1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------------------- FORM 10-K --------------------------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 31, 1998, Commission File Number 1-9235 THOR INDUSTRIES, INC. --------------------- (Exact name of registrant as specified in its charter) Delaware 93-0768752 - ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 419 W. Pike Street, Jackson Center, Ohio 45334-0629 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (937) 596-6849 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common Stock (par value $.10) New York Stock Exchange - ----------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None - ------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to the filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K 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. X The aggregate market value of voting securities of the registrant held by non-affiliates of the registrant on October 9, 1998, was $136,527,533 based upon closing price on the New York Stock Exchange for such date. The number of common shares of registrant's stock outstanding as of October 13, 1998, was 12,209,810. Documents incorporated by reference: Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on December 7, 1998, are incorporated by reference in Part III.
2 ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Thor Industries, Inc. ("Thor"), founded in 1980, produces and sells a wide range of recreation vehicles and small and mid-size buses in the United States and Canada. The Company's principal operating subsidiaries are Airstream, Inc. ("Airstream"); Dutchmen Manufacturing, Inc. ("Dutchmen"); Four Winds International, Inc. ("Four Winds"); Thor America, Inc. ("Thor America"); Komfort Corp. ("Komfort"); Thor Indiana, Inc. ("Thor Indiana"); Aero Manufacturing, Inc. ("Aero"); Citair, Inc. ("Citair"); Thor California, Inc. ("Thor California"); ElDorado National Kansas, Inc. ("ElDorado Kansas"); ElDorado National California, Inc. ("ElDorado California") and Champion Bus, Inc. ("Champion"). During fiscal 1998 the Company shut down its losing bus operation in Brown City, Michigan and effective September 30, 1998 agreed to divest its Thor West operations to that company's management. On December 31, 1997 the Company sold its Henschen Axle manufacturing operation for approximately $2.9 million cash. On February 6, 1998 the Company purchased for $9.7 million cash substantially all the assets of Champion Motor Coach (now Champion Bus), a builder of small and mid-size buses. The Company, a Delaware corporation, is the successor to a corporation of the same name which was incorporated in Nevada on July 29, 1980. Its principal executive office is located at 419 West Pike Street, Jackson Center, Ohio 45334, and its telephone number is (937) 596-6849. RECREATIONAL VEHICLES AIRSTREAM Airstream manufactures and sells premium and medium-high priced travel trailers and motorhomes under the trade names "Airstream Classic," "Land Yacht," and "Cutter." Airstream Classic vehicles are distinguished by their rounded shape and bright aluminum finish and, in management's judgment, constitute the most recognized product in the industry. Airstream, responding to the demands of the market for a lighter, lower-cost product, also manufactures and sells the Airstream "Safari" and "Bambi" travel trailers. DUTCHMEN Dutchmen manufactures and sells conventional travel trailers and fifth wheels under the trade names "Dutchmen" and "Four Winds." It has become one of the largest-selling brands in the U. S. due to its reputation for a quality product sold at a lower price. AERO Aero Manufacturing manufactures and sells lightweight, European-styled travel trailers designed for towing behind cars, mini vans and sport utility vehicles. The Company manufactures folding camping trailers, which it sells under the "Dutchmen" and "Skamper" trade names. FOUR WINDS Four Winds manufactures and sells conventional Class C and Class A motorhomes. Its products are sold under the "Four Winds," "Hurricane," "Infinity," "WindSport," "Dutchmen" and "Chateau" trade names. THOR AMERICA Thor America (formerly Thor Pennsylvania) manufactures and sells moderate and lower-priced travel trailers and fifth wheels under the trade names "Citation" and "Chateau." THOR INDIANA Thor Indiana manufactures and sells laminated fifth wheels and travel trailers under the brand names "Signature" and "Fifth Avenue." 2
3 ITEM 1. BUSINESS (CONTINUED) CITAIR Citair is one of the largest Canadian producers of moderately-priced travel trailers, fifth wheels, Class C motorhomes and truck campers. It operates under the name "General Coach" and sells under the trade names "Citation" and "Corsair." KOMFORT Komfort manufactures and sells travel trailers and fifth wheels and sells primarily in the western U. S. and western Canada. THOR CALIFORNIA Thor California manufactures and sells conventional travel trailers and fifth wheels under the brand names "Wanderer" and "Tahoe" primarily in the western United States. BUSES ELDORADO NATIONAL ElDorado National is a manufacturer of small and mid-size buses for transit, airport car rental and hotel/motel shuttles, paramedical transit for hospitals and nursing homes, tour and charter operations, and other uses. The Company builds buses under model names such as "Aerotech," "Escort," "MST," "Transmark," and "EZ Rider." Its plants are located in Salina, KS and Chino, CA. CHAMPION BUS On February 6, 1998 the Company purchased substantially all of the assets of Champion Motor Coach, Inc. from Champion Enterprises, Inc. Champion Motor Coach is now called Champion Bus, Inc. and under prior ownership had annual sales in excess of $60 million. Champion builds small and mid-size buses under model names such as "Challenger," "Contender" and "SoLo." Management believes that Thor Bus (ElDorado National and Champion) is the largest manufacturer of small and mid-size commercial buses in North America. PRODUCT LINE SALES SEGMENT The table below sets forth the contribution of each of the Company's product lines to net sales in each of the last three years. <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- ($000) Amount % Amount % Amount % ------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Recreation vehicles $547,485 77 $485,010 78 $ 495,991 82 Buses 168,115 23 139,425 22 106,087 18 ------------------------------------------------------------------------- Total Net Sales $715,600 100 $624,435 100 $ 602,078 100 ========================================================================= </TABLE> Further information concerning business segments is included in Note M of the Notes to the Consolidated Financial Statements. RECREATIONAL VEHICLES: The Company manufactures and sells a wide variety of RVs throughout the United States and Canada, as well as related parts and accessories. RV classifications are based upon standards established by the Recreation Vehicle Industry Association ("RVIA"). The principal types of RVs produced by the Company include conventional travel trailers, fifth wheels, fold-down camping trailers, Class A, Class B, and Class C motorhomes. 3
4 ITEM 1. BUSINESS (CONTINUED) Travel trailers are non-motorized vehicles which are designed to be towed by passenger automobiles, pickup trucks or vans. Travel trailers provide comfortable, self-contained living facilities for short periods of time. The Company produces "conventional," "fifth wheel" and "fold-down" travel trailers. Conventional and fold-down camping trailers are towed by means of a frame hitch attached to the towing vehicle. Fifth wheel trailers, designed to be towed by pickup trucks, are constructed with a raised forward section that is attached to the bed area of the pickup truck. A motorhome is a self-powered vehicle built on a motor vehicle chassis. The interior typically includes a driver's area, kitchen, bathroom, and dining and sleeping areas. Motorhomes are self-contained with their own lighting, heating, cooking, refrigeration, sewage holding and water storage facilities, so that they can be lived in without being attached to utilities. Class A motorhomes, constructed on medium-duty truck chassis, are supplied complete with engine and drive train components by motor vehicle manufacturers such as General Motors, Ford or Freightliner. The living area and driver's compartment are designed, manufactured, and installed by the Company. Conventional Class C motorhomes are built on a Ford and General Motors small truck or van chassis which includes an engine, drive train components, and a finished cab section. The Company constructs a living area which has access to the driver's compartment and attaches it to the cab. The Company also produces a small number of Class B motorhomes which are self-contained, converted vans. Although they are not designed for permanent or semi-permanent living, RVs do provide comfortable living facilities for short periods of time. Management believes its products are competitive, both in terms of price and quality, with those of its competitors in each category of the RV market. PRODUCTION. In order to minimize finished inventory, the Company's RVs generally are produced to order. The Company's facilities are designed to provide efficient assembly line manufacturing of its products. The Company believes that its