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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20547
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 29, 1996
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____________ to _____________
Commission File number: 0-22048
STARCRAFT CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana 35-1817634
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
P.O. Box 1903, 2703 College Avenue, Goshen, Indiana 46526
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (219) 533-1105
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of December 27, 1996, was $14,415,100.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 27, 1996, was 4,118,600 shares.
Exhibit Index on Page ___
Page 1 of ___ Pages
STARCRAFT CORPORATION
FORM 10-K
INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
SIGNATURES
PART I
Item 1. BUSINESS.
Overview
The Company is a leading second-stage manufacturer of custom van, sport
utility vehicle ("SUV") and pickup truck conversions. Starcraft has historically
specialized in upscale custom vehicles. With the addition of the Imperial Group
("Imperial")in 1994, the Company offers a full range of conversion vehicles at
every consumer price point. The Company believes it is one of the five largest
van conversion manufacturers in the U.S. The Company sells its products to an
extensive network of approximately 1,000 authorized automotive dealers
throughout the continental U.S. and overseas. The Company believes the Starcraft
name has a long-standing reputation in the vehicle conversion industry for high
quality.
Starcraft traces its history to 1903 when Star Tank Company was founded
in Goshen, Indiana as a maker of metal farm equipment. Over the course of the
century the Company's predecessor became a leading manufacturer of aluminum
boats and recreational vehicles and, in the late 1970's, led the automotive
conversion industry by producing luxury van conversions for middle and upper
income consumers. In 1987, the predecessor's management completed a leveraged
buyout and, in 1988, sold the boat manufacturing business. The resulting entity
was highly leveraged and eventually sought protection from creditors in a
bankruptcy reorganization proceeding in late 1990. On January 18, 1991, the
Company purchased the assets of the automotive and recreational vehicle
divisions (except for Canadian operations) from Starcraft Van Conversions
Corporation and its affiliates, as debtors-in-possession (the "Predecessor"),
with bankruptcy court approval. The Company simultaneously sold the RV division
to a third party. In July 1994, the Company's wholly owned subsidiary, Imperial
Automotive Group, Inc. acquired substantially all of the assets of Imperial
Industries, Inc. In December 1995, the Company expanded its manufacturing
capabilities with a new plant in McGregor, Texas, operated by Starcraft
Southwest, Inc., a wholly owned subsidiary.
The Company was incorporated in Indiana in 1990 to acquire the assets
of the Predecessor. Its executive offices are located at 2703 College Avenue,
Goshen, Indiana, 46526; telephone (219)533-1105. The Company has three
wholly-owned operating subsidiaries: Starcraft Automotive Group, Inc.; Imperial
Automotive Group, Inc. and Starcraft Southwest, Inc.
Starcraft's principal manufacturing facilities are in Goshen, Indiana,
and, as of December 1995, McGregor, Texas, and it produces upholstery components
at a facility in Emma, Indiana. The Company consolidated its Elkhart facility
into its Goshen facility in December 1996. See "Item 2.
Properties."
Industry Information
The custom conversion industry developed during the early 1970's.
Starcraft's Predecessor was a leader in transforming the industry from one
oriented toward younger recreational users to one oriented toward more mature
automotive customers. The Company believes retail prices of custom vans in the
United States for the 1996 model year generally ranged from $20,000 to $40,000.
Retail mark-ups vary widely among dealers and are not within the Company's
control.
According to the Recreational Vehicle Industry Association ("RVIA"),
the average domestic wholesale price to dealers of a van conversion, pickup
truck conversion and SUV conversion (including chassis) during the first nine
calendar months of 1996 were $24,000, $20,200 and $29,000, respectively. Because
the Company emphasizes high-end, luxury vehicles, Starcraft's average domestic
wholesale price to dealers during fiscal 1996, was $25,700, assuming an average
cost of chassis to dealers of $18,000. Imperial's and Lonestar's average
wholesale price to dealers during fiscal 1996 were $21,000 and $22,000,
respectively assuming an average cost of chassis to dealers of $17,500.
According to RVIA statistics, approximately 151,000 custom vans were
sold by United States conversion manufacturers during calendar 1995 compared to
182,000, 192,000, and 179,000 units in 1994, 1993 and 1992, respectively, RVIA
reported sales of 119,000 units through September 1996 and estimates sales of
custom vans for calendar 1996 will total 144,000, a 5% decrease from prior year
levels. In 1995, RVIA began tracking pickup truck and SUV conversions. For the
nine months ended September 1996, 58,400 of such vehicles were sold by the
conversion industry compared to 54,500 in 1995.
RVIA statistics are based on reports of its member manufacturers and
its estimates with respect to non-member manufacturers. The Company believes
RVIA members produce 80%-85% of conversions produced in the United States.
The conversion industry is cyclical and is affected by the general
trends of the economy and consumer preferences and consumer confidence and
trends of the automotive and recreational vehicle industries. The level of
disposable consumer income affects the Company's sales because its products are
generally considered discretionary expenditures by consumers. In difficult
economic times, consumers tend to spend less of their income on discretionary
items. Other economic factors affecting the demand for the Company's products
include the availability and price of gasoline, the level of interest rates and
the availability of consumer financing. Reduced gasoline availability could
adversely affect the demand for the Company's products. A significant increase
in the price of gasoline could reduce demand for the Company's products because
it would increase the cost of operating these products. Because many consumers
finance their purchase of vehicle conversions, the availability of financing and
level of interest rates can affect a consumer's purchasing decision. A decline
in general economic conditions or consumer confidence can be expected to affect
Starcraft's sales adversely. The Company is dependent upon the OEMs to supply
its requirements for vehicle chassis. Labor stoppages, supply shortages and a
variety of other factors that influence OEM production can affect the
availability or timely delivery of vehicle chassis to the Company. In 1996 the
Company's sales were adversely impacted by the availability of certain OEM
chassis.
Company Products
The Company converts fullsize vans manufactured by each of the major
original equipment manufacturers ("OEMs"): GMC Truck, Chevrolet, Dodge and Ford.
The Company manufactures minivan conversions on the GMC Safari, the Chevrolet
Astro and the Dodge Caravan. Starcraft also customizes Chevrolet and GMC SUV's,
along with several pickup truck models for GMC, Chevrolet, Ford and Dodge. The
Company currently offers several fullsize van and minivan models. Each vehicle
model contains a principal set of conversion features and a variety of optional
accessories designed by the Company in each model year to meet prevailing
customer preferences. Starcraft van models fall principally into three price
ranges (conversion cost to dealer): from $4,000-$6,000, $6,000-$9,000, and
$9,000 and above. Imperial and Lonestar models fall into the following price
ranges: $2,000-3,000, $3,000-4,000, over $4,000. These price ranges provide
marketing flexibility allowing for different demographics and varying dealer
marketing objectives. Certain SUV and pickup truck conversion packages may be
priced below these ranges.
Operating Data
The following sets forth information respecting the Company's gross
sales by product type (including Imperial after July 5, 1994 and Lonestar after
December 1, 1995) for the fiscal periods indicated.
GROSS SALES BY PRODUCT(1)
Period Ended
September 29, 1996 October 1, 1995 October 2, 1994
(52 weeks) (52 weeks) (52 weeks)
--------------------------------- ------------------------------------- ------------------------------------
(Sales in Thousands)
Average Average Average
Price/ Gross % of Price/ Gross % of Price/ Gross % of
Units Unit Sales Sales Units Unit Sales Sales Units Unit Sales Sales
----- ---- ----- ----- ----- ---- ----- ----- ----- ---- ----- -----
Fullsize vans 8,085 $6,600 $53,300 50.1% 9,041 $7,500 $67,600 54.8% 7,888 $7,800 $61,800 63.3%
Minivans 4,676 8,200 38,300 36.0 4,894 8,300 40,700 33.0 3,045 7,600 23,200 23.7
Trucks and
SUVs 3,345 3,200 10,700 10.0 3,009 3,400 10,300 8.4 2,078 4,300 9,000 9.2
Parts N/A N/A 4,200 3.9 N/A N/A 4,700 3.8 N/A N/A 3,700 3.8
--- ----- --- --- ----- --- --- --- ----- ---
Total 16,106 $106,500 100.0% 16,944 $123,300 100.0% 13,011 $97,700 100.0%
====== ======== ===== ====== ======== ===== ====== ====== =====
- -----------
(1) Gross dollar sales represent the price to dealers of the conversion
before discounts and exclude the cost of the chassis.
Company Strategy
The Company believes it can continue to grow by expanding its domestic
van conversion business, increasing its sales of pickup truck and SUV
conversions and further developing international sales opportunities.
Domestic Van Sales. The Company will continue to focus on core van
conversion products and, through aggressive marketing and promotion, will seek
to expand U.S. sales of custom vans. While Starcraft product lines will continue
to emphasize upscale custom van conversions, Imperial will continue a
complementary emphasis on mid- and low-price point conversion packages. The
Company will continue to seek to further differentiate its Starcraft lines from
its competition by emphasizing total value versus unit price. With the Imperial
acquisition, the Company is in position to participate in the rapidly growing
price-sensitive segment of its van conversion market. By offering both the
Starcraft and Imperial product lines, the Company is able to offer dealers a
full price range of conversion vehicles from a single manufacturer. The
establishment of the Lonestar facility offers the opportunity for strategic
development in the Southwest, particularly Texas. The Company believes this
operation creates a competitive price advantage by reducing freight costs.
The Company will continue to focus on innovative product development to
enhance customer appeal and vehicle quality and safety. The Company will
continue to seek to differentiate itself from its competition by virtue of the
resources it devotes to training dealer personnel in selling, product knowledge,
service and compliance. Starcraft utilizes a specially equipped service van,
videos, manuals, other visual aids, and classroom instruction at its main
facility and at dealer locations throughout the country. The Company maintains a
strong customer service area which includes warranty claims and approval, parts
ordering and processing and customer information. The Company maintains records
of Starcraft units sold as far back as 1978 and Imperial maintains records back
to 1991, which was the inception of the predecessor company, Imperial
Industries, Inc. Starcraft is expanding its use of regional service clinics,
regional and dealer-specific sales seminars and dealer plant visits.
Domestic Truck and SUV Conversions. Although the Company's conversions
of General Motors' Suburban, other SUV and pickup trucks have proven to be a
popular line of products, limited chassis availability has inhibited the
Company's sales of these products. The Company intends to expand its sales of
non-van custom vehicles, especially luxury custom pickup trucks, and has
designed conversion packages especially for these vehicles. In 1996, the Company
added the GMC Jimmy, Chrysler Jeep and a variety of pickup truck lines. The
general market in the U.S. for pickup trucks and SUVs has been strong in the
last three model years. The Company expects this strong market to continue and
is working with the OEMs to help assure the availability of chassis in
sufficient quantity to meet its expanding requirements. In particular, the
Company is exploring opportunities to develop and produce special SUV upfit
packages for General Motors and the other OEMs. See "Chassis and Other
Suppliers." Starcraft Southwest will address the increasing market demand for
SUVs, pickup trucks and Suburbans in the southwest with increased chassis
allocation of such vehicles.
