance enough Class A Common Stock to provide for any shares that may be required for exercise of stock options or conversion of the Series B Preferred Stock. 12 Keystone RV Company Notes to Financial Statements (continued) 6. INCOME TAXES The Company operated as an S Corporation from August 29, 1995 through February 12, 1999, when its S Corporation election was terminated. As a result, the Company was not subject to federal or, in most instances, state income taxes during this period since income was taxed directly to the shareholders. Accordingly, the Company's provision for income taxes in the historical statements of income is substantially less than the level of income tax expense that the Company is subject to as a C Corporation subsequent to February 12, 1999. Components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31 2000 1999 1998 ---------------------------------------- Currently payable: Federal $ 4,784,269 $ 3,224,415 $ - State 1,150,514 841,466 - ---------------------------------------- 5,934,783 4,065,881 - Deferred: Federal (565,943) (366,951) - State (135,845) (88,079) - ---------------------------------------- (701,788) (455,030) - ---------------------------------------- $ 5,232,995 $ 3,610,851 $ - ========================================
The provision for income taxes differs from the amounts that would be provided based on the statutory federal tax as follows:
YEAR ENDED DECEMBER 31 2000 1999 1998 ---------------------------------------- Tax provision at statutory federal income tax rate $ 4,534,708 $ 3,525,212 $ 1,638,923 State income tax provision, net of federal benefit 659,535 489,709 - S Corporation earnings prior to conversion to C Corporation - (248,075) (1,638,923) Deferred tax credit recognized upon conversion to C Corporation - (284,060) - Other 38,752 128,065 - ---------------------------------------- $ 5,232,995 $ 3,610,851 $ - ========================================
13 Keystone RV Company Notes to Financial Statements (continued) 6. INCOME TAXES (CONTINUED) Deferred income taxes result from temporary differences between the amounts of assets and liabilities reported for financial reporting purposes and income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: DECEMBER 31, 2000 1999 -------------------------- Current deferred tax assets: Warranty costs $ 778,758 $ 341,139 Dealer incentives 466,203 183,175 Other 45,564 20,848 -------------------------- 1,290,525 545,162 Noncurrent deferred tax liability-- Property basis (133,707) (90,132) -------------------------- Net deferred tax asset $ 1,156,818 $ 455,030 =========== =========== 7. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) plan for the benefit of all full-time employees. The Company's contributions are discretionary and are limited to amounts deductible for federal income tax purposes. Amounts expensed for the plan were approximately $150,000, $45,000, and $25,000 for the years ended December 31, 2000, 1999, and 1998, respectively. 8. STOCK OPTIONS In February 1999, the Company granted to the chief executive officer of the Company a nonqualified option to purchase 725 shares of Class A Common Stock at an exercise of $193 per share. The option vests immediately and expires after ten years. In December 2000, the Company granted an employee and a director of the Company nonqualified options to purchase a total of 223 shares of Class A Common Stock at an exercise of $1,754 per share. The options vest 25% each year over a four year period and expire after ten years. No options have been exercised or forfeited, or have expired during 1999 or 2000 and, therefore, options for a total of 748 shares remain outstanding at December 31, 2000. 14 Keystone RV Company Notes to Financial Statements (continued) 8. STOCK OPTIONS (CONTINUED) The Company follows the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its stock options which require compensation expense of stock options to be recognized only if the market price of the underlying stock exceeds to the exercise price on the date of grant. Accordingly, the Company has not recognized compensation expense for its stock options granted. Pro forma information regarding net income is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated as of the date of grant using a "minimum value" method acceptable for nonpublic companies. Pro forma net income, reported as if compensation expense had been recognized under the fair value provisions of FAS 123 for these options, was $7,705,313 and $6,638,182 for the years ended December 31, 2000 and 1999, respectively. 9. COMMITMENTS AND CONTINGENCIES The Company leases its facilities under 15 noncancelable agreements which expire at various dates through 2010, and which require annual rentals varying from $22,000 to $349,800 plus the payment of normal maintenance, insurance, and property taxes on the property. The Company has the option on certain leases to purchase the property at the end of the lease term at its fair market value. Rental expense included in the statements of income for the years ended December 31, 2000, 1999, and 1998 is $1,621,653, $810,601, and $442,630, respectively. The total minimum rental commitment under these leases at December 31, 2000 is as follows: 2001 $ 1,773,672 2002 1,176,736 2003 1,139,616 2004 1,139,616 2005 674,664 Thereafter 1,838,196 ----------------- $ 7,742,500 ================= 15 Keystone RV Company Notes to Financial Statements (continued) 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) In connection with the wholesale floor-plan financing of