production facilities are sufficient for its current production levels. Capacity increases can be achieved at relatively low cost, largely by increasing the number of production employees, adding additional shifts, or acquiring additional facilities. The Company purchases in finished form many of the components used in the production of RVs. The principal raw materials used in the manufacturing processes for motorhomes and travel trailers are aluminum, lumber, plywood, plastic, fiberglass, and steel purchased from numerous suppliers.The Company believes that, except for chassis, substitute sources for raw materials and components are available with no material impact on the Company's operations. The Company is able to obtain the benefit of volume price discounts for many of its purchases of raw materials and components by centralized purchasing. Generally, all of the Company's operating subsidiaries introduce new or improved lines or models of RVs each year. Changes typically include new sizes and floorplans, different decors or design features, and engineering improvements. SEASONALITY. Since RVs are used primarily by vacationers and campers, the Company's sales of its RVs are seasonal and, in most geographical areas, tend to be significantly lower during the winter months than in other periods. As a result, sales of RVs historically are lowest during the Company's second fiscal quarter, which ends January 31. MARKETING AND DISTRIBUTION. The Company markets its RVs through independent dealers located throughout the U.S. and Canada. Each of the Company's RV subsidiaries maintains its own dealer organization, with few dealers carrying more than one product line offered by the Company. Presently there are approximately 800 dealers carrying the Company's products in the U.S. and Canada. The Company believes that close working relationships between its management personnel and the many independent dealers provide the Company with valuable information on customer preferences and the 4
5 ITEM 1. BUSINESS (CONTINUED) quality and marketability of the Company's products. Additionally, by maintaining substantially separate dealer networks for each of its subsidiaries, the Company's products are more likely to be competing against competitor's products in similar price ranges rather than the Company's other products. Each of the Company's operating subsidiaries has an independent sales force to call on its dealers. The Company's most important sales promotions occur at the major RV shows for dealers which take place throughout the year at different locations across the country. The Company benefits from the RV awareness advertising and major marketing programs geared towards first-time buyers sponsored by RVIA in national print media and television. The Company engages in a limited amount of consumer-oriented advertising for its RVs, primarily through industry magazines, the distribution of product brochures, and direct mail advertising campaigns. In its selection of dealers, the Company emphasizes the individual dealer's financial strength to maintain a sufficient inventory of the Company's products, as well as its reputation, experience, and ability to provide service. Many of the Company's dealers carry one or more competitor's line of RVs. Each operating company has sales agreements with its dealers and these agreements are subject to annual review. No single dealer accounted for more than 5% of the Company's consolidated net sales of RVs during the year. Substantially all of the Company's sales to dealers are made on terms requiring cash on delivery or within 10 days thereafter. The Company generally does not finance dealer purchases. Most dealers are financed on a "floorplan" basis by a bank or finance company which lends the dealer all or substantially all of the wholesale purchase price and retains a security interest in the vehicles purchased. As is customary in the RV industry, upon the request of a lending institution financing a dealer's purchase of the Company's products and after completion of a credit investigation of the dealer involved, the Company will execute a repurchase agreement. Repurchase agreements provide that, for up to 12 months after a unit is financed and in the event of default by the dealer, the Company will repurchase the unit repossessed by the financing institution for the amount then due, which is usually less than 100% of dealer's cost. The risk of loss under repurchase agreements is spread over numerous dealers and is further reduced by the high resale value of the units which the Company would be required to repurchase. In the Company's experience, losses under repurchase agreements have not been significant and management believes any future losses under the agreements would not have a material adverse effect on the Company. Thor entered the retail recreation vehicle financing business in March, 1994. Thor Credit Corporation is a captive finance company owned by Thor Industries and Deutsche Financial Services, a major national financial institution engaged in recreation vehicle financing. In March 1996, Thor and Cruise America, Inc. formed a joint venture, CAT Joint Venture LLC, to make short-term rental of motorized vehicles to the public. WARRANTIES. The Company currently provides retail purchasers of its RVs with a standard limited warranty for one year against defects in materials and workmanship, and two years on certain major components separately warranted by the suppliers. Certain components, such as the chassis and engines of the Company's motorhomes, are warranted by their manufacturers for periods specified by those manufacturers. The Company's subsidiaries also offer at least a two-year structural warranty. 5
6 BUSES: The Company's line of small and mid-size buses are sold under the names ElDorado National and Champion Bus. ElDorado National's trade names include "Aerotech," "Escort FE," "Escort RE," "Transmark," "MST" and "EZ Rider." Champion's trade names include "Challenger," "Contender" and "SoLo." The Company's line of mid-size buses consists of airport shuttle buses, intra- and inter-urban mass transportation buses, and buses for tourist uses. PRODUCTION. The Company's production facilities in Salina, Kansas; Chino, California; and Imlay City, Michigan, are designed to provide efficient assembly line manufacturing of its bus products. The vehicles are produced according to specific orders which are normally obtained by dealers. Some of the chassis, all of the engines and auxiliary units, and some of the seating and other components used in the production of buses are purchased in finished form. The Chino, California, facility assembles chassis for its rear engine buses from industry standard components and assembles the buses directly on the chassis. The principal raw materials used in the manufacturing of buses are fiberglass, steel, aluminum, plywood, and plastic. Most of the raw materials and components needed are purchased from numerous suppliers. The Company purchases most of its bus chassis from Ford and General Motors and most of its engines from Cummins. The Company believes that, except for chassis, raw materials and components could be purchased from other sources, if necessary, with no material impact on the Company's operations. MARKETING AND DISTRIBUTION. The Company markets its product line through a network of 65 independent dealers in the United States and Canada. The Company selects dealers using criteria similar to those used in selecting RV dealers. During fiscal 1998, no single dealer accounted for more than 18% of the Company's net bus revenue. The Company also sells its buses directly to certain national accounts such as major rental car companies, hotel chains, and transit authorities. Terms of sale are typically cash on delivery or through national floorplan financing institutions. Sales to some state transportation agencies and other government agencies may be on longer terms. WARRANTIES. The Company currently provides purchasers of its buses with a limited warranty for one year or 12,000 miles against defects in materials and workmanship, excluding only certain specified components which are warranted separately by suppliers. The Company provides a five-year or 75,000 mile warranty on the Company-assembled body structure of its "Aerotech" buses. Chassis and engines are warranted for one year or 12,000 miles by their manufacturers. REGULATION The Company is subject to the provisions of the National Traffic and Motor Vehicle Safety Act and the safety standards for bus, RVs, and components, which have been promulgated thereunder by the Department of Transportation. Because of its sales in Canada, the Company is also governed by similar laws and regulations issued by the Canadian Government. The Company is a member of RVIA, a voluntary association of RV manufacturers which promulgates RV safety standards. The Company places an RVIA seal on each of its RVs to certify that such standards have been met. Both federal and state authorities have various environmental control standards relating to air, water, and noise pollution which affect the business and operation of the Company. For example, these standards, which are generally applicable to all companies, control the Company's choice of paints, discharge of air compressor waste water, and noise emitted by factories. The Company relies upon certifications obtained by chassis manufacturers with respect to compliance by the Company's vehicles with all applicable emission control standards. The Company is also subject to the regulations promulgated by the Occupational Safety and Health Administration ("OSHA"). The Company's plants are periodically inspected by federal agencies concerned with health and safety in the work place, and by RVIA, to ensure that the Company's products comply with applicable governmental and industry standards. The Company believes that its products and facilities comply in all material respects with applicable vehicle safety, environmental, RVIA, and OSHA regulations. 6