International Vehicle Sales. The Company intends to further promote
Starcraft vehicles overseas, especially in Central/Northern Europe and Japan.
The Company has an European parts center owned and operated by a
German corporation affiliated with Starcraft's Norwegian dealer to improve its
service to German customers. The Company maintains a distribution agreement with
General Motors and Mitsui & Co. (U.S.A.), Inc. which the Company believes makes
Mitsui the sole distributor of General Motors vans in Japan. Under this
agreement Mitsui agreed to use its best efforts to promote Starcraft vans in
Japan and Starcraft agreed to sell van conversions in Japan solely through
Mitsui.
Chassis and Other Suppliers
Historically, most of the Company's van conversions have been General
Motors products. In 1991, approximately 92% of its unit sales were represented
by General Motors. Approximately one-half of the Company's General Motors units
are received from each of the Chevrolet Motors and GMC Truck divisions. Between
calendar years 1991 and 1995, Ford and Chrysler products collectively increased
from 8% to 26% of domestic unit sales and were 33% of domestic unit sales in
1996. The increase in the proportion of the Company's sales represented by Ford
and Chrysler products was due primarily to dealers reducing General Motors
fullsize vans as well as aggressive promotional activities carried on by Ford
and Chrysler.
The OEMs supply incomplete chassis to Starcraft or other manufacturers
or dealers for restricted use. The Company obtains substantially all of its
chassis acquired for domestic sale from the OEMs pursuant to consignment or
restricted sale contracts. Under these contracts each OEM maintains strict
control over the disposition of chassis delivered to the Company for
modification and the Company is prohibited from delivering a converted chassis
provided by the OEM to any person except an authorized dealer for that OEM. All
of the Company's consignment and restricted sale contracts with chassis
suppliers are terminable by either party on short notice without cause.
Under restricted sale contracts with the OEMs, the OEM retains the
certificate of origin and the Company has no right to obtain it or any other
evidence of title. These contracts state that vehicle title technically passes
to the Company upon acceptance of a chassis and the Company pays state property
taxes on chassis, but the Company can only sell the chassis back to the OEM for
resale to an authorized dealer. Except for demonstration vehicles, the Company
is prohibited from making modifications to chassis under these contracts until
it matches them with a dealer order. The Company has obtained waivers of this
limitation to permit accumulation of GMC or Chevrolet inventory in connection
with model year changes or other periods of anticipated increasing demand. Prior
to matching a chassis to a dealer order, the Company finances the chassis
through the OEM's financing affiliates at nominal rates. Once the Company
notifies the OEM that it has matched a chassis with a dealer, the OEM
"repurchases" the chassis, crediting the Company's account with the OEM's
financing affiliate and invoicing its dealer (the Company's customer) for the
price of the chassis. Upon receiving the converted vehicle, the dealer is
obligated to
pay the Company for the improvements the Company has made. If the Company fails
to match a chassis with a dealer order within 90 days, the finance charge the
Company must pay increases. The past 90-day finance charge is currently the
prime rate plus 1%.
Historically, Starcraft's international conversion sales have been
chassis originally manufactured by General Motors. Generally, the foreign
purchaser is an authorized dealer for General Motors and Starcraft. The dealer
submits an order to General Motors' overseas sales affiliate (the "GM Export
Affiliate") for the chassis together with specifications for a Starcraft
conversion. The GM Export Affiliate purchases the chassis from General Motors
and forwards it to Starcraft for second stage manufacturing. Starcraft invoices
the GM Export Affiliate for the completed conversion, and the GM Export
Affiliate arranges for shipment of the unit, at the GM Export Affiliate's
expense, from Starcraft to the foreign dealer.
Starting in 1997, General Motors has changed its chassis system for the
Company's sales to Europe. The Company will be the "Manufacturer of Record" for
units imported into Europe and will be required to arrange and be responsible
for all U.S. export and shipping requirements. The Company will continue to sell
only to authorized General Motors dealers. The Company does not believe this new
system will have a significant impact on its European sales.
A variety of factors govern chassis ordering and availability. Chassis
are ordered from the OEM based on the Company's annual sales plan. The plan is
broken down by OEM and vehicle model. Vehicle specifications are determined on
the basis of historical trend analysis and analysis of the backlog of orders.
The Company's chassis order forecast is shared with each OEM to determine
chassis availability. The OEMs confirm chassis availability and timing on an
annual basis. After confirmation by the OEM, the Company orders a 90-day supply
prioritized through a central computerized system. On a weekly basis, the
Company releases the actual orders it requires and the OEMs schedule delivery
dates for the orders. Chassis allocation to the Company from the OEMs is based
on credit lines, prior usage and wholesale and retail sales rates.
The following table sets forth for the periods indicated the number of
chassis received by the Company and the dollar value thereof, and, as of the end
of such periods, the number of chassis held over 90 days and the dollar value in
thousands thereof.
Period Ended
------------------------------------------------------------------------------
September 29, 1996 October 1, 1995 October 2, 1994
(52 weeks) (52 weeks) (52 weeks)
----------------- ---------------- -------------
(Dollars in thousands)
Chassis Received 17,179 17,419 13,647
Value of Chassis Received(1) $305,300 $309,800 $223,800
Chassis over 90 days (at period end) 262 491 155
Value of Chassis held over 90 days(1) $ 4,615 $ 8,712 $ 2,713
The conversion process begins after a chassis is inspected and accepted
and the Company has received a confirmed order from an authorized dealer that is
compatible with the chassis. Generally, the order is scheduled for production
typically four to five days before work on the vehicle commences to allow for
completion of components to be installed in the chassis. The Company completes
the conversion process in an average of seven to eight days from the date that
the vehicle is first scheduled for production.
The Company is dependent upon the OEMs to supply its requirements for
vehicle chassis. Labor stoppages, supply shortages and a variety of other
factors that influence OEM production can affect the availability or timely
delivery of vehicle chassis to the Company. The impact of these factors was
significant in 1996. If vehicle chassis are unavailable, or if the Company must
accept delivery earlier or later than it otherwise would prefer, sales could be
adversely affected and financing expenses could increase. The Company must also
comply with its consignment and restricted sale contracts with the OEMs pursuant
to which the OEMs impose certain specifications for the Company's vehicle
conversions, including gross vehicle weight standards. Such contracts also
restrict the Company's ability to dispose of completed chassis and prohibit the
transfer of chassis to unauthorized U.S. and foreign dealers. All of the
Company's consignment and restricted sale contracts with chassis suppliers are
terminable by either party on short notice without cause. The availability of
the OEM financing rates is dependent upon the Company's compliance with its OEM
contracts and its ability to maintain satisfactory credit relationships with the
OEM's finance subsidiaries. Adverse changes in the Company's financial condition
or results of operations could cause such financing subsidiaries to seek to
adversely change the Company's financing terms or to terminate such financing
arrangements. Such a change or termination could have a material adverse effect
on the Company's financial condition and results of operations.
General Motors introduced a newly redesigned fullsize van in early
calendar 1996. The Company believes dealers reduced their inventory levels in
1995 in anticipation of the new chassis thereby negatively impacting the
Company's sales to dealers. In addition, the Company believes the
9
availability of the newly redesigned General Motors fullsize van restricted and
negatively impacted the Company's 1996 sales. At the end of 1996, the
availability of this chassis to the Company was adequate.
Vehicle converters can be penalized by the OEM for manufacturing
overweight vehicles and the National Highway Traffic Safety Administration
("NHTSA") could require overweight vehicles to be recalled. See "Safety and
Regulation." Such standards are imposed by the OEMs in part to help assure that
vehicle weight does not exceed the capacity of the OEM's braking system.
The export of completed vehicles to unauthorized foreign dealers has
been a significant issue in the conversion industry in recent years, especially
for General Motors. In the past, some automotive dealers have sold vehicles to
brokers who, in turn, have sold them to unauthorized dealers overseas. General
Motors' financing subsidiary has indicated an intention to penalize or terminate
financing arrangements with any firm deemed responsible for unauthorized
exports. The Company makes an effort to assure itself that none of its vehicles
are exported in an unauthorized manner including obtaining written assurances
from certain dealers. General Motors has significantly increased its efforts to
curtail such activity. The Company has no control over the eventual disposition
of its vehicles by dealers, however, so it cannot eliminate the possibility of
unauthorized export. These efforts nevertheless should help assure that the
Company will not be deemed responsible for any unauthorized export.
Supplies for the components and materials the Company utilizes in its
vehicle conversions are generally available from several sources. From time to
time the Company experiences delays in delivery of certain components or
materials from suppliers, but such delays have not historically had any material
effect on the Company's production.
Manufacturing
The incomplete van chassis Starcraft receives directly from the OEMs
have no seats or floor covering or other interior components. Starcraft modifies
the exterior and interior of the chassis body to provide passenger comfort and
enhance safety. SUVs and pickup trucks received have full interior OEM
components. The Company modifies these components and performs certain exterior
enhancements.
Vehicle Modification and Assembly. After a chassis is inspected and
accepted, the Company begins the conversion process by modifying the chassis
exterior, installing tinted vista bay windows, raised roof, decorative decals
and ground effects. Star-structure steel bracing is installed for added
structural support, followed by rust proofing, wiring, insulation and vibration
dampening materials.
After exterior seals are tested for leaks, the vehicle is lined with
fabric and wood-accented sidewalls and headliners. The Company's associates
assemble the complete vehicle interior in multiple production lines using the
Company's own manufactured components and parts supplied by
10
others. The Company's distinctive hardwood features, contoured seats, carpeting,
curtains and other amenities are installed in each vehicle, along with the
customer's selection from over 100 optional accessories, including a wide
variety of electronic components such as rear heating and air-conditioning,
television, video cassette player and other audio equipment.
Vehicle Components. The Company manufactures its own woodwork,
upholstery and wiring harnesses, among other components. Starcraft's distinctive
hardwood interior appointments are manufactured at the Goshen facility in its
45,000 square-foot woodshop. The Company planes, joins, shapes, sands and
finishes rough-cut teak and walnut lumber in a process that combines automation
and hand craftsmanship. A wood-burning laser is utilized which can transfer any
image directly onto wood components for added customization.
Vehicle seating and upholstery are primarily manufactured at the
Company's Emma, Indiana, facility, located 15 miles from its Goshen, Indiana
plant and 25 miles from the Imperial Elkhart facility, although interior
sidewall and headliner coverings are tailored at the Goshen and Elkhart
facilities. Company associates cut and sew interior wall coverings, headliners,
curtains and seat upholstery from leather, cloth and vinyl materials. The seat
padding and upholstery are then assembled on pre-fabricated frames. Some of
Starcraft's wire harnesses are manufactured at the Goshen plant. The Company
also paints and finishes all of its custom fiberglass and polymer vehicle body
components, such as raised roofs, running boards and other ground effects which
are manufactured to the Company's design specifications by others. The Company
maintains an enclosed painting system to provide fiberglass and polymer
components with high quality base coat and clear coat finishes. This
water-filtered, down draft system is similar to those of the major automotive
manufacturers and is designed to control environmentally harmful emissions.