recreational vehicles, the Company has entered into repurchase agreements with lending institutions in the amount of approximately $72,000,000 at December 31, 2000 and $38,500,000 at December 31, 1999. Such agreements are customary in the recreational vehicle industry and the Company's exposure to loss under such agreements is limited by the resale value of the inventory, which is required to be repurchased. Losses incurred under such arrangements in 2000 were approximately $635,000, the majority of which was associated with one dealer. In 1999, any such losses were immaterial. The Company is involved in various litigation generally incidental to normal operations. In the opinion of management, the resolution of pending litigation is not expected to have a material effect on financial condition, results of operations or liquidity of the Company. 10. ACQUISITION OF DAMON CORPORATION TOWABLE DIVISION On April 28, 2000 the Company acquired certain assets of the towable division of Damon Corporation for cash of $5,896,672. The acquisition has been accounted for using the purchase method and the results of operations of the acquired operations have been included in the financial statements since the acquisition date. The Company has recorded inventory and fixed assets at fair market value resulting in goodwill of $1,600,000, which is being amortized over fifteen years. 16 Keystone RV Company Notes to Financial Statements (continued) 11. CASH FLOWS INFORMATION Supplemental information relative to the statements of cash flows for the years ended December 31, 2000, 1999, and 1998, is as follows: Supplemental disclosures of cash flows information:
2000 1999 1998 ------------------------------------------ Supplemental disclosures of cash flows information: Cash payments for interest $1,029,755 $ 705,000 $ 110,000 Cash payments for income taxes 4,175,835 3,302,000 - Supplemental schedule of noncash financing activities: Issuance of common stock and stock subscriptions 241,654 200,000 - Issuance of notes receivable and stock subscriptions receivable to shareholders 241,654 - - Issuance of notes payable to redeemed shareholders 500,000 1,000,000 - Accrued dividends--preferred stock 820,489 708,400 - Dividends declared but unpaid-- common stock - - 1,348,000
12. SUBSEQUENT EVENT On November 9, 2001, the Company was acquired by Thor Industries, Inc. (Thor) for approximately $143 million in cash and stock. 17 Keystone RV Company Financial Statements (Unaudited) Nine months ended September 30, 2001 and 2000 CONTENTS Financial Statements (Unaudited) Balance Sheet (Unaudited)..................................................1 Statements of Income (Unaudited)...........................................3 Statements of Cash Flows (Unaudited).......................................4 Notes to Financial Statements (Unaudited)..................................5 Keystone RV Company Balance Sheet (Unaudited) September 30, 2001
ASSETS Current assets: Cash $ 2,717,530 Accounts receivables: Trade, less allowance for doubtful accounts of $361,421 30,811,953 Other 1,063,090 ----------- 31,875,043 Inventories 15,024,162 Prepaid expenses 276,225 Deferred income taxes 3,887,525 ----------- Total current assets 53,780,485 Property and equipment: Land and improvements 844,343 Leasehold improvements 528,830 Machinery and equipment 3,211,414 ----------- Total cost 4,584,587 Accumulated depreciation and amortization 1,224,648 ----------- Property--net 3,359,939 Goodwill, less accumulated amortization of $151,124 1,448,876 Other assets 253,819 ----------- 5,062,634 Total assets $58,843,119 ===========
1 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 16,816,848 Accrued expenses: Income taxes 9,323,081 Compensation and related items 2,193,116 Warranty costs 8,189,774 Other 2,574,719 ------------ Total current liabilities 39,097,538 Deferred income taxes 171,707 Commitments and contingencies Series A redeemable preferred stock, $.01 par value (stated at redemption value of $100 per share plus accrued dividends) authorized--1,000,000 shares; issued and outstanding--99,000 shares 12,015,191 Series B redeemable convertible preferred stock, $.01 par value (stated at redemption value) authorized--1,000,000 shares; issued and outstanding--13,564 shares 50,846,797 Shareholders' equity (deficit): Common stock, $.01 par value: Authorized--10,000,000 shares Issued and outstanding--(14,027) 140 Additional paid-in capital 642,965 Retained earnings (deficit) (43,931,219) ------------ Total shareholders' equity (deficit) (43,288,114) ------------ Total liabilities and shareholders' equity (deficit) $ 58,843,119 ============
See accompanying notes. 2 Keystone RV Company Statements of Income (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 -------------------------------- Net sales $ 312,830,472 $ 188,304,210 Cost of goods sold 275,686,128 165,498,152 -------------------------------- Gross profit 37,144,344 22,806,058 Selling, general, and administrative expenses 13,468,574 10,536,130 -------------------------------- Operating income 23,675,770 12,269,928 Other income (expense): Interest income 42,908 39,103 Interest expense (490,445) (787,030) Other (132,334) (170,947) -------------------------------- (579,871) (918,874) -------------------------------- Income before income taxes 23,095,899 11,351,054 Provision for income taxes 9,324,144 4,586,000 -------------------------------- Net income $ 13,771,755 $ 6,765,054 ================================