7 ITEM 1. BUSINESS (CONTINUED) COMPETITION The RV industry is characterized by relative ease of entry, although the codes, standards, and safety requirements introduced in recent years are a deterrent to new competitors. The need to develop an effective dealer network also acts as a barrier to entry. The RV market is intensely competitive with a number of other manufacturers selling products which compete directly with those of the Company. Competition in the industry is based upon price, design, value, quality, and service. The Company believes that the quality, design, and price of its products and the warranty coverage and service it provides is such that its products compete favorably for retail purchasers. The Company estimates that it is the second largest R.V. manufacturer. The Company estimates that it has a 34% market share of the U.S. and Canadian small and mid-size bus market. Other competitors offer lines of buses which compete with all of the Company's products. Price, quality, and delivery are the primary competitive factors. As with its RVs, the Company believes that the quality, design, and price of its products, the warranty coverage and service it provides, and the loyalty of its customers is such that its products compare favorably with similarly priced products of its competitors. TRADE NAMES AND PATENTS The Company has registered United States and Canadian trade names or licenses under the trade names of others, covering the principal trade names and model lines under which its products are marketed. The Company is not dependent upon any patents or technology licenses in the conduct of its business. EMPLOYEE RELATIONS At July 31, 1998, the Company had approximately 3,051 employees in the United States and 253 in Canada. Of these 3,304 employees, 364 are salaried. Citair's and Thor America's approximately 351 hourly employees are currently represented by certified labor organizations. Citair's and Thor America's current labor agreements covering their operations expire at various times between October, 1998 and September, 2000. The Company's employees at other facilities are not represented by certified labor organizations. The Company believes it maintains a good working relationship with its employees. The Company has had no work stoppage and continues to negotiate its expired labor contract at one of its Canadian operations. RESEARCH AND DEVELOPMENT During the fiscal years 1998, 1997 and 1996, the Company spent approximately $847,000, $768,000 and $881,000 respectively, on research and development activities. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Canadian sales from operations in Canada and export sales to Canada from United States operations amounted to approximately 3.6% and 7.3%, respectively, of the Company's total net sales to unaffiliated customers in fiscal year 1998. Further information concerning foreign operations is shown in Note M of the Notes to Consolidated Financial Statements. FORWARD LOOKING STATEMENTS This annual report includes "forward looking statements" that involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company's expectations. Factors which could cause materially different results include, among others, the success of new product introductions, the pace of acquisitions and cost structure improvements, competitive and general economic conditions, and the other risks set forth in the Company's filings with the Securities and Exchange Commission. 7
8 ITEM 2. PROPERTIES The Company owns or leases approximately 1,903,000 square feet of plant and office space. Management believes that the Company's present facilities, consisting primarily of steel clad, steel or wood frame, or masonry construction, and the machinery and equipment contained therein, are well maintained and in good condition. The Company believes that it would be able to obtain replacement premises at acceptable costs for its leased premises should its leases not be renewed. The following table describes the location, number and size of the Company's facilities as of July 31, 1998. FACILITIES <TABLE> <CAPTION> Approximate No. of Building Area Location Owned or Leased Buildings Square Feet - -------- --------------- --------- -------------- <S> <C> <C> <C> RVs Jackson Center, OH (Airstream) (1).......................Leased...............11................304,000 Middleburg, PA (Thor America).............................Owned................3................116,000 Hensall, Ontario, Canada (Citair).........................Owned................1.................97,000 Oliver, B.C., Canada (Citair).............................Owned................1.................55,000 Oliver, B.C., Canada (Citair) (5)........................Leased................1.................11,000 Ontario, CA (Thor West) (2)..............................Leased................1................111,000 Middlebury, IN (Dutchmen).................................Owned................1.................20,000 Goshen, IN (Dutchmen) (3)................................Leased................1.................40,000 Goshen, IN (Dutchmen).....................................Owned................5................128,000 Syracuse, IN (Fold Down)..................................Owned................1.................46,000 Syracuse, IN, (Aero)......................................Owned................2.................67,000 Syracuse, IN, (Aero) (12)................................Leased................1.................52,000 Bristol, IN (Thor Indiana) (6)...........................Leased................1.................57,000 Bristol, IN (Thor Indiana) (8)...........................Leased................6................106,000 Elkhart, IN (Four Winds)..................................Owned................3................171,000 Milwaukie, OR (Komfort) (9)..............................Leased................1.................57,000 San Moreno, CA (Thor California) (10)....................Leased................3................126,000 BUSES Salina, KS (ElDorado Kansas)..............................Owned................2.................93,000 Salina, KS (ElDorado Kansas) (11)........................Leased................1..................8,000 Salina, KS (ElDorado Kansas) (13)........................Leased................1.................23,000 Chino, CA (ElDorado California) (4)......................Leased.............. 1.................64,000 Chino, CA (ElDorado California) (4)......................Leased.............. 1.................10,000 Chino, CA (ElDorado California) (4)......................Leased................1..................8,000 Brown City, MI (ElDorado Michigan) (7)...................Leased.............. 1.................24,000 Imlay City, Michigan (Champion Bus).......................Owned................5................109,000 ------------------------- Total.........................................................................56..............1,903,000 ========================= </TABLE> (1) Airstream locations are occupied under net subleases which expire in 2002. (2) This location is occupied under a ten-year net lease with the right of first refusal if a sale is proposed by lessor. The lease expires in 2001 with an option to renew for two consecutive five-year terms. Will be sublet during fiscal 1999 as part of Thor West divestment. (3) This location is occupied under a net lease which expires in 1998. Lease will not be renewed at expiration. (4) This location is occupied under a net lease which expires in 1999 with a 1-year renewal option. (5) This location is occupied under a net lease which expires in 1999. (6) This location is occupied under a net lease which expires in 1998 with a 5-year renewal option. Lease will not be renewed at expiration. (7) This location is occupied under a net lease which expires annually with 90 days notice. Terminated lease 9/30/98. (8) This location is occupied under a net lease which expires in 2005 with an option to extend for 5 years (9) This location is occupied under a net lease which expires in 2005 with an option to extend for 5 years. (10) This location is occupied under a net lease which expires in 2008 with an option to extend for 5 years. (11) This location is occupied under a net lease which is on month to month basis with 60 day notice. (12) This location is occupied under a net lease which expires in 2001. (13) This location is occupied under a net lease which expires in 1999 with annual renewal option on year to year basis. 8