By manufacturing many of its own components, the Company is able to
exercise significant control over the quality and supply of components built
into its custom vehicles and to accommodate a wide range of customization
demands. The Company is also able to provide consumers with ongoing service and
repair capabilities by maintaining a record of, and access to supplies of,
paint, upholstery and other materials used to modify each vehicle.
Imperial does not manufacture many of its internal components and is
primarily an assembler. To compete in the price-sensitive market segment
Imperial's strategy has been to purchase components from suppliers to reduce its
fixed costs. Imperial purchases some seating and interior shades from Starcraft.
Lonestar purchases substantially all of its components.
Production Associates. The Company periodically employs associate
training that may include classroom instruction, job certification and technical
and personal skills training. The principal objective of the
training is to develop associates into more effective members of a team
dedicated to continuous improvement in all facets of the Company's business.
Starcraft production line associates are compensated on an hourly basis with
additional incentive tied to quality and productivity. Imperial's and Lonestar's
employees are divided into departments whose compensation include incentives
based primarily on productivity.
The Goshen facility produced 45 custom vehicles per eight-hour shift
during peak production periods in 1996 and (prior to the reorganization
described below) has capacity to produce up to 70 units in one shift. The
110,000-square-foot Imperial facilities in Elkhart, Indiana produced
approximately 35 vehicles per shift during peak periods in 1996 and have
capacity to produce up to 50 units per shift. The new McGregor, Texas facility
has a capacity of 30 units per shift and produced 15 units per shift during peak
times in 1996.
In October 1996 the Company finalized its plan to consolidate the
operations of Imperial into Starcraft's manufacturing complex in Goshen,Indiana.
The Goshen facility has been reorganized to allow a production capacity of
Starcraft and Imperial units of 95 units per day on one shift. The plan is
designed to further enhance profitable growth by reducing excess production
capacity, personnel count and fixed overhead expenses. The Company estimates
that a $700,000 pretax restructuring charge in connection with this plant
consolidation will be recorded in the first quarter of fiscal year 1997. The
charge includes employee termination costs, leasehold asset write-offs and the
recognition of contractual lease obligations.
Sales and Marketing
Domestic. The Company sells its custom vehicles to approximately 1,000
automobile dealers throughout the continental U.S. and overseas. Custom vehicles
are sold through a network of regional exclusive sales representatives and
associate representatives. Each of its U.S. dealers is an authorized dealer for
General Motors, Ford or Chrysler and most sell and service a full complement of
cars, SUVs and vans. Starcraft's top 50 dealers accounted for approximately 59%,
51% and 45% of unit sales in fiscal 1996, 1995 and 1994, respectively.
Imperial's top 50 dealers accounted for approximately 67% of unit sales in
fiscal 1996 compared to 71% in fiscal 1995. During the past two years, the
geographic areas of the U.S. where the Company's sales have been strongest
include (i) the Great Lakes region (i.e., Illinois, Indiana, Michigan, New York,
Ohio, Pennsylvania, and Wisconsin), (ii) Oklahoma and Texas and (iii) Northern
California.
The Company's direct sales efforts to dealers are supplemented by a
variety of advertising and promotional programs including shows and promotions
designed to appeal to the retail market, media advertising, dealer incentive
programs and participation in various automobile shows. The Company is also
refining a targeting approach to better utilize advertising expenditures by
expanding its team selling efforts and developing new marketing materials,
including videos.
International. Starcraft's Predecessor, in conjunction with General
Motors dealers overseas, began selling custom vans overseas in 1987. Starcraft
now exports converted vehicles to 17 countries around the world and employs a
senior vice president who is exclusively responsible for the development of
international sales. International sales fluctuate from country to country and
over time depending on import taxes and tariffs and fluctuations in currency
exchange rates as well as local economic conditions. Starcraft's primary
overseas markets are Japan, Korea and northern Europe. The Company exported
2,543, 2,195 and 1,329 conversions in fiscal 1996, 1995 and 1994, respectively.
The Company intends to further promote Starcraft and Imperial vehicles
overseas. The Company maintains a European parts center owned and operated by a
German corporation affiliated with Starcraft's Norwegian dealer to improve its
service to German customers. The Company maintains a distribution agreement with
General Motors and Mitsui by which the Company believes makes Mitsui the sole
distributor of General Motors vans in Japan. This agreement will continue from
year-to-year unless terminated on three months notice prior to the end of any
such year.
Imperial and Lonestar currently have minimal export sales.
Research and Development
The Company continues to devote efforts and resources in the area of
research and development to improve the appeal and safety of its products.
Starcraft believes it has a strong record of innovative product development to
enhance customer appeal and vehicle quality. For example, it introduced the
"Star-Effects" package in September 1992. Star-Effects employs an
impact-resistant polymer to produce van ground effects (running boards and
adjacent areas) with more appealing streamlined styling.
The Company has a patent on a system called the Integrated Belting
System ("IBS"). Upon a rear-end collision in excess of 20 m.p.h., passenger
seats in many vehicles can collapse backward, increasing the risk of injury to
vehicle occupants. IBS is designed to reduce significantly the risk of seat back
collapse by restraining the seat back. A new seat belt integrated with the
conventional seat belt system is anchored to the vehicle roof or wall and
traverses the seat back. In the event of collision, the seat back is secured in
place.
IBS has been successfully tested by an independent testing firm. The
Company believes that only one other automotive manufacturer currently offers
seats with a safety feature designed to prevent collapse on rear impact.
Eventually, the Company intends to license the use of IBS by other
manufacturers. There is no assurance, however, as to the extent IBS will be
employed by other manufacturers.
To meet new NHTSA standards, the Company developed its "Star-structure"
steel bracing system. "Star-structure" is installed throughout a van's roof and
sidewalls and is designed to absorb impact in the event of a collision. The
extent of potential impact absorption varies between OEM chassis. See "Patents
and Trademarks" and "Safety and Regulation."
The Company has product research and development teams devoted to
design and safety improvements. During fiscal 1996, 1995 and 1994, the Company
spent approximately $893,000, $726,000 and $792,000, respectively, on product
research and development.
Competition
The United States vehicle conversion market is very competitive with
five principal national manufacturers and numerous local and regional
manufacturers, many of which are relatively small companies serving local
dealers. The Company believes it is one of the five largest van conversion
companies in the United States. The others are Glaval Inc., Mark III Industries,
Inc., Tiara Motor Coach and Explorer Van Company. The Company's Starcraft lines
generally feature high-end, luxury custom vehicles competing most directly with
Explorer and Tiara. The Imperial product lines compete more directly in the
price-sensitive segment of the van conversion market. According to the OEMs, the
number of authorized converters declined 8% in 1996. The Company believes the
number of competitors will continue to decline as increased quality, financial
and engineering standards are imposed by the OEMs.
In international markets, the Company competes with numerous foreign
manufacturers that produce vehicles comparable to converted vans, although
custom vans such as the Company's tend not to be widely produced within its
foreign markets.
The Company's Starcraft lines will continue to be focused on luxury
vehicle modifications and will seek to increase its market share of high-end van
conversions for which Starcraft vehicles have an established reputation.
Starcraft will also continue to be sensitive to changes in consumer preferences.
The Imperial product lines enable the Company to participate more fully in the
rapidly growing price-sensitive segment of the conversion market and offer its
dealers a full price range of conversion vehicles from one manufacturer. The
Company believes competitive factors in its industry include price, quality and
variety of product line, service and warranty, dealer network and safety. The
Company maintains a leading position in the conversion industry through high
quality workmanship, innovation, versatility in meeting customization
requirements and the diversity of its product line.
Backlog and Seasonality
At September 29, 1996, the Company had a backlog of 1,067 unit orders
compared with a backlog of 1,016 unit orders at October 1, 1995. The Company
considers such orders to be reasonably firm. All of the Company's
products are subject to certain seasonal sales influences and sales tend to be
stronger during March through July. The Company uses off-season sales promotions
to market its products with a view to reducing seasonal swings in sales.
Warranties
The Company provides a three-year, 36,000 mile limited warranty on its
conversions. In 1997, the Starcraft products will offer a 5-year, 60,000 mile
warranty. The OEMs provide their own standard warranties of the chassis and
engine. At the time of sale of its products, the Company estimates the costs to
be incurred for product warranties and establishes reserves for warranty claims.
The Company believes that such reserves will adequately cover any such warranty
claims. The Company provides complete owners' manuals to retail customers
covering the conversion package as well as parts, warranty and service manuals
for dealers. The Company keeps a record of the paint, upholstery and stylings
included in each vehicle conversion so that, when necessary, it can re-create
matching replacement parts.
Patents and Trademarks
IBS. In 1996, the Company received a U.S. patent on IBS, which is
designed to reduce significantly the risk of seat back collapse in the event of
a rear-end collision by restraining the seat back. A new seat belt integrated
with the conventional seat belt system is anchored to the vehicle roof or wall
and traverses the seat back. In the event of collision, the seat back is secured
in place. See "Research and Development."
Trademarks. The Company's Predecessor manufactured boats, motor homes
and other recreational vehicles under the name "Starcraft."(R) The boat
manufacturing business was sold by the Predecessor to Brunswick Corporation in
1988. The Company initially acquired the recreational vehicle business in the
Predecessor's 1991 reorganization proceeding, but immediately sold it to Jayco,
Inc. The Predecessor's Canadian conversion business was acquired by a Canadian
firm. Brunswick Corporation has independently registered and owns the
"Starcraft" and related trademarks for use with boats and marine products and
thus Starcraft has no control over the quality of boats produced and sold under
the "Starcraft" mark. The Company retains ownership of "Starcraft" and related
registered marks for use with automotive and recreational vehicle products. It
licenses the owners of the Predecessor's RV business and Canadian van conversion
business to use these trademarks. While it has some control over the quality of
its licensees' products, it does not control all aspects of their businesses.
The Canadian entity is required to pay a royalty to the Company and to purchase
its components from the Company (or from others with the Company's approval).
The Company does not export to Canada and its Canadian licensee does not export
to the United States.
Because of these considerations, there is a risk that the
distinctiveness of the "Starcraft" mark could become diluted or that its
reputation for quality could be adversely affected if the quality of another
manufacturer's products sold under the mark declines. The Company believes,
however, that customers are sufficiently discerning when making a purchase as
significant as a vehicle conversion that confusion between the Company and
makers of other "Starcraft" products is unlikely. It also believes its licensees
are currently in compliance with their obligations under their license
agreements.
Safety and Regulation
The manufacture, distribution and sale of the Company's products are
subject to governmental regulations in the United States at the federal, state
and local levels. The most extensive regulations are promulgated under the
National Traffic and Motor Vehicle Safety Act which, among other things,
empowers NHTSA to require a manufacturer to remedy vehicles containing "defects
related to motor vehicle safety" or vehicles which fail to conform to all
applicable federal motor vehicle safety standards.
Federal Motor Vehicle Safety Standards were promulgated by the NHTSA in
1992. Many of the Company's conversion components were affected by these
standards. Starcraft engaged a testing company, which also performs testing for
NHTSA, to test the Company's components. The Company's components subject to the
new standards have been determined to meet or exceed them. Promulgation of
additional safety standards in the future could require the Company to incur
additional testing and engineering expenses which could adversely affect the
Company's results of operations. NHTSA is likely to promulgate new standards in
the future respecting one or more of the following matters, among others:
occupant protection in vehicle rollovers, mandatory installation of air bags and
side impact protection.