See accompanying notes. 3 Keystone RV Company Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------------------------ OPERATING ACTIVITIES Net income $ 13,771,755 $ 6,765,054 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 532,348 339,322 Gain on sale of fixed assets - (10,107) Deferred income taxes (2,559,000) (646,000) Change in operating assets and liabilities: Receivables (9,129,673) (11,609,448) Inventories 538,185 (6,093,995) Prepaid expenses 142,809 (65,557) Excess of outstanding checks over bank balance (5,395,336) 5,682,378 Accounts payable 4,881,160 5,990,197 Accrued expenses 7,346,348 1,418,304 Accrued income taxes 6,800,621 2,802,800 Other assets (14,006) 1,135 ------------------------------ Net cash provided by operating activities 16,915,211 4,574,083 INVESTING ACTIVITIES Purchase of operating division - (5,896,672) Purchase of property and equipment (873,543) (1,353,968) Proceeds from sale of property and equipment - 182,429 ------------------------------ Net cash used in investing activities (873,543) (7,068,211) FINANCING ACTIVITIES Net proceeds (payments) on revolving credit agreements (12,885,000) 3,700,000 Principal payments on long-term debt - (446) Proceeds from sale of treasury shares and issuance of common stock 181,239 138,824 Purchase of treasury shares (120,827) (344,000) Payments for recapitalization and redemption of common stock (500,000) (1,000,000) ------------------------------ Net cash provided by (used in) financing activities (13,324,588) 2,494,378 ------------------------------ Net increase in cash 2,717,080 250 Cash at beginning of period 450 200 ------------------------------ Cash at end of period $ 2,717,530 $ 450 ==============================
See accompanying notes. 4 Keystone RV Company Notes to Financial Statements (Unaudited) September 30, 2001 1. BASIS OF PRESENTATION The financial statements of Keystone RV Company (Company) for the nine months ended September 30, 2001 and 2000 and related footnote information are unaudited and have been prepared on the same basis as the audited financial statements. In the opinion of management, the interim unaudited financial statements included all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of these interim periods. The results for the nine months ended September 30, 2001 are not necessarily indicative of the operating results to be expected for the entire year. 2. INVENTORIES Major classifications of inventories as of September 30, 2001 are as follows: Raw materials $ 12,541,063 Work-in-process 1,540,593 Finished goods 942,506 -------------- Total inventories $ 15,024,162 ============== 3. CASH FLOWS INFORMATION Supplemental information relative to the statements of cash flows for the nine months ended September 30, 2001 and 2000 is as follows: 5 Keystone RV Company Notes to Financial Statements (continued) (Unaudited) 3. CASH FLOWS INFORMATION (CONTINUED) Supplemental disclosures of cash flows information:
(UNAUDITED) 2001 2000 ---------------------------------- Supplemental disclosures of cash flows information: Cash payments for interest 688,599 701,548 Cash payments for income taxes 5,082,524 4,182,696 Supplemental schedule of noncash financing activities: Issuance of common stock and stock subscriptions - 241,654 Issuance of notes receivable and stock subscriptions receivable to shareholders - 241,654 Issuance of notes payable to redeemed shareholders - 500,000 Accrued dividends--preferred stock 608,882 616,044
4. SUBSEQUENT EVENT On November 9, 2001, the Company was acquired by Thor Industries, Inc. (Thor) for approximately $143 million in cash and stock. 5. SERIES B PREFERRED SHARES In accordance with United States generally accepted accounting principles, the carrying value of the Series B Preferred Stock has been increased based on changes in the fair market value and has been shown as a liability. Accordingly, during the nine months ended September 30, 2001, the Company recorded a charge to retained earnings (deficit) of $36,529,276 for the increase in the value of the Series B Preferred Stock. For purposes of these financial statements, the estimated value of the Series B Preferred Stock of $50,846,797 at September 30, 2001 is based upon the consideration paid to the holders of the Series B Preferred Shares in the acquisition of the Company on November 9, 2001 discussed in Note 4. 6 Keystone RV Company Notes to Financial Statements (continued) (Unaudited) 6. SHAREHOLDER LITIGATION The Company is involved in litigation with a former employee whose employment was terminated in July, 2001. The dispute relates to the appropriate repurchase price for the employee's common shares of the Company under a shareholder agreement. The Company has deposited in escrow with the court the full amount of the repurchase price it believes to be appropriate under the Shareholder Agreement. Further payment, if any, required in the matter will be provided from amounts escrowed in connection with the acquisition of the Company by Thor. 7. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the FASB Statements. Other intangible assets will continue to be amortized over their useful lives. The Company has not yet determined what the effect of the new pronouncement will have on its financial statements. In August, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment of long-lived assets to be held and used, and of long-lived assets and components of an entity to be disposed of. This statement is effective for fiscal years beginning after December, 2001 and the Company has not yet determined what effect, if any, adoption will have on its financial statements. 7