9 ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain litigation arising out of its operations in the normal course of business. The Company believes that no such litigation will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters submitted. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) MARKET INFORMATION The Company's Common Stock is traded on the New York Stock Exchange. Set forth below is the range of high and low prices for the common stock for each quarter during the Company's most recent fiscal years, as quoted in the New York Stock Exchange Monthly Market Statistics and Trading Reports. <TABLE> <CAPTION> Fiscal 1998 Fiscal 1997 ----------- ----------- High Low High Low -------------------------------------------- <S> <C> <C> <C> <C> First Quarter............................... $21.92 $16.63 $17.33 $12.50 Second Quarter.............................. 23.42 19.21 17.50 14.83 Third Quarter............................... 26.67 24.38 17.33 13.59 Fourth Quarter.............................. 28.44 24.38 17.29 14.25 </TABLE> (B) HOLDERS As of October 13, 1998, the number of holders of record of the Company's common stock was 192. (C) DIVIDENDS The Company paid quarterly dividends of $.03 ($.02 after adjustment for stock split) a share during its quarter ended October 31, 1997 and January 31, 1998. A 3-for-2 common stock split was declared effective April 6, 1998 and in the April 30, 1998 and July 31, 1998 quarters a $.02 a share dividend was paid. The Company paid quarterly dividends of $.02 a share (adjusted for stock split) during 1997. Any payment of cash dividends in the future will be at the discretion of the Company's Board of Directors and will depend upon the financial condition, capital requirements, and earnings of the Company, as well as other factors which the Board of Directors may deem relevant. ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> Fiscal years ended July 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------------- INCOME STATEMENT DATA: ($000, except per share amounts) <S> <C> <C> <C> <C> <C> Net sales................................... $715,600 $624,435 $602,078 $562,681 $491,079 Net income.................................. 19,395 16,423 14,851 13,790 16,045 EARNINGS PER COMMON SHARE: Basic.................................... 1.59 1.32 1.12 1.03 1.20 Diluted.................................. 1.58 1.31 1.12 1.03 1.20 Dividends per common share.................. .08 .08 .08 .08 .08 BALANCE SHEET DATA: Total assets................................ $213,981 $170,969 $173,818 $148,461 $142,446 </TABLE> 9
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net sales in fiscal 1998 totaled $715,600,390 versus $624,435,108 in fiscal 1997. Net income in fiscal 1998 totaled $19,395,228 versus $16,422,767 in 1997. Basic earnings per common share was $1.59 in 1998 versus $1.32 in 1997. The consolidated statements of income for the years ended July 31, 1998, 1997 and 1996 shown as a percentage of sales are: <TABLE> <CAPTION> Fiscal years ended July 31, ----------------------------------------------- 1998 1997 1996 ----------------------------------------------- <S> <C> <C> <C> Net sales...................................................... 100.0% 100.0% 100.0% Cost of products sold.......................................... 88.5 89.5 89.0 ----------------------------------------------- Gross profit................................................... 11.5 10.5 11.0 Selling, general and administrative expenses................... 6.6 6.2 6.9 ----------------------------------------------- Operating income............................................... 4.9 4.3 4.1 Other income................................................... .1 .1 .1 Loss on divestment of subsidiaries............................. (.4) -- -- ----------------------------------------------- Income before income taxes..................................... 4.6 4.4 4.2 Provision for income taxes..................................... 1.9 1.8 1.7 ----------------------------------------------- Net income..................................................... 2.7% 2.6% 2.5% ----------------------------------------------- </TABLE> 1998 VS. 1997 Net sales totaled $715,600,390 up 14.6% from $624,435,108 in the same period last year. Net income increased to $19,395,228, compared to $16,422,767 last year. Included in the net income for fiscal 1998 was a pre-tax gain on the sale of Airstream, Inc.'s Henschen operation of $1,269,000 and the pre-tax loss on the divestment of Thor West of $3,990,000. The cumulative effect of these divestments reduced basic earnings per share by approximately $.15 per share. In general, the Company did not adjust its sales prices materially in fiscal 1998. Recreation vehicle revenues of $547,484,994 were 13% higher than last years $485,010,470. Recreation vehicle revenues were 77% of total Company revenue compared to 78% last year. Bus revenues of $168,115,346 were 21% higher than last years $139,424,638. Bus revenues were 23% of total Company revenue compared to 22% last year. Manufacturing gross profit increased as a percentage of sales from 10.5% in 1997 to 11.5% in 1998. As a percentage of sales, selling, general and administrative cost increased due primarily to increased income related compensation and selling expenses related to increased volume. Interest income decreased by $2,725 and interest expense decreased by $387,984. The combined income tax rate was 41.3% compared to 40.6% last year. The net loss on divestment of a subsidiary increased the combined tax rate in 1998 by approximately .6% due to the write-off of $2,139,000 of non-deductible goodwill. 1997 VS. 1996 Net sales totaled $624,435,108 up 4% from $602,077,568 in the same period last year. Net income increased to $16,422,767 compared to $14,850,721 last year. This increase was primarily due to increased sales and reduction in selling, general and administrative expenses. In general, the Company did not adjust its sales prices during fiscal 1997. Recreation vehicle revenues of $485,010,470 were 2% lower than last year. Recreation vehicle sales were 78% of total company revenues compared to 82% last year. Bus revenues of $139,424,638 were 31% higher than last year. Bus sales were 22% of total company revenue compared to 18% last year. Manufacturing gross profit decreased to 10.5% of sales from 11.0% last year. As a percentage of sales, selling, general and administrative costs decreased due primarily to reductions in administrative expenses and promotion programs. Interest income decreased by approximately $63,000 and interest expense increased by approximately $10,500. The combined income tax rate was 40.6% compared to 41.0% in 1996. 10
11 LIQUIDITY On July 31, 1998, Thor had $43,531,805 in cash and cash equivalents, compared to $12,752,729 on July 31, 1997. Working capital on July 31, 1998, was $99,139,080 compared to $79,158,686 on July 31, 1997. Inventory valued at current cost on July 31, 1998, exceeded LIFO inventory by $2,853,696. The Company has no long term debt. The Company currently has a $30,000,000 revolving line of credit. There were no borrowings on the line at July 31, 1998. The loan agreement contains certain covenants, including restrictions on additional indebtedness, and the Company must maintain certain financial ratios. The line of credit bears interest at negotiated rates below prime and expires on November 30, 1998. The Company believes that internally generated funds and the revolving credit agreement already in place will be sufficient to meet current needs and anticipated capital requirements. The Company does not anticipate significant capital expenditures for fiscal 1999. Amortization of intangibles decreased from $2,084,312 for the year ended July 31, 1997 to $1,904,394 for the year ended July 31, 1998 because certain intangibles became fully amortized. YEAR 2000 ISSUES The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a recent assessment, the Company determined that it will be required to replace portions of its software so that its computer systems will properly utilize dates beyond December 31,1999. The Company presently believes that with replacement software and modifications to existing software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remedy their own Year 2000 issue. The Company's total Year 2000 project costs include the estimated costs and time associated with the impact of third party's Year 2000 issues on the Company, and are based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company believes it has no exposure to contingencies related to the Year 2000 issue for the products it has sold. The Company plans to complete the Year 2000 project during fiscal 1999. The total cost of the Year 2000 project is estimated at $200,000, substantially all of which is to purchase a revision of its current software, and is being funded through operating cash flows. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from these plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. ACCOUNTING PRONOUNCEMENTS The following Statements of Financial Accounting Standards (SFAS) were issued by the Financial Accounting Standards Board. The impact of adopting these statements has not been determined. SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997. This statement requires the disclosure of comprehensive income in the financial statements. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," was issued in June 1997. This statement establishes standards for the way that business enterprises report information about operating segments. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. The statement requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in fair value of the derivatives are recorded depending upon whether the instruments meet the criterion for hedge accounting. This statement is effective for fiscal years beginning after June 15, 1999. 11