NHTSA can require automotive manufacturers to recall products. The
Company has not experienced any material recalls.
The Company's international sales are subject to foreign tariffs and
taxes, changes in which are difficult to predict and which can adversely affect
Starcraft sales. Starcraft's products must also comply with government safety
standards imposed in its foreign markets. For example, in Japan and Germany each
vehicle conversion is individually inspected by local authorities before the
vehicle is registered in the country.
Both federal and state authorities have various environmental control
standards relating to air, water and noise pollution that affect the business
and operations of the Company. In particular, the Company generates paint,
varnish and other finishing wastes that it is required to dispose of in
compliance with environmental regulations. The Company
believes that it has complied in all material respects with applicable
environmental regulations and standards and does not currently expect that any
failure of compliance will have any material adverse effect on the Company.
Like other automotive manufacturers, the Company may be subject to
claims that its products caused or contributed to damage or injury sustained in
vehicle accidents or may be required to recall products deemed unsafe. Any such
claims in excess of the Company's insurance coverage or material product recall
expenses could adversely affect the Company's financial condition and results of
operations.
Employees
As of September 29, 1996, the Company employed 899 people. Of these,
approximately 694 were production line associates and 205 were salaried sales,
engineering and administrative staff. During peak production periods, the
Company may increase its work force. Historically, the available labor force has
been adequate to meet such periodic requirements. The Company considers its
relationships with its personnel to be satisfactory.
The Company maintains a training and education process. The principal
goal of this program is to build a team-based learning organization that
develops the combined skills of associates. Management believes this approach
promotes a culture conducive to participation and teamwork that breeds
innovation and improved performance. The process includes personal and practical
skills training, and technical and development training. The Company has applied
for and received matching grants from the State of Indiana for part of this
training effort.
Item 2. PROPERTIES.
The Company owns its properties in Goshen, and Emma, Indiana and leases
the Elkhart properties, as further described below.
Location Size of facility Type of operation
Goshen, Indiana 454,400 Sq. ft. Executive Offices (20,420 sq. ft.);
Manufacturing and Assembly
Emma, Indiana 42,700 Sq. ft. Sewing and Upholstery
Manufacturing
Elkhart, Indiana 110,000 Sq. ft. Offices (20,900 sq. ft.);
(Imperial) Manufacturing and Assembly
Elkhart, Indiana 12,500 Sq. ft. Offices (1,500 sq. ft.)
(Imperial Truck Manufacturing and Assembly
Plant)
McGregor, Texas 60,000 Sq. ft. Offices (10,000 sq. ft.)
(since November 1995) Manufacturing and Assembly
The Goshen and Emma production facilities were constructed in the
1960's. They have been maintained and improved upon from time to time and are
presently in satisfactory condition and sufficient for the Company's current
requirements. The Company also stores chassis on a 37-acre lot it owns near its
Goshen production facility. The Goshen facility produced 45 units per day during
peak production periods in 1996 (and, prior to the reorganization described
below, has estimated capacity to produce approximately 70 units per day). See
"Manufacturing."
The first Elkhart facility, on approximately 17 acres of land, is
leased for five years through February 15, 1998, with two, one-year renewal
options at the Company's discretion. The lease contains an option to purchase
for $3.45 million. Monthly rent is $23,900 and the Company is responsible for
property taxes and building insurance. The second Elkhart facility is leased for
2 years through June 1997. Rent in the first year is $2,500 per month and is
$3,000 per month in the second year. The McGregor facility is leased for one
year with nine, one-year options to renew at the Company's discretion.
In October 1996 the Company finalized its plan to consolidate the
operations of Imperial into Starcraft's manufacturing complex in Goshen,Indiana.
The Goshen facility has been reorganized to allow a production capacity of
Starcraft and Imperial units of 95 units per day on one shift. The plan is
designed to further enhance profitable growth by reducing excess production
capacity, personnel count and fixed overhead expenses. The Company estimates
that a $700,000 pretax restructuring charge in connection with this plant
consolidation will be recorded in the first quarter of fiscal year 1997. The
charge includes employee termination costs, leasehold asset write-offs and the
recognition of contractual lease obligations.
Item 3. LEGAL PROCEEDINGS.
The Company does not anticipate that any pending legal proceeding to
which it is party will have any material adverse effect on its financial
condition or results of operations. The Company is subject to product liability
claims arising from traffic accidents. The Company maintains product liability
insurance which it currently considers adequate.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Starcraft commenced its initial public offering of Common Stock on July
21, 1993. Its Common Stock is quoted on the Nasdaq Stock Market, National
Market, under the symbol "STCR." As of December 27, 1996, there were 87
shareholders of record of Starcraft's Common Stock.
The following table sets forth the high and low bid prices per share of
Common Stock for the periods indicated.
Quarter Ended High Low
- ------------- ---- ---
January 1, 1995 $ 8.500 $6.000
April 2, 1995 9.000 6.875
July 1, 1995 8.000 4.500
October 1, 1995 6.750 5.125
Dec. 31, 1996 6.750 3.875
March 31, 1996 5.375 4.250
June 30, 1996 5.437 3.750
Sept. 29, 1996 5.000 3.750
Source: Media General Financial Services.
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Dividend Policy. The Company has paid no cash dividends since its
initial public offering. The Company currently intends to retain earnings for
use in the operation and expansion of its business and therefore does not
anticipate paying cash dividends on Common Stock in the foreseeable future. The
payment of dividends is within the discretion of the Board of Directors and will
be dependent, among other things, upon earnings, capital requirements, any
financing agreement covenants and the financial condition of the Company.
Stock Repurchase. In March 1995, the Company's Board of Directors
approved the repurchase of up to 500,000 shares of the Company's outstanding
shares of common stock. During 1996 the company repurchased 53,000 common shares
in the open market for $246,000. As of December 27, 1996, 153,000 shares have
been repurchased and additional shares may be acquired during the remainder of
fiscal 1997 if in the opinion of the management the Company's stock continues to
be undervalued by the market.
Anti-Takeover Provisions. Indiana law and the Company's Articles of
Incorporation and Code of By-laws contain provisions that restrict the
acquisition of control of the Company. Such provisions can affect the rights of
shareholders acquiring substantial interests in the Company's shares. For
example, a shareholder who acquires more than 10% of the Company's shares
without prior board approval will be limited in the timing and terms of any
transaction it may enter into with the Company and will be subject to related
provisions. Any shareholder who effects an acquisition after which such
shareholder holds more than 20% of the Company's outstanding shares will have no
voting rights in the shares acquired in such acquisition, unless such rights are
conferred by the disinterested shareholders at the next annual meeting (or
earlier special meeting).
Item 6. SELECTED FINANCIAL DATA.
Year Ended
--------------------------------------------------------------
(dollars in thousands, Sept. 29, Oct. 1, Oct 2, Oct 3, Sept. 27,
except per share data) 1996 1995 1994 1993 1992 (1)
- ---------------------------------------------------------------------------------------
INCOME
STATEMENT
DATA
Net sales:
Domestic $ 73,317 $ 91,652 $ 81,640 $ 75,278 $ 69,284
Export 25,648 21,408 10,734 10,001 7,169
98,965 113,060 92,374 85,279 76,453
Cost of goods sold 83,669 92,692 73,775 68,262 61,101
Gross profit 15,296 20,368 18,599 17,017 15,352
Operating expenses 15,049 15,864 12,505 11,099 9,970
Operating income 247 4,504 6,094 5,918 5,382
Interest (expense) (293) (208) 99 (373) (257)
Other, net 176 214 104 31 100
Income before taxes 130 4,510 6,297 5,576 5,225
Income taxes/pro forma
income taxes(2) 20 1,753 2,517 2,241 2,090
Net income/pro forma
net income $ 110 $ 2,757 $ 3,780 $ 3,335 $ 3,135
Weighted common
shares outstanding 4,142 4,261 4,193 3,512 3,583
Earnings per share $ 0.03 $ 0.65 $ 0.90 $ 0.95 $ 0.87
BALANCE
SHEET
DATA
Working capital $ 8,476 $ 8,693 $ 8,140 $ 9,072 $ 6,822
Total assets 36,524 34,213 32,772 24,590 18,973
Long-term debt 0 323 196 209 5,576
Shareholders' equity 21,552 21,688 19,556 14,866 5,558
Book value per share 5.23 5.20 4.58 3.05 1.57
- ---------
(1) Unaudited information.
(2) For all periods up through July 21, 1993, the Company was an S Corporation
for federal and state income tax purposes and, accordingly, was not subject
to such taxes. The pro forma information has been computed as if the
Company were subject to federal and state income taxes for all periods
presented, based on the tax laws in effect during the respective periods.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
The consolidated statements of income summarize operating results for the
last three years. This section of Management's Discussion highlights the main
factors affecting the changes in operating results during the three-year period.
1996 Versus 1995
NET SALES
Net sales for 1996 were $99.0 million, down 12.5% from 1995. Domestic sales
decreased 20.0% to $73.3 million while export sales increased 19.8% to $25.6
million. Unit sales decreased 4.9% to 16,106 in 1996.
Domestic sales were hampered early in the year by the availability of
General Motors products, primarily attributable to the OEM strike, production
issues on the minivan and the delayed introduction of the newly redesigned
fullsize van. As the Company historically relies heavily on General Motors
products, the Company's unit van shipments declined 12.7% in 1996 compared to
the industry's decline of 6.5% as reported by the Recreational Vehicle Industry
Association. Van conversion sales are being negatively impacted by the growing
popularity of OEM sport utility vehicles ("SUVs"). The Company's shipments of
converted pickup trucks and SUVs increased 11.3% in 1996. International sales in
1996 benefited from the early build of 1997 model minivans for Japan totaling $6
million. Sales to Japan in 1997 are estimated to be $4 million lower as a result
of this early build.
The average conversion price declined 9.3% in 1996 due to a change in
product sales mix toward pickup trucks and SUVs and the percentage increase of
Imperial and Lonestar units which compete primarily in the entry level price
range.
GROSS PROFIT
Gross profit margin for 1996 was 15.5% compared to 18.0% in the prior year.
The 1996 decline is due to the impact of fixed overhead on the lower sales and
approximately $200,000 of project expenses incurred on the start-up of the new
Texas facility.
SELLING AND PROMOTION EXPENSE
Selling and promotion expense for 1996 decreased 11.2% to $8.3 million,
primarily attributable to the reduced sales. Selling and promotion expense as a
percent of sales was 8.4% in 1996 compared to 8.2% in the prior year.
GENERAL AND
ADMINISTRATIVE EXPENSE
General and administrative expense was $6.8 million in 1996, a 3.4%
increase from 1995. The increase is due to approximately $360,000 of expenses to
start-up the new Texas facility, offset by the successful implementation of
several expense-containment strategies including personnel reductions.
INCOME TAX EXPENSE
The effective tax rate on income for 1996 was 15.4% compared to 38.9% in
the prior year. The effective rate in 1996 benefited from the implementation of
a foreign sales corporation subsidiary.