12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Quarterly Financial Data <TABLE> <CAPTION> October 31 January 31 April 30 July 31 ------------------------------------------------------------------------ ($000, except per share amounts) <S> <C> <C> <C> <C> 1998 Net sales................................... $165,458 $134,510 $206,902 $208,730 Gross profit................................ 18,776 14,701 23,427 25,697 Net income (1) ............................ 5,553 3,442 6,135 4,265 Earnings per common share: Basic.................................... .45 .28 .50 .35 Diluted.................................. .45 .28 .50 .35 Dividends paid per common share:............ .02 .02 .02 .02 MARKET PRICES PER COMMON SHARE: High .................................... $ 21.92 $ 23.42 $ 26.67 $ 28.44 Low ..................................... $ 16.63 $ 19.21 $ 24.38 $ 24.38 ------------------------------------------------------------------------ 1997 Net sales................................... $150,497 $123,525 $169,329 $181,084 Gross profit................................ 16,143 11,456 17,795 20,374 Net income (1) ............................ 4,790 1,692 4,358 5,583 Earnings per common share: Basic.................................... .37 .13 .36 .46 Diluted.................................. .37 .13 .36 .45 Dividends paid per common share............. .02 .02 .02 .02 MARKET PRICES PER COMMON SHARE: High .................................... $ 17.33 $ 17.50 $ 17.33 $ 17.29 Low ..................................... $ 12.50 $ 14.83 $ 13.59 $ 14.25 ======================================================================== </TABLE> (1) Net income in the fourth quarter was decreased by $2,249,000 in 1998 and increased $887,000 in 1997, due to adjustments to physical inventory, warranty reserves and management incentives and in 1998 a $2,766,000 net loss for the divestment of Thor West. 12
13 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors and Executive Officers of the Registrant is included in the definitive Proxy Statement, dated on or about October 29, 1998, filed with the Commission pursuant to Regulation 14A, which portion of said Proxy Statement is hereby incorporated by reference. ITEM 11. MANAGEMENT REMUNERATION The information required in response to this Item is contained under the caption EXECUTIVE OFFICERS in the definitive Proxy Statement, dated on or about October 29, 1998, filed with the Commission pursuant to Regulation 14A, which portion of said Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is contained under the caption ELECTION OF DIRECTORS for Security Ownership of Management and under the caption OWNERSHIP OF COMMON STOCK for principal shareholders, of the definitive Proxy Statement, dated on or about October 29, 1998, filed with the Commission pursuant to Regulation 14A, which portion of said Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item is contained under the caption CERTAIN RELATIONS AND TRANSACTIONS WITH MANAGEMENT in the definitive Proxy Statement, dated on or about October 29, 1998, filed with the Commission pursuant to Regulation 14A, which portion of said Proxy Statement is hereby incorporated by reference. 13
14 PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K <TABLE> <CAPTION> (A) 1. FINANCIAL STATEMENTS PAGE <S> <C> <C> Independent Auditors' Report..................................................................17 Consolidated Balance Sheets, July 31, 1998 and 1997........................................18-19 Consolidated Statements of Income for the Years Ended July 31, 1998, 1997 and 1996...............................................................20 Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1998, 1997 and 1996...................................................21 Consolidated Statements of Cash Flows for the Years Ended July 31, 1998, 1997 and 1996...............................................................22 Notes to Consolidated Financial Statements for the Years Ended July 31, 1998, 1997 and 1996............................................................23-28 (A) 2. FINANCIAL STATEMENT SCHEDULE AS OF JULY 31, 1998, AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1998: Schedule II--Valuation and Qualifying Accounts................................................29 All other schedules have been omitted as not required or not applicable under the instructions. (A) 3. EXHIBITS (3) Articles of Incorporation and By-Laws (a) Registrant's Restated Certificate of..................................................* Incorporation. (Filed as Exhibit 3(a) to Registration Statement No. 33-13827.) (b) Registrant's By-laws. (Filed as Exhibit 3(b)..........................................* to Registration Statement No. 33-13827.) (4) Instruments Defining the Rights of Security Holders Including Indentures (a) Form of Common Stock Certificate......................................................* (Filed as Exhibit 4(a) to 10-K dated July 31, 1987.) </TABLE> *Incorporated by reference. 14
15 EXHIBITS (CONTINUED) (22) SUBSIDIARIES OF THE REGISTRANT The subsidiaries of the Registrant, excluding those which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of July 31, 1998, are: Airstream, Inc. (a Nevada corporation), Thor America, Inc. (a Pennsylvania corporation) Citair, Inc. (a Pennsylvania corporation), Citair does business in Canada under the name "General Coach." Dutchmen Manufacturing, Inc. (a Delaware corporation) Aero Manufacturing, Inc. (a Delaware corporation) Thor Indiana, Inc. (a Delaware corporation) Four Winds International, Inc. (a Delaware corporation) Thor California, Inc. (a Delaware corporation) Thor Industries West, Inc. (a California corporation), Komfort Corp. (a Delaware corporation) ElDorado National California, Inc. (a California corporation) ElDorado National Kansas, Inc. (a Kansas corporation) Champion Bus, Inc. (a Delaware corporation), (27) FINANCIAL DATA SCHEDULES (1) Financial Data Schedule for year ended July 31, 1998. (2) Restated Financial Data Schedule for year ended July 31, 1997. (3) Restated Financial Data Schedule for year ended July 31, 1996. (B) REPORT ON FORM 8-K On February 24, 1998, a Form 8-K was filed with the Securities and Exchange Commission pursuant to the acquisition of certain assets and liabilities of Champion Motor Coach, Inc. 15
16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THOR INDUSTRIES, INC. (Signed) /S/ Wade F.B. Thompson ------------------------- Wade F. B. Thompson Chairman, President, and Chief Executive Officer Date October 29, 1998 ------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> (Signed) /S/ Peter B. Orthwein (Signed) /S/ Walter L. Bennett ----------------------------- --------------------------- Peter B. Orthwein Walter L. Bennett Vice Chairman, Treasurer Vice President, Finance (Principal Financial Officer) and Director (Principal Accounting Officer) Date October 29, 1998 Date October 29, 1998 ----------------------------- ------------------------------- (Signed) /S/ Wade F.B. Thompson (Signed) /S/ Alan Siegel ----------------------------- --------------------------- Wade F. B. Thompson Alan Siegel Chairman, President, and Chief Executive Director Officer (Principal Executive Officer and Director) Date October 29, 1998 Date October 29, 1998 ----------------------------- ------------------------------- (Signed) /S/ William C. Tomson -------------------------- William C. Tomson Director Date October 29, 1998 --------------------------- </TABLE> 16
17 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS--THOR INDUSTRIES, INC. We have audited the accompanying consolidated balance sheets of Thor Industries, Inc., and subsidiaries (the "Company") as of July 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1998. Our audits also included the financial statement schedule listed in the index of item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits 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 mis-statement. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Dayton, Ohio October 22, 1998 17
18 THOR INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, JULY 31, 1998 AND 1997 <TABLE> <CAPTION> ASSETS 1998 1997 - ------ ------------------------------ CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents........................................................... $ 43,531,805 $ 12,752,729 Accounts receivable: Trade, less allowance for doubtful accounts-- $115,435 in 1998 and $516,535 in 1997........................................... 56,275,459 50,837,162 Other........................................................................... 1,850,844 776,952 Inventories (Note B)................................................................ 66,717,687 60,446,826 Prepaid expenses and other (Note D)................................................. 5,328,903 3,647,131 ------------------------------- Total current assets................................................................ 173,704,698 128,460,800 ------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land................................................................................ 1,400,995 1,237,784 Buildings and improvements.......................................................... 14,871,672 12,115,879 Machinery and equipment............................................................. 14,083,765 14,860,030 ------------------------------- Total cost.......................................................................... 30,356,432 28,213,693 Accumulated depreciation............................................................ 12,912,386 12,159,291 ------------------------------- NET PROPERTY, PLANT AND EQUIPMENT................................................... 17,444,046 16,054,402 ------------------------------- INVESTMENT IN JOINT VENTURES (NOTE J)............................................... 3,369,968 3,365,442 ------------------------------- OTHER ASSETS: Goodwill............................................................................ 11,761,553 14,538,350 Noncompete agreements............................................................... 3,011,798 3,953,586 Trademarks.......................................................................... 2,208,158 2,533,497 Other............................................................................... 2,480,722 2,062,562 ------------------------------- Total other assets.................................................................. 19,462,231 23,087,995 ------------------------------- TOTAL............................................................................... $213,980,943 $170,968,639 =============================== </TABLE> See notes to consolidated financial statements. 18
19 <TABLE> <CAPTION> LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 - ------------------------------------ -------------------------------- <S> <C> <C> CURRENT LIABILITIES: Accounts payable................................................................... $ 49,382,369 $ 31,814,320 Accrued liabilities: Compensation and related items.................................................. 11,181,046 8,828,872 Product warranties.............................................................. 10,063,753 7,452,061 Other........................................................................... 3,938,450 1,206,861 -------------------------------- TOTAL CURRENT LIABILITIES........................................................... 74,565,618 49,302,114 -------------------------------- OTHER LIABILITIES (NOTE D).......................................................... 1,200,955 1,847,064 -------------------------------- CONTINGENT LIABILITIES (NOTE G)..................................................... -- -- STOCKHOLDERS' EQUITY (NOTE H): Preferred stock--authorized 1,000,000 shares; none outstanding....................... -- -- Common stock--par value of $.10 a share; authorized, 20,000,000 shares; issued 13,692,697 shares in 1998 and 13,648,991 in 1997........................... 1,369,270 909,925 Additional paid-in capital.......................................................... 25,316,643 25,105,120 Foreign currency translation........................................................ (1,184,939) (629,546) Retained earnings................................................................... 132,227,188 113,810,210 Restricted stock plan............................................................... (137,544) -- -------------------------------- TOTAL............................................................................... 157,590,618 139,195,709 Less 1,433,637 treasury shares at cost.............................................. (19,376,248) (19,376,248) -------------------------------- Total stockholders' equity.......................................................... 138,214,370 119,819,461 -------------------------------- TOTAL............................................................................... $213,980,943 $170,968,639 ================================ </TABLE> 19
20 THOR INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> 1998 1997 1996 ----------------------------------------------------- <S> <C> <C> <C> NET SALES...................................................... $715,600,390 $ 624,435,108 $602,077,568 Cost of products sold.......................................... 632,999,085 558,666,678 536,020,378 ----------------------------------------------------- GROSS PROFIT................................................... 82,601,305 65,768,430 66,057,190 Selling, general and administrative expenses................... 45,601,175 36,381,235 38,537,782 Amortization of intangibles.................................... 1,904,394 2,084,312 2,748,852 ----------------------------------------------------- Operating income............................................... 35,095,736 27,302,883 24,770,556 OTHER INCOME (EXPENSE): Interest income.............................................. 869,289 872,014 935,332 Interest expense............................................. (247,670) (635,654) (625,185) Other........................................................ 54,539 97,958 95,248 Loss on divestment of subsidiaries........................... (2,721,000) -- -- ----------------------------------------------------- TOTAL OTHER INCOME (EXPENSE)................................... (2,044,842) 334,318 405,395 ----------------------------------------------------- INCOME BEFORE INCOME TAXES..................................... 33,050,894 27,637,201 25,175,951 Provision for income taxes (Note D)............................ 13,655,666 11,214,434 10,325,230 ----------------------------------------------------- NET INCOME..................................................... $ 19,395,228 $ 16,422,767 $ 14,850,721 ===================================================== EARNINGS PER COMMON SHARE (NOTE A) Basic.......................................................... $ 1.59 $ 1.32 $ 1.12 Diluted........................................................ 1.58 1.31 1.12 ===================================================== </TABLE> See notes to consolidated financial statements. 20
21 THOR INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> Treasury Stock Common Stock ------------------------------------------------- Additional Restricted Foreign Paid-In Stock Currency Retained Shares Amount Shares Amount Capital Plan Translation Earnings ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> July 31, 1995 188,239 $ 1,924,459 9,099,247 $ 909,925 $25,105,120 -- $ (772,606) $ 84,585,329 Net income -- -- -- -- -- -- -- 14,850,721 Shares purchased 224,200 3,890,737 -- -- -- -- -- -- Cash dividends $.12 per common share -- -- -- -- -- -- -- (1,055,089) Foreign currency translation adjustment -- -- -- -- -- -- 130,750 -- ----------------------------------------------------------------------------------------------------------- July 31, 1996 412,439 5,815,196 9,099,247 909,925 25,105,120 -- (641,856) 98,380,961 Net income -- -- -- -- -- -- -- 16,422,767 Shares purchased 543,319 13,561,052 -- -- -- -- -- -- Cash dividends $.12 per common share -- -- -- -- -- -- -- (993,518) Foreign currency translation adjustment -- -- -- -- -- -- 12,310 -- ----------------------------------------------------------------------------------------------------------- July 31, 1997 955,758 19,376,248 9,099,247 909,925 25,105,120 -- (629,546) 113,810,210 Net income -- -- -- -- -- -- -- 19,395,228 Stock option activity -- -- 36,100 3,610 513,070 -- -- -- Restricted stock activity -- -- 5,150 515 154,950 $ (155,465) -- -- Stock split 477,879 -- 4,552,200 455,220 (456,497) -- -- -- Cash dividends $.08 per common share -- -- -- -- -- -- -- (978,250) Foreign currency translation adjustment -- -- -- -- -- -- (555,393) -- Compensation expense -- -- -- -- -- 17,921 -- -- ----------------------------------------------------------------------------------------------------------- July 31, 1998 1,433,637 $19,376,248 13,692,697 $1,369,270 $25,316,643 $(137,544) $(1,184,939) $132,227,188 =========================================================================================================== </TABLE> See notes to consolidated financial statements. 21