- ------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 to 1996
1996 1995 Change
- ------------------------------------------------------------------------------------------------
Net sales $ 98,965 100.0% $113,060 100.0% (12.5%)
Cost of gods sold 83,669 84.5% 92,692 82.0% (9.7%)
--------- --- --------- --- ----
Gross profit 15,296 15.5% 20,368 18.0% (24.9%)
Selling and promotion expense 8,252 8.4% 9,292 8.2% (11.2%)
General and administrative expense 6,797 6.9% 6,572 5.8% 3.4%
--------- --- --------- --- ----
Operating income 247 0.2% 4,504 4.0% (94.5%)
Interest expense (293) (0.3%) (208) (0.2%) 40.9%
Other income, net 176 0.2% 214 0.2% (17.8%)
--------- --- --------- --- ----
Income before taxes 130 0.1% 4,510 4.0% (97.1%)
Income taxes 20 0.0% 1,753 1.6% (98.9%)
--------- --- --------- --- ----
NET INCOME $ 110 0.1% $ 2,757 2.4% (96.0%)
========= === ========= === ====
1995 VERSUS 1994
NET SALES
The Company's net sales for 1995 increased by 22.4% to $113.1 million from
$92.4 million in the prior year. Unit shipments increased to 16,940 in 1995 from
13,000 in 1994. This sales improvement was attributable to the Imperial
Automotive Group ("Imperial Group") acquisition, which added $20.2 million in
sales on 5,230 incremental unit shipments and additional export sales of $10.7
million on 870 incremental units, offset by an $11.0 million sales decline on
2,160 less units in Starcraft Automotive Group's ("Starcraft Group") domestic
business.
The Company's average conversion price decreased 6.3% reflecting the impact
of the Imperial Group acquisition, which competes in a more price-sensitive
segment of the market. This decline was partially offset by the increased export
sales, which carried a higher average conversion price. Starcraft Group's
average conversion price in 1995 was $8,500 compared to $3,700 for Imperial
Group.
Industry domestic conversion shipments declined 12.3% in 1995 as reported
by the Recreational Vehicle Industry Association. The industry decline in
conjunction with Starcraft Group dealers reducing inventory levels by 34.0%
during 1995 resulted in a decrease of 22.5% in Starcraft Group's domestic unit
sales volume. The Company believes General Motors dealers reduced inventory
levels primarily in anticipation of the 1996 introduction of the newly designed
GMT 600 fullsize van chassis. The retail sales of Starcraft Group units from
domestic dealers to consumers declined 3.7% in 1995.
GROSS PROFIT
Gross profit for 1995 increased by 9.5% to $20.4 million from $18.6 million
in the prior year. Gross profit as a percentage of net sales was 18.0% for 1995
compared to 20.1% for 1994.
The decrease in margin rate was the result of the increased sales from
Imperial Group, which carries a lower margin rate. Additionally, Imperial
Group's costs to move to a new facility reduced the margin rate by 0.4% of net
sales.
SELLING AND
PROMOTION EXPENSE
Selling and promotion expense as a percentage of net sales increased to
8.2% in 1995 from 8.0% in the prior year. Starcraft Group's advertising expense
increased 0.2% of net sales due to additional direct mail programs and
sponsorships.
GENERAL AND
ADMINISTRATIVE EXPENSE
General and administrative expense for 1995 increased to $6.6 million from
$5.1 million in the prior year primarily due to the Imperial Group acquisition.
As a percentage of net sales, such expenses increased to 5.8% from 5.5% in the
prior year due to increased insurance and legal costs.
INTEREST
Net interest expense for 1995 was $208,000 compared to $99,000 in net
interest income for 1994. The increase in expense is primarily due to interest
incurred on additional borrowings incurred to pay the purchase price of the
Imperial Group acquisition.
INCOME TAX EXPENSE
The effective income tax rate for 1995 was 38.9% compared to 39.9% for
1994. The decrease is primarily attributable to a change in federal and state
permanent timing differences.
- ------------------------------------------------------------------------------------------------
(dollars in thousands) 1994 to 1995
1995 1994 Change
- ------------------------------------------------------------------------------------------------
Net sales $ 113,060 100.0% $92,374 100.0% 22.4%
Cost of gods sold 92,692 82.0% 73,775 79.9% 25.6%
--------- ----- ------- ----- ----
Gross profit 20,368 18.0% 18,599 20.1% 9.5%
Selling and promotion expense 9,292 8.2% 7,393 8.0% 25.7%
General and administrative expense 6,572 5.8% 5,112 5.5% 28.6%
--------- ----- ------- ----- ----
Operating income 4,504 4.0% 6,094 6.6% (26.1%)
Interest (expense) income (208) (0.2%) 99 0.1% ---
Other income, net 214 0.2% 104 0.1% 105.8%
--------- ----- ------- ----- ----
Income before taxes 4,510 4.0% 6,297 6.8% (28.4%)
Income taxes 1,753 1.6% 2,517 2.7% (30.4%)
--------- ----- ------- ----- ----
NET INCOME $ 2,757 2.4% $3,780 4.1% (27.1%)
========= ===== ======= ===== ====
SEASONALITY AND TRENDS
The Company's sales and profits are dependent on the automotive markets in
the United States and Japan and the OEM's ability to supply chassis. Although
the Company currently does not face such issues, during 1996 the Company's sales
were adversely impacted by chassis availability from the OEMs. The business
tends to be seasonal with stronger sales in March through July and is influenced
by a number of factors including atypical weather for any sales region and OEM
programs affecting the price, supply and delivery of vehicle chassis. General
Motors' chassis represented 72% of the Company's total unit shipments in 1996.
The Company's retail dealers had approximately 5,300 units on hand at the
end of 1996 compared to 5,600 at the end of the prior year. Both these levels
remain significantly lower than the 1994 level of 7,200. The lower levels appear
to be the result of dealer caution in stocking the newly redesigned General
Motors fullsize van and the trend of dealers to stock more SUVs.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided cash of $1.9 million compared to $1.1 million
in the prior year. This improvement came principally from a favorable change in
working capital. Receivables increased $2.8 million due to the increase in
international receivables which carry longer payment terms. The increase in
accounts payable of $2.9 million in 1996 is attributable to the ramp up of
production in September 1996 for the increased international business and
improved vendor payment terms. Operating cashflows were applied primarily to
fund capital expenditures, repurchase the Company's Common Stock and reduce
outstanding indebtedness.
At the end of 1996 long-term debt was zero. The Company maintains a $15
million bank revolving credit line. In addition to the availability of bank
financing, the Company has restricted sales agreements with General Motors
Acceptance Corporation, Chrysler Financial Corporation and Ford Motor Credit
Company. Pursuant to these agreements, the Company obtains vehicle chassis from
the OEMs for 90 days at nominal rates. If the Company fails to match a chassis
with a dealer order within 90 days after delivery of the chassis to the Company,
carrying charges increase to prime rate plus 1%.
In 1995 the Board of Directors approved the repurchase of up to 500,000
shares of the Company's outstanding shares of Common Stock. During 1996 the
Company repurchased 53,000 common shares in the open market for $246,000. As of
December 27, 1996, 153,000 common shares have been repurchased under this
program. Additional shares may be acquired in 1997 if, in the opinion of
management, the Company's stock continues to be undervalued by the market.
In October 1996, the Company finalized its plan to consolidate the
operations of the Imperial Automotive Group manufacturing operation, located in
Elkhart, Indiana, into Starcraft Automotive Group's manufacturing complex in
Goshen, Indiana, during December 1996. This plan is designed to enhance
profitable growth by reducing excess production capacity, personnel count and
fixed overhead expenses. The Company estimates that a $700,000 pretax
restructuring charge in connection with this plant consolidation will be
recorded in the first quarter of 1997. The charge includes employee termination
costs, leasehold asset write-offs and the recognition of contractual lease
obligations.
The Company believes that cash flows from operations, funds available under
its bank revolving credit agreement, and the continued use of OEM financing
arrangements to manage its chassis inventory will be sufficient to satisfy its
anticipated operating needs and capital improvements for 1997.
DISCUSSION OF FORWARD-LOOKING INFORMATION
From time to time, Starcraft may make oral or written forward-looking
statements regarding its anticipated sales, costs, expenses, earnings and
matters affecting its condition and operations. Such forward-looking statements
are subject to a number of material factors which could cause the statements or
projections contained therein to be materially inaccurate. Such factors include,
without limitation, the following:
General Operating Contingencies. The Company may not be able to attract and
retain sufficient employees with sufficient skills to conduct its operations
efficiently and may from time to time be subject to work slow-downs or
stoppages. The Company may be adversely affected by delay or unavailability of
supply of numerous component parts. The Company will not always be able to
satisfy its capital requirements with internally generated funds and may, from
time to time, need to rely on bank financing and other third party capital
resources. There is no assurance that such resources will always be available to
the Company or as to the terms that will apply to any financing.
Acquisitions. The Company expects to be engaged in negotiations from time
to time regarding prospective acquisitions of van conversion or other
businesses. Such acquisitions could be material to the Company and, if effected,
could have
a material effect on the Company's financial condition or results of operations.
There is no assurance as to when or whether the Company will be able to effect
acquisitions, whether it will be able to generate requisite funding to effect
such acquisitions, or as to the terms on which such acquisitions may be
effected.
Economic Conditions. The van conversion industry is cyclical and is
affected by the general trends of the economy and consumer preferences and
consumer confidence and trends of the automotive and recreational vehicle
industries. The level of disposable consumer income affects the Company's sales
because its products are generally considered discretionary expenditures by
consumers. In difficult economic times, consumers tend to spend less of their
income on discretionary items. Other economic factors affecting the demand for
the Company's products include the availability and price of gasoline, the level
of interest rates and the availability of consumer financing. Reduced gasoline
availability could adversely affect the demand for the Company's products. A
significant increase in the price of gasoline could reduce demand for the
Company's products because it would increase the cost of operating these
products. Because many consumers finance their purchase of vehicle conversions,
the availability of financing and level of interest rates can affect a
consumer's purchasing decision. A decline in general economic conditions or
consumer confidence can be expected to affect Starcraft's sales adversely.
Supply and Financing of Vehicle Chassis. The Company is dependent upon the
OEMs to supply its requirements for vehicle chassis. Labor stoppages, supply
shortages and a variety of other factors that influence OEM production can
affect the availability or timely delivery of vehicle chassis to the Company.
The impact of these factors was significant in 1996. If vehicle chassis are
unavailable, or if the Company must accept delivery earlier or later than it
otherwise would prefer, sales could be adversely affected and financing expenses
could increase. The Company must also comply with its consignment and restricted
sale contracts with the OEMs pursuant to which the OEMs impose certain
specifications for the Company's vehicle conversions, including gross vehicle
weight standards. Such contracts also restrict the Company's ability to dispose
of completed chassis and prohibit the transfer of chassis to unauthorized U.S.
and foreign dealers. All of the Company's consignment and restricted sale
contracts with chassis suppliers are terminable by either party on short notice
without cause. The availability of the OEM financing rates is dependent upon the
Company's compliance with its OEM contracts and its ability to maintain
satisfactory credit relationships with the OEM's finance subsidiaries. Adverse
changes in the Company's financial condition or results of operations could
cause such financing subsidiaries to seek to change adversely the Company's
financing terms or to terminate such financing arrangements. Such a change or
termination could have a material adverse effect on the Company's financial
condition and results of operations.