22 THOR INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> 1998 1997 1996 ----------------------------------------------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME..................................................... $19,395,228 $16,422,767 $14,850,721 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 2,464,843 2,376,832 2,266,175 Amortization of intangibles............................... 1,904,394 2,084,312 2,748,852 Deferred income taxes..................................... (2,672,630) 387,316 355,321 Loss on divestment of subsidiary.......................... 3,990,000 -- -- Gain on divestment of subsidiary.......................... (1,269,000) -- -- CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM ACQUISITIONS: Accounts receivable............................................ (2,214,503) (2,655,459) (11,010,761) Inventories.................................................... 3,812,032 2,119,629 (6,452,919) Prepaid expenses and other..................................... (290,390) 509,456 125,834 Accounts payable............................................... 8,769,480 3,912,715 9,457,950 Accrued liabilities............................................ 6,833,229 (2,302,492) (1,129,620) Other.......................................................... (391,926) (669,083) (164,250) ----------------------------------------------------- Net cash provided by operating activities...................... 40,330,757 22,185,993 11,047,303 ----------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment..................... (2,088,698) (1,794,253) (4,722,312) Disposals of property, plant and equipment..................... 289,742 680,471 192,067 Acquisitions--net of cash acquired.............................. (9,670,735) -- -- Proceeds from divestment of subsidiary......................... 2,934,973 -- -- Investment in CAT-Joint Venture LLC............................ -- -- (2,300,000) ----------------------------------------------------- Net cash used in investing activities.......................... (8,534,718) (1,113,782) (6,830,245) ----------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends................................................. (978,250) (993,518) (1,055,089) Net increase (decrease) in line of credit...................... -- (6,515,000) 6,515,000 Purchase of treasury shares.................................... -- (13,561,052) (3,890,737) Proceeds from issuance of common stock......................... 516,680 -- -- ----------------------------------------------------- Net cash provided by (used in) financing activities ........... (461,570) (21,069,570) 1,569,174 ----------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH........................ (555,393) 12,310 130,750 ----------------------------------------------------- Net increase in cash and cash equivalents...................... 30,779,076 14,951 5,916,982 Cash and cash equivalents, beginning of year................... 12,752,729 12,737,778 6,820,796 ----------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR......................... $43,531,805 $12,752,729 $12,737,778 ===================================================== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid.............................................. $12,332,383 $12,126,600 $10,070,961 Interest paid.................................................. 247,670 635,654 625,185 Non-cash transaction--issuance of restricted stock.............. 155,465 -- -- </TABLE> See notes to consolidated financial statements. 22
23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Thor Industries, Inc. and its wholly-owned domestic and foreign subsidiaries. Investments in two unconsolidated 50% owned companies are accounted for by the equity method. All intercompany balances and transactions are eliminated in consolidation. CASH AND CASH EQUIVALENTS--Interest-bearing deposits and other investments with original maturities of three months or less are considered cash equivalents. INVENTORIES--Inventories are stated at the lower of cost or market, determined principally by the last-in, first-out (LIFO) basis. DEPRECIATION--Property, Plant and Equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements--ten to thirty-nine years Machinery and equipment--three to ten years OTHER ASSETS--Other assets are amortized using the straight-line method over the estimated lives of the assets as follows: Goodwill--twenty or thirty years Noncompete agreements--five or ten years Trademarks--ten or twenty years The Company periodically reviews long-term assets for impairment. PRODUCT WARRANTIES--Estimated warranty costs are provided at the time of sale of the warranted products. REVENUE RECOGNITION--Revenues from the sale of recreational vehicles and buses are recognized when shipped to dealers, distributors, or contract buyers. ESTIMATES--The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION--Assets and liabilities of Canadian operations reported in the consolidated balance sheets have been translated at current exchange rates. Revenues and expenses reported in the consolidated statements of income have been translated at the average exchange rate for the year. Transaction gains and losses are not significant. STOCK SPLIT--All per share amounts have been restated to reflect a 3-for-2 common stock split effective April 6, 1998. STOCK OPTIONS--The Company measures cost for stock options issued to employees using the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation," which was adopted by the Company in 1997. Pursuant to the new standard, companies are encouraged, but not required, to adopt the fair value method of accounting for stock options and similar equity instruments. The Company has elected to continue measuring compensation cost in accordance with APB No. 25. EARNINGS PER SHARE--As of January 31, 1998, the Company adopted Financial Accounting Standard Board Statement No. 128, "Earnings Per Share" (SFAS 128). This standard requires the presentation of basic and diluted earnings per share on the face of the income statement. Earnings per share as reported in prior periods have been restated in accordance with SFAS 128, by dividing net income by the following: <TABLE> <CAPTION> 1998 1997 1996 ---------------------------------------- <S> <C> <C> <C> Weighted average shares outstanding for basic earnings per share........................... 12,227,307 12,458,337 13,214,490 Stock options........................................ 41,914 52,063 -- ---------------------------------------- Total for diluted shares............................. 12,269,221 12,510,400 13,214,490 ======================================== </TABLE> 23
24 COMPREHENSIVE INCOME--In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which will require disclosure in the financial statements of all the changes in equity during a period from transactions and other events and circumstances from non-owner sources. Items included in comprehensive income will include separate classification of items based upon their nature. The Statement requires that comparative information for prior years be restated. SFAS No. 130 is effective for financial statements for fiscal years beginning after December 15, 1997. The effect on the Company's financial statements has not yet been determined. SEGMENTS--In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which will require new segment information in public companies' annual financial statements. Additionally, selected information will be required in interim financial statements. The Statement requires that comparative information for prior years be restated. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The effect on the Company's financial statements has not yet been determined. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. The statement requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in fair value of the derivatives are recorded depending upon whether the instruments meet the criterion for hedge accounting. This statement is effective for fiscal years beginning after June 15, 1999. RE-CLASSIFICATIONS--Certain reclassifications have been made in the 1997 and 1996 consolidated financial statements to conform to the presentation used in 1998. B. INVENTORIES Major classifications of inventories are: <TABLE> <CAPTION> As of July 31, ------------------------------ 1998 1997 ------------------------------ <S> <C> <C> Finished products................................................................... $ 4,724,367 $ 7,921,573 Work in process..................................................................... 19,858,127 14,755,637 Raw materials....................................................................... 27,771,403 23,854,734 Chassis............................................................................. 17,217,486 17,083,859 ------------------------------ Total............................................................................... 69,571,383 63,615,803 Less excess of FIFO costs over LIFO costs........................................... 2,853,696 3,168,977 ------------------------------ Total inventories................................................................... $66,717,687 $60,446,826 ============================== </TABLE> C. LINE OF CREDIT The Company has a $30,000,000 unsecured revolving line of credit. There was no outstanding balance at July 31, 1998. The loan agreement contains certain covenants and the Company must maintain certain financial ratios. The line of credit bears interest below the prime rate (6.5% at July 31, 1998) and expires on November 30, 1998. D. INCOME TAXES <TABLE> <CAPTION> Years ended July 31, ------------------------------------------------- 1998 1997 1996 ------------------------------------------------- Components of the provision are: Current: <S> <C> <C> <C> Federal...................................................... $13,122,320 $8,568,239 $ 7,766,485 State and local.............................................. 2,468,150 1,933,350 2,240,014 Foreign...................................................... 737,826 325,529 (36,590) --------------------------------------------------- Total current................................................ 16,328,296 10,827,118 9,969,909 Total deferred............................................... (2,672,630) 387,316 355,321 --------------------------------------------------- Provision for income taxes................................... $13,655,666 $11,214,434 $10,325,230 =================================================== </TABLE> 24