Regulation. The Company is subject to various foreign, federal, state and
local regulations. In particular, conversion components produced by the Company
are required to comply with Federal Motor Vehicle Safety Standards and similar
safety standards imposed in its foreign markets. Promulgation of additional
safety standards in the future could require the Company to incur additional
testing and engineering expenses which could adversely affect the Company's
results of operations. The Company's international sales can be adversely
affected by changes in foreign import tariffs and taxes and fluctuations in
exchange rates. The Company must comply with certain Federal and state
regulations relating to the disposition of hazardous wastes generated in its
production processes. The Company's failure to comply with applicable
regulations or changes in current regulations, including the adoption of new
safety or environmental standards, could have material adverse effect on the
Company's results of operations.
Competition. The United States vehicle conversion industry is very
competitive with several principal nationwide manufacturers and numerous local
and regional competitors. There is no assurance the Company will be able to
maintain its current competitive position in the vehicle conversion market or
that it will be able to expand its sales of custom truck and SUV conversions.
Potential Product Liability. Like other automotive manufacturers, the
Company may be subject to claims that its products caused or contributed to
damage or injury sustained in vehicle accidents, "lemon law" claims or may be
required to recall products deemed unsafe. Any such claims in excess of the
Company's insurance coverage or material product recall expenses could adversely
affect the Company's financial condition and results of operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Starcraft Corporation
We have audited the accompanying consolidated balance sheet of
Starcraft Corporation and Subsidiaries as of September 29, 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of Starcraft Corporation and Subsidiaries as of October 1,
1995 and for each of the two years in the period then ended were audited by
other auditors whose report dated November 3, 1995 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Starcraft Corporation and Subsidiaries as of September 29, 1996 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 7, 1996
Fort Wayne, Indiana
[Logo]
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Starcraft Corporation
Goshen, Indiana
We have audited the accompanying consolidated balance sheet of Starcraft
Corporation and Subsidiaries as of October 1, 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for the periods ended
October 1, 1995, and October 2, 1994. These consolidated financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Starcraft
Corporation and Subsidiaries as of October 1, 1995, and the results of their
operations and their cash flows for the periods ended October 1, 1995 and
October 2, 1994, in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Elkhart, Indiana
November 3, 1995
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS:
September 29, October 1,
(in thousands, except share data) 1996 1995
------------- ----------
Cash and cash equivalents $ 1,366 $ 1,255
Trade receivables, less allowance for
doubtful accounts: (1996 - $51; 1995 - $57) 9,165 6,045
Manufacturers rebates receivable 1,079 1,389
Inventories 11,508 11,713
Other 330 493
------- -------
Total current assets 23,448 20,895
PROPERTY AND EQUIPMENT:
Land, buildings, and improvements 6,033 5,702
Machinery and equipment 4,430 3,871
------- -------
10,463 9,573
Less accumulated depreciation 2,697 1,898
------- -------
7,766 7,675
GOODWILL, at amortized cost 5,140 5,365
------- -------
OTHER ASSETS 170 278
$36,524 $34,213
======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 9,330 $ 6,383
Accrued expenses:
Warranty 1,600 1,785
Compensation and related expenses 882 1,143
Taxes 1,280 929
Other 1,557 1,352
Current portion of long-term debt: 323 610
------- -------
Total current liabilities 14,972 12,202
LONG-TERM DEBT, less current portion -- 323
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 2,000,000 shares authorized but unissued -- --
Common stock, no par value: Authorized shares - 10,000,000 shares
Issued and outstanding shares 1996 - 4,118,600; 1995 - 4,171,600 13,971 14,104
Additional paid-in capital 1,008 1,008
Retained earnings 6,573 6,576
------- -------
21,552 21,688
------- -------
$36,524 $34,213
======= =======
Consolidated Statements of Income
Year Ended
------------------------------------------------------
September 29, October 1, October 2,
(in thousands, except share data) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
NET SALES
Domestic $ 73,317 $ 91,652 $ 81,640
Export 25,648 21,408 10,734
--------- --------- ---------
98,965 113,060 92,374
COST OF GOODS SOLD 83,669 92,692 73,775
--------- --------- ---------
Gross profit 15,296 20,368 18,599
OPERATING EXPENSES
Selling and promotion 8,252 9,292 7,393
General and administrative 6,797 6,572 5,112
--------- --------- ---------
15,049 15,864 12,505
--------- --------- ---------
Operating income 247 4,504 6,094
NON-OPERATING (EXPENSE) INCOME:
Interest, net (293) (208) 99
Other income, net 176 214 104
--------- --------- ---------
(117) 6 203
--------- --------- ---------
Income before income taxes 130 4,510 6,297
FEDERAL AND STATE INCOME TAXES 20 1,753 2,517
--------- --------- ---------
Net Income $ 110 $ 2,757 $ 3,780
========= ========= =========
EARNINGS PER COMMON
AND COMMMON EQUIVALENT SHARE $ 0.03 $ 0.65 $ 0.90
========= ========= =========
AVERAGE NUMBER OF COMMON
AND COMMMON EQUIVALENT SHARES OUTSTANDING 4,142,402 4,260,915 4,193,003
========= ========= =========
Consolidated Statements of Cash Flows
Year Ended
--------------------------------------------------
September 29, October 1, October 2,
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 110 $ 2,757 $ 3,780
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,087 1,006 613
Other 51 93 60
Change in operating assets and liabilities
Receivables (2,810) (229) (1,013)
Inventories 205 (1,346) 2,457
Other 163 176 53
Accounts payable 2,947 (696) 126
Accrued expenses 110 (703) 863
------- ------- -------
Net cash provided by operating activities 1,863 1,058 6,939
INVESTING ACTIVITIES
Purchase of property and equipment (932) (1,630) (1,451)
Purchase of assets of Imperial Industries, Inc. -- -- (3,900)
Other 36 45 (146)
------- ------- -------
Net cash used in investing activities (896) (1,585) (5,497)
FINANCING ACTIVITIES
Proceeds from revolving credit agreement 7,800 5,100 700
Payments on revolving credit agreement (7,800) (5,100) (700)
Payments on long-term debt (610) (512) (466)
Repurchase of common stock (246) (625) --
------- ------- -------
Net cash used in financing activities (856) (1,137) (466)
------- ------- -------
Net increase (decrease)
in cash and cash equivalents 111 (1,664) 976
Cash and cash equivalents at beginning of year 1,255 2,919 1,943
------- ------- -------
Cash and cash equivalents at end of year $ 1,366 $ 1,255 $ 2,919
======= ======= =======
Supplemental information:
Interest paid $ 304 $ 222 $ 15
Income taxes paid $ 60 $ 2,205 $ 2,484
Consolidated Statements of Shareholders Equity
Common Additional Retained Common Stock Total
(in thousands, except share data) Stock Paid-In Capital Earnings Repurchased
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, October 3, 1993 $ 13,932 $ 4,608 $ 326 $ (4,000) $ 14,866
Net income -- -- 3,780 -- 3,780
Issuance of 130,000
shares of common stock 910 -- -- -- 910
Retirement of 738,400
shares of repurchased
common stock (400) (3,600) -- 4,000 --
-------- -------- -------- ----- --------
BALANCE, October 2, 1994 14,442 1,008 4,106 -- 19,556
Net income -- -- 2,757 -- 2,757
Repurchase and retirement
of 100,000 shares
of common stock (338) -- (287) -- (625)
-------- -------- -------- --- --------
BALANCE, October 1, 1995 14,104 1,008 6,576 -- 21,688
Net income -- -- 110 -- 110
Repurchase and retirement
of 53,000 shares
of common stock (133) -- (113) -- (246)
-------- -------- -------- --- --------
BALANCE, September 29, 1996 $ 13,971 $ 1,008 $ 6,573 $- $ 21,552
======== ======== ======== === ========
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Nature of Business and Principles of Consolidation
Starcraft Corporation and Subsidiaries (Company) are second-stage
manufacturers of custom van, pickup truck, and sport utility vehicle
conversions. The consolidated financial statements include the accounts of
Starcraft Corporation and its wholly owned subsidiaries: Starcraft Automotive
Group, Inc., Imperial Automotive Group, Inc. and Starcraft Southwest, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company's customers operate in the automotive industry. The Company
sells conversion units throughout the United States, and export sales are
principally to locations in Japan, Korea, and northern Europe. Credit is
extended to customers based on an evaluation of the customer's financial
condition, and when credit is extended collateral is generally not required.
Sales to the Company's largest customer for the years ended September 29, 1996,
October 1, 1995, and October 2, 1994 were $18,526,000, $15,185,000 and
$5,009,000, respectively.
Significant Accounting Policies
Cash Equivalents
Cash equivalents include all highly-liquid investments with a maturity of
three months or less.
The Company maintains deposits in one or more financial institutions which,
at times, may be in excess of FDIC insurance limits.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for certain inventories ($8,408,000 at
September 29, 1996) and by the first-in, first-out (FIFO) method for all other
inventories ($3,100,000 at September 29, 1996).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets. The Company is depreciating buildings over a period of 50 years,
building improvements over periods of 5 to 20 years, and equipment over periods
of 3 to 12 years.
Goodwill
Goodwill is amortized by the straight-line method over a period of 25 years
and is stated net of accumulated amortization of $482,000 and $257,000 at
September 29, 1996 and October 1, 1995, respectively.
Warranties
The Company follows the policy of accruing an estimated liability for
warranties at the time the warranted products are sold.
Revenue Recognition
The Company generally manufactures products based on specific orders from
customers. Shipments are generally made by common carrier after receiving
authorization from the customer, and revenue is generally recognized upon
shipment. Net sales do not include the cost of chassis (see Note 7).
Stock Based Compensation
The Company periodically grants stock options for a fixed number of shares
to employees. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting Changes
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," which required impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company's long-lived
assets are assessed for potential impairment whenever existing facts and
circumstances indicate the carrying value of those assets may not be
recoverable. The adoption of SFAS 121 in fiscal 1996 had no effect on the
Company's financial statements.
Seasonality
The Company's business is seasonal. Sales are generally higher during the
spring and summer months of the year.
Fiscal Year
The Company's fiscal year ends on the Sunday closest to September 30. The
years ended September 29, 1996, October 1, 1995, and October 2, 1994 each
contain 52 weeks.
2. Inventories
The composition of inventories at September 29, 1996 and October 1, 1995 is as
follows:
(in thousands) 1996 1995
- -------------------------------------------------------
Raw materials $ 7,126 $ 6,808
Work-in-process 1,786 2,340
Finished goods 2,596 2,565
--------- --------
$ 11,508 $ 11,713
========= ========
The use of the LIFO method of determining the cost of inventories did not
have a material effect on inventories at September 29, 1996 and October 1, 1995
or net income for the years then ended.
3. Debt Arrangements
The Company has a bank line of credit totaling $15 million, none of which
was outstanding at September 29, 1996. Borrowings under this line of credit bear
interest at the prime rate of the lending bank (8.25% at September 29, 1996), or
at the Company's option, LIBOR plus 1.25%, and are unsecured. This facility
expires in January 1998.
At September 29, 1996, the Company has a note payable to Imperial
Industries, Inc. for $323,000 resulting from additional consideration paid as
part of the acquisition of its assets (see Note 6). The note is due in monthly
installments of $55,178 including interest at 8% with the final installment due
March 1997.
Interest expense for the years ended September 29, 1996, October 1, 1995,
and October 2, 1994, was approximately $305,000, $224,000, and $15,000,
respectively.
4. Income Taxes
Federal and state income taxes, all of which were domestic, consist of the
following:
Year Ended Sept. 29, Oct. 1, Oct. 2,
(in thousands) 1996 1995 1994
- -----------------------------------------------------------
Current:
Federal $ (103) $ 1,272 $ 2,011
State 55 378 457
------- ------- -------
(48) 1,650 2,468
Deferred:
Federal 54 83 41
State 14 20 8
------- ------- -------
68 103 49
------- ------- -------
$ 20 $ 1,753 $ 2,517
======= ======= =======
The provisions for income taxes are different from amounts that would otherwise
be computed by applying a federal statutory rate of 34% to income taxes. A
reconciliation of the differences is as follows:
Year Ended Sept. 29, Oct. 1, Oct. 2,
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------
Rate applied to
pre-tax income $ 44 $ 1,533 $ 2,141
State taxes, net of
federal benefit 46 182 372
Foreign sales
corporation (205) -- --
Other, net 135 38 4
------- ------- -------
$ 20 $ 1,753 $ 2,517
======= ======= =======
The composition of the deferred tax assets and liabilities at September 29,
1996 and October 1, 1995 is as follows:
(in thousands) 1996 1995
- -----------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $(330) $(247)
Inventory basis difference (64) (127)
Other (84) (59)
----- -----
(478) (433)
Deferred tax assets:
Nondeductible accruals:
Warranty 378 450
Other 175 126
----- -----
553 576
----- -----
Net deferred tax assets $ 75 $ 143
===== =====
5. Compensation Plans
The Company sponsors a qualified profit-sharing plan, more commonly known
as a 401(k) plan, for all of its employees with over six months of service. The
plan provides for a matching contribution by the Company of the employee's
salary deduction, up to 6% of compensation. In addition, the plan provides for a
discretionary contribution annually as determined by the Board of Directors. The
amounts charged to expense for the years ended September 29, 1996, October 1,
1995, and October 2, 1994 for this plan were approximately $107,000, $470,000,
and $364,000, respectively.
The Company sponsors a qualified stock option plan with 380,000 shares of
common stock reserved for options to key employees and directors. Under the
plan, options may not be granted at prices below 85% of the current market value
of the stock at the date of the grant. All options awarded through September 29,
1996 have been at fair market value on the date of grant. For the year ended
September 29, 1996, the effect of the stock options in computing earnings per
common share was antidilutive.
The following is a summary of transactions of shares under option for the years
ended September 29, 1996, October 1, 1995, and October 2, 1994.
Year Ended
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Outstanding, beginning
of year 311,850 241,350 166,850
Granted during
the year 171,000 167,000 79,500
Canceled during
the year (113,001) (96,500) (5,000)
-------- ------- ------
Outstanding,
end of year 369,849 311,850 241,350
======= ======= =======
Eligible, end of
year for exercise
currently (between
$3.875 and $10
per share) 354,349 248,076 118,105
======= ======= =======
The Company sponsors a qualified stock option plan with 40,000 shares of
common stock reserved for options to certain sales representatives who are not
employees of the Company. Under this plan, options may not be granted at prices
below 85% of the current market value of the stock at the date of grant. All
options awarded through September 29, 1996 have been at fair market value on the
date of grant. There were 5,500 options outstanding as of September 29, 1996.
For the year ended September 29, 1996, the effect of the stock options in
computing earnings per common share was antidilutive.
6. Business Combination
On July 3, 1994, the Company acquired the assets and assumed certain
liabilities of Imperial Industries, Inc. (Imperial), a manufacturer of van
conversions. The purchase price of the acquired assets was $3,900,000 in cash
and 130,000 shares of the Company's common stock with a value of $910,000.
Based upon Imperial achieving certain pre-tax net profits for the calendar
year 1994, the Company was required to pay additional consideration of $1.22
million in the form of a 24 month note (see Note 3). This consideration was
recorded as an addition to goodwill in 1995.
Unaudited pro forma consolidated results of operations for the year ended
October 2, 1994 as though the acquisition of Imperial had occurred as of October
3, 1993 are as follows (in thousands, except per share data):
Net sales $ 109,582
Net income 4,504
Earnings per common and
common equivalent share 1.07
The above pro forma results of operations reflect adjustments for
amortization of goodwill, imputed interest on borrowed funds, and income taxes.
The pro forma amounts do not purport to be indicative of what would have
occurred had the acquisition been made as of October 1, 1993 or of results which
may occur in the future.
7. Consignment Arrangements
The Company obtains vehicle chassis for modification from major vehicle
manufacturers (OEMs) under consignment and restricted sales agreements. These
agreements generally provide that (i) the Company may not obtain certificates of
origin or other evidence of ownership of chassis, (ii) modification must conform
to standards specified by OEMs, and (iii) modifications generally are performed
only after a sale has been negotiated with an OEM approved dealer. The Company
generally ships converted chassis only after dealer acceptance has been approved
by the OEM. The OEMs bill the dealer and provide warranty for the chassis.
The agreements are secured by various credit arrangements with the OEMs.
The OEMs may require the Company to purchase chassis in the event that the
restricted sales agreements are terminated. Chassis purchases required by the
terms of these arrangements were not material during the periods covered by the
accompanying financial statements. The Company pays the OEMs a nominal carrying
charge for the first 90 days that it possesses a chassis. After 90 days, the
carrying charges accelerate to approximate market interest rates. Throughout the
consignment period, the Company is subject to the risk of decline in value of
consigned chassis.
Consistent with the practice in their industry, the Company accounts for
chassis as consignment inventory. Accordingly, the Company records chassis
inventory and related obligations only in the event they are required to
purchase chassis from the OEM. Provisions for decline in chassis value are
recognized when, in management's estimation, such provisions are necessary.
Provisions for decline in chassis value, chassis inventory and chassis sales are
not material to the accompanying financial statements.
At September 29, 1996, the Company has possession of chassis in the
aggregate amount of $45,167,000 (of which $4,615,000 related to chassis on
consignment for periods exceeding 90 days) and has total chassis line
availability between $73.7 million and $83.9 million based on the time of year.
Carrying charges on consignment chassis, which are presented in cost of goods
sold, for the years September 29, 1996, October 1, 1995, and October 2, 1994
were approximately $1,729,000, $2,046,000, and $795,000, respectively. The OEMs
have also instituted incentive rebates to second-stage manufacturers based on
the number of chassis delivered to dealers. Those incentives reduced cost of
goods sold by approximately $1,135,000, $1,415,000, and $1,075,000 in 1996,
1995, and 1994, respectively.
8. Research and Development
The Company incurs costs to improve the appeal and safety of its products.
Research and development costs are charged to operations when incurred. Amounts
charged to operations for the years ended September 29, 1996, October 1, 1995,
and October 2, 1994 were approximately $893,000, $726,000, and $792,000,
respectively.
9. Commitments
The Company leases certain of its facilities and equipment. The total
rental expense for the years ended September 29, 1996, October 1, 1995, and
October 2, 1994 is $490,000, $295,000, and $50,000, respectively. Rental
commitments at September 29, 1996 for long-term noncancelable operating leases
are as follows:
1997 $386,000
1998 135,000
1999 14,000
2000 6,000
2001 5,000
--------
$546,000
========
10. Unaudited Interim Financial Information
Presented below is certain unaudited quarterly financial information for
the years ended September 29, 1996 and October 1, 1995.
(in thousands, except share data)
Quarter Ended
- --------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 29,
1995 1996 1996 1996
- --------------------------------------------------------------------------
Net sales $ 15,658 $ 23,063 $ 31,507 $ 28,737
Gross profit 1,538 1,717 6,276 5,765
Net income
(loss) (1,142) (1,229) 1,414 1,067
Earnings (loss)
per common
share (.27) (.30) .34 .26
Quarter Ended
- --------------------------------------------------------------------------
Jan. 1, April 2, July 2, Oct. 1,
1995 1995 1995 1995
- --------------------------------------------------------------------------
Net sales $25,558 $31,759 $30,973 $24,770
Gross profit 4,443 5,105 6,473 4,347
Net income 352 848 1,402 155
Earnings
per common
share .08 .20 .33 .04
11. Subsequent Event
In October 1996, the Company finalized its plan to consolidate the
operations of the Imperial Automotive Group manufacturing operation, located in
Elkhart, Indiana, into Starcraft Automotive Group's manufacturing complex in
Goshen, Indiana during December 1996. The Company estimates that a $700,000
pre-tax restructuring charge in connection with this plant consolidation will be
recorded in the first quarter of fiscal 1997.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Previously reported in the Registrant's Form 10-K for the fiscal year
ending October 1, 1995.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Registrant's proxy statement to be
filed with the Securities and Exchange Commission on or before January 27, 1997.
Item 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Registrant's proxy statement to be
filed with the Securities and Exchange Commission on or before January 27, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Registrant's proxy statement to be
filed with the Securities and Exchange Commission on or before January 27, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Registrant's proxy statement to be
filed with the Securities and Exchange Commission on or before January 27, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) List the following documents filed as a part of the report:
Financial Statements (as of and for the fiscal periods ended September 29, 1996,
October 1, 1995 and October 2, 1994):
Balance Sheets
Statements of Income
Statements of Cash Flows
Statements of Shareholders' Equity
Notes to Financial Statements
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ending
September 29, 1996.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index beginning on page E-1.
(d) The following financial statement schedule is filed as a part of this
report:
(i) Valuation and Qualifying Accounts and Reserves.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
have been omitted.
STARCRAFT CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Deductions from
Beginning of Charged to Additions to Balance at Close
Period Operations Reserves(a) of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
- -deducted from accounts receivable,
trade, in the consolidated balance sheets:
52 weeks ended September 29, 1996 $ 57 $ -- $ (6) $ 51
52 weeks ended October 1, 1995 $ 60 $ -- $ (3) $ 57
52 weeks ended October 2, 1994 $ 41 $ -- $ 19 (b) $ 60
- ------------
(a) Write-off of bad debts, less recoveries.
(b) Includes $20 acquired as part of acquisition of assets of Imperial
Industries, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
STARCRAFT CORPORATION
DATE: December 27, 1996 By: /s/ Kelly L. Rose
--------------------------
Kelly L. Rose,
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 27th day of December,
1996:
1) Principal Executive Officer:
By: /s/ Kelly L. Rose Chairman, Chief Executive Officer
----------------------
Kelly L. Rose
(2) Principal Financial/Accounting Officer:
By: /s/ Michael H. Schoeffler President, Chief
---------------------- Financial Officer, Treasurer,
Michael H. Schoeffler Secretary
(3) The Board of Directors:
By: /s/ Kelly L. Rose Director
----------------------
Kelly L. Rose
By: /s/ Frank K. Martin Director
----------------------
Frank K. Martin
By: /s/ L. Craig Fulmer Director
----------------------
L. Craig Fulmer
By: /s/ David J. Matteson Director
----------------------
David J. Matteson
By: /s/ Allen H. Neuharth Director
----------------------
Allen H. Neuharth
EXHIBIT INDEX
Reference to Sequential
Regulation S-K Page
Exhibit Number Document Number
2.1 Asset Purchase and Sale Agreement between Imperial
Industries, Inc. and the Registrant, dated June 2, 1994.
Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K, as amended, filed with the
Securities Exchange Commission on July 20, 1994. *
3.1 Registrant's Articles of Incorporation, as amended.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Form 10-K for the year ending October 1,
1995. *
3.2 Registrant's Code of By-Laws, as amended. [ ]
3.3 Form of Share Certificate. **
4.1 Article 6 - "Terms of Shares" and Article 9 -
"Provisions for Certain Business Combinations" of the
Registrant's Articles of Incorporation, as amended.
4.2 Article III - "Shareholder Meetings", Article VI -
"Certificates for Shares" and Article VII - "Corporate
Books and Records - Section 3" of the Registrant's Code
of By-Laws, as amended.
4.3 Amended and Restated Credit Agreement between the
Registrant and Bank One Indianapolis, N.A., dated
November 30, 1994. Incorporated by reference to Exhibit
4.6 for the fiscal year ending October 2, 1994. *
4.4 First Amendment to Amended and Restated Credit Agreement
between the Registrant and Bank One, Indianapolis, N.A.
dated March 7, 1995. Incorporated by reference to
Exhibit 10(2) to the Registrant's Form 10-Q for the
quarter ending April 2, 1995. *
10.1(a) The Starcraft Automotive Corporation Stock Incentive Plan. **
10.1(b) The Starcraft Corporation 1997 Stock Incentive Plan. [ ]
10.2 Form of Tax indemnification agreement among the
Registrant, Mr. Kash, Mr. Rose, Mr. Newberry and Mr.
Hardin, dated as of July 21, 1993. Incorporated by
reference to Exhibit 10.7 of the Registrant's
registration statement on Form S-1, Reg. No. 33- 63760. *
10.3(a) Employment Agreement with Kelly L. Rose dated June 2,
1993. Incorporated by reference to Exhibit 10.10(a) of
the Registrant's Form S-1. **
10.3(b) Employment Agreement with Kelly L. Rose dated December
12, 1996. [ ]
10.3(c) Consulting Agreement with Allen H. Neuharth dated
September 15, 1993. Incorporated by reference to Exhibit
10.3(k) of the Registrant's Form 10-K for the fiscal
year ending October 2, 1994. *
10.3(d) Employment Agreement between the Registrant and Michael
H. Schoeffler dated January 16, 1995. Incorporated by
reference to Exhibit 10.3(m) of the Registrant's Form
10-K for the year ending October 1, 1995. *
10.3(e) Employment Agreement between the Registrant and Michael
H. Schoeffler dated December 12, 1996. [ ]
10.4 Inventory Loan and Security Agreement by and between the
Registrant and General Motors Acceptance Corporation, as
amended. Incorporated by reference to Exhibit 10.13 of
the Registrant's Form S-1. **
10.5 Agreement by and between the Registrant and General
Motors Acceptance Corporation dated February 7, 1991.
Incorporated by reference to Exhibit 10.14 of the
Registrant's Form S-1. **
10.6 Intercreditor Agreement between General Motors
Acceptance Corporation and Bank One, Indianapolis, N.A.
dated July 21, 1992. Incorporated by reference to
Exhibit 10.16 of the Registrant's Form S-1. **
10.7 Authorized Converter Pool Agreement between the
Registrant and Ford Motor Company dated May 7, 1991 and
amended May 7, 1991. Incorporated by reference to
Exhibit 10.17 of the Registrant's Form S-1. **
10.8 Wholesale Financing and Security Agreement between the
Registrant and Ford Motor Credit Company dated April 17,
1991. Incorporated by reference to Exhibit 10.18 of the
Registrant's Form S-1. **
10.9 Intercreditor Agreement between Ford Motor Credit
Company and Bank One, Indianapolis, N.A. dated July 17,
1992. Incorporated by reference to Exhibit 10.20 of the
Registrant's Form S-1. **
10.10 Truck Consignment Agreement between the Registrant and
Chrysler Corporation dated August 29, 1991. Incorporated
by reference to Exhibit 10.21 of the Registrant's Form
S-1. **
10.11 License Agreement by and between the Registrant and
AlliedSignal, Inc. dated February 18, 1993. Incorporated
by reference to Exhibit 10.22 of the Registrant's Form
S-1. **
10.12 Agent Agreement by and between the Registrant, Mitsui &
Co. (U.S.A.), Inc. and Mitsui & Co., Ltd. dated March 1,
1993. Incorporated by reference to Exhibit 10.23 of the
Registrant's Form S-1. **
10.13 License Agreement by and between the Registrant and
Starcraft RV, Inc. dated September 12, 1991.
Incorporated by reference to Exhibit 10.24 of the
Registrant's Form S-1. **
10.14 License Agreement by and between the Registrant and
Starcraft Recreational Products, Ltd. dated January 18,
1991. Incorporated by reference to Exhibit 10.25 of the
Registrant's Form S-1. **
10.15 Contract for Conditional Sale of Real Estate by and
between the Registrant and the Harold A. Schrock
Revocable Trust dated December 20, 1991 and amended
February 28, 1992. Incorporated by reference to Exhibit
10.26 of the Registrant's Form S-1. **
10.16(a) Directors' Share Plan, restated effective October 1,
1995. Incorporated by reference to exhibit 10.16(a) of
the Registrant's Form 10-K for the year ending October
1, 1995. *
10.16(b) Directors' Compensation Deferral Plan effective October
1, 1995. Incorporated by reference to Exhibit 10.16(b)
of the Registrant's Form 10-K for the year ending
October 1, 1995. *
10.17 Ford Authorized Convertor Pool Agreement between
Imperial Automotive Group, Inc. and Ford Motor Co. dated
June 29, 1994. Incorporated by reference to Exhibit
10.19 of the Registrant's Form 10-K for the fiscal year
ending October 2, 1994. *
10.18 Inventory Loan and Security Agreement between Imperial
Automotive Group, Inc. and General Motors Acceptance
Corporation dated June 20, 1994. Incorporated by
reference to Exhibit 10.20 of the Registrant's Form 10-K
for the fiscal year ending October 2, 1994. *
10.19 Ford Authorizing Converter Pool Agreement between Ford
Motor Co. and Imperial Automotive Group, Inc. dated June
29, 1994. Incorporated by reference to Exhibit 10.21 of
the Registrant's Form 10-K for the fiscal year ending
October 2, 1994. *
10.20 Intercreditor Agreement between General Motors
Acceptance Corporation and Bank One Indianapolis, N.A.
dated July 15, 1994. Incorporated by reference to
Exhibit 10.24 of the Registrant's Form 10-K for the
fiscal year ending October 2, 1994. *
10.21 GMC Truck Special Vehicle Manufacturers Agreement by and
between Starcraft Automotive Group, Inc. and GMC Truck
Division, Truck & Bus Group, General Motors Corporation
dated February 1, 1995. Incorporated by reference to
Exhibit 10.21 of the Registrant's Form 10-K for the year
ending October 1, 1995. *
10.22 GMC Truck Special Vehicle Manufacturer's Agreement
between Imperial Automotive Group, Inc. and the GMC
division of General Motors Corporation effective
February 1, 1995. Incorporated by reference to Exhibit
10.22 of the Registrant's Form 10-K for the year ending
October 1, 1995. *
10.23 Lease between Imperial Automotive Group, Inc. and Beck
Real Estate Corporation dated February 3, 1995.
Incorporated by reference to Exhibit 10 to the
Registrant's Form 10-Q for the quarter ending January 1,
1995. *
10.24 Guaranty of Starcraft Automotive Group, Inc. to the
obligations of Starcraft Corporation to General Motors
Acceptance Corporation dated February 9, 1995.
Incorporated by reference to Exhibit 10.23 of the
Registrant's Form 10-K for the year ending October 1,
1995. *
10.25 Guaranty of Starcraft Automotive Group, Inc. to the
obligations of Imperial Automotive Group, Inc.to General
Motors Acceptance Corporation dated February 9, 1995.
Incorporated by reference to Exhibit 10.25 of the
Registrants Form 10-K for the year ending October 1,
1995. *
10.26 Promissory Note from the Registrant to Imperial
Industries, Inc. dated April 1, 1995. Incorporated by
reference to Exhibit 10(3) to the Registrant's Form 10-Q
for the quarter ending April 2, 1995. *
10.27 Chevrolet Quality Approved Converters Program Agreement
by and between Starcraft Automotive Group, Inc. and
Chevrolet Motor Division, General Motors Corporation
dated April 10, 1995. Incorporated by reference to
Exhibit 10.27 of the Registrant's Form 10-K for the year
ending October 1, 1995. *
10.28 Chevrolet Quality Approved Converters Program between
Imperial Automotive Group, Inc. and Chevrolet division
of General Motors Corporation dated April 10, 1995.
Incorporated by reference to Exhibit 10.28 of the
Registrant's Form 10-K for the year ending October 1,
1995. *
10.29 Agreement between Chrysler Corporation and Starcraft
Automotive Group, Inc. dated July 1, 1995. Incorporated
by reference to Exhibit 10.29 of the Registrant's Form
10-K for the year ending October 1, 1995. *
10.30 Pool Company Wholesale Finance Plan and Security
Agreement between Chrysler Credit Corporation and
Starcraft Automotive Group, Inc. dated July 1, 1995.
Incorporated by reference to Exhibit 10.30 of the
Registrant's Form 10-K for the year ending October 1,
1995. *
10.31 Agreement between Chrysler Corporation and Imperial
Industries, Inc. dated July 1, 1995. Incorporated by
reference to Exhibit 10.31 of the Registrant's Form 10-K
for the year ending October 1, 1995. *
10.32 Pool Company Wholesale Finance Plan and Security
Agreement between Chrysler Credit Corporation and
Imperial Industries, Inc. dated July 1, 1995.
Incorporated by reference to Exhibit 10.32 of the
Registrant's Form 10-K for the year ending October 1,
1995. *
10.33 Promissory Note from Duke T. Hale dated November 4,
1995. Incorporated by reference to Exhibit 10(1) to the
Registrant's Form 10-Q for the quarter ending April 2,
1995. *
11 Computation of Earnings Per Share [ ]
21 Subsidiaries of the Registrant. [ ]
23 (a) Consent of Ernst & Young LLP. [ ]
23 (b) Consent of McGladrey & Pullen, LLP
27 Financial Data Schedule
* Incorporated by reference as indicated in the
description.
** Incorporated by reference to the exhibit, bearing the
corresponding exhibit number to the Registrant's
registration statement on Form S-1, Reg. No. 33-63760,
unless another exhibit number is listed in the above
description.