25 <TABLE> <CAPTION> July 31, July 31, 1998 1997 -------------------------------- <S> <C> <C> A SUMMARY OF DEFERRED INCOME TAXES IS: CURRENT DEFERRED TAX ASSET (LIABILITY): Inventory basis..................................................................... $(1,422,218) $(1,188,863) Employee benefits................................................................... 351,618 356,568 Self-insurance...................................................................... 722,696 521,962 Product warranties.................................................................. 3,522,313 2,585,501 Loss on divestment of subsidiary.................................................... 1,045,208 -- Other............................................................................... (351,431) (275,423) -------------------------------- TOTAL CURRENT DEFERRED TAX ASSET INCLUDED IN PREPAID EXPENSES AND OTHER.............................................. 3,868,186 1,999,745 -------------------------------- LONG-TERM DEFERRED TAX ASSET (LIABILITY): Property basis...................................................................... (1,454,048) (2,326,810) Other............................................................................... 411,173 479,746 -------------------------------- TOTAL LONG-TERM DEFERRED TAX LIABILITY INCLUDED IN OTHER LIABILITIES....................................................... (1,042,875) (1,847,064) NET DEFERRED TAX ASSET.............................................................. $ 2,825,311 $ 152,681 -------------------------------- </TABLE> The differences between income taxes at the federal statutory rate and the actual income taxes are as follows: <TABLE> <CAPTION> 1998 1997 1996 --------------------------------------------------- <S> <C> <C> <C> Provision at statutory rates................................... $11,567,813 $ 9,673,020 $ 8,811,582 State and local income taxes, net of federal tax benefit....... 1,604,298 1,210,178 1,412,612 Amortization of intangibles.................................... 212,936 269,869 269,869 Non-deductible loss on divestment of subsidiary................ 351,293 -- -- Other.......................................................... (80,674) 61,367 (168,833) --------------------------------------------------- Provision for income taxes .................................... $13,655,666 $11,214,434 $10,325,230 =================================================== </TABLE> Income before income taxes includes foreign income of $1,878,422 in 1998, $603,473 in 1997 and $176,482 in 1996. E. LEASES The Company has operating leases principally for land, buildings and equipment. Minimum future rental payments required under these operating leases are $8,801,984, which includes the following amounts due in each of the next five years ending July 31: $2,353,600 in 1999; $2,086,066 in 2000; $1,771,217 in 2001; $944,790 in 2002; $519,106 in 2003 and $1,127,205 thereafter. Rent expense was $2,616,539 in 1998, $2,541,033 in 1997 and $2,497,776 in 1996. F. PROFIT SHARING PLANS The Company has five 401(k) plans for full-time employees at five subsidiaries and a 401(k) plan for domestic union employees at another subsidiary. Contributions to the union negotiated 401(k) plan are based on hours worked; contributions to one non-union plan are at the discretion of the Board of Directors. There are no Company contributions to the four remaining non-union 401(k) plans. Total expense for these plans was $164,217 in 1998, $148,646 in 1997 and $180,171 in 1996. 25
26 G. CONTINGENT LIABILITIES It is customary practice for companies in the recreational vehicle industry to enter into repurchase agreements with financing institutions to provide financing to their dealers. Generally, the agreements provide for the repurchase of products from the financing institution in the event of a dealer's default. Although the total contingent liability approximated $151,305,000 at July 31, 1998, the risk of loss under the agreements is spread over numerous dealers and is further reduced by the resale value of the units which the Company would be required to repurchase. Losses under these agreements have not been significant in the periods presented in the accompanying consolidated financial statements, and management believes any future losses under the agreements will not have a significant effect on consolidated financial position or results of operations. The Company obtains certain vehicle chassis from automobile manufacturers under converter pool agreements. The agreements generally provide that the manufacturers will supply chassis at the Company's various production facilities under the terms and conditions as set forth in the agreement. The manufacturer does not transfer the certificate of origin to the Company and, accordingly, the Company accounts for the chassis as consigned, unrecorded inventory. Typically, chassis are converted and delivered to customers within 90 days of delivery. If the chassis is not converted within 90 days of delivery to the Company, the Company purchases the chassis, and at that time the Company records the inventory. At July 31, 1998, chassis on hand accounted for as consigned, unrecorded inventory was approximately $12,459,000. H. STOCKHOLDERS' EQUITY Officers and key employees have been granted stock options under the 1988 Incentive Stock Option Plan. Under the Plan, options to purchase 450,000 common shares may be granted and expire on various dates from 1998-2007. The Company applies APB Opinion No. 25 and related Interpretations in accounting for the plan. Accordingly, no compensation cost has been recognized for its stock option plan. A summary of option transactions under the Incentive Stock Option Plan is as follows: <TABLE> <CAPTION> 1998 1997 1996 ---------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 193,650 $14.33 150 $ 5.33 150 $5.33 Granted -- -- 193,500 14.33 -- -- Exercised (36,150) 14.33 -- -- -- -- Canceled (4,500) 14.33 -- -- -- -- ---------------------------------------------------------------------------------------- Outstanding at end of year 153,000 $14.33 193,650 $14.33 150 $5.33 ======================================================================================== Exercisable at year-end 27,000 -- 150 -- 150 -- ---------------------------------------------------------------------------------------- Weighted average fair value of options granted -- -- -- $ 6.02 -- -- ---------------------------------------------------------------------------------------- </TABLE> The assumptions used in determining the fair value of options granted during 1997 are as follows: Expected volatility 25.52% Expected life of grant 6 years Risk-free interest rate 6.27% Expected dividend rate 0.50% The following summarizes information about stock options outstanding at July 31, 1998. <TABLE> <CAPTION> Options Outstanding Options Exercisable ----------------------------------------------------------------------------------------- Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Exercise Prices at July 31, 1998 Contractual Life Exercise Price at July 31 1998 Price ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> $14.33 153,000 9 years $14.33 27,000 $14.33 ========================================================================================= </TABLE> At July 31, 1998, 38,250 shares were available for future grants. 26
27 Had compensation cost for the Company's grants been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per common share would have been as follows: <TABLE> <CAPTION> 1998 1997 ---------------------------- <S> <C> <C> Net income As reported.......................................$19,395,228 $16,422,767 Pro forma..........................................19,255,433 16,282,972 Earnings per common share--basic As reported.............................................$1.59 $1.32 Pro forma................................................1.57 1.31 Earnings per common share--diluted As reported.............................................$1.58 $1.31 Pro forma................................................1.57 1.30 </TABLE> On September 29, 1997, the Board of Directors approved a stock award plan which allows for the granting of up to 100,000 shares of restricted stock to selected executives. Restrictions expire 50% after 5 years following the date of issue, and the balance after six years. As of July 31, 1998, the Company issued 5,150 shares of restricted stock under the plan. Compensation cost related to the plan which is being amortized over the restriction period was $17,921 in 1998. I. RESEARCH AND DEVELOPMENT Research and development expenses were approximately $847,000 in 1998, $768,000 in 1997 and $881,000 in 1996. J. JOINT VENTURES In March 1996, the Company and Cruise America, Inc. formed a joint venture, CAT Joint Venture LLC, to rent recreation vehicles to the public. The Company's total investment of $2,321,163 includes a subordinated note receivable of $1,910,000 due in 2000. In March 1994, the Company and a financial services company formed a joint venture, Thor Credit Corporation, to finance the sales of recreational vehicles to consumer buyers. The Company's total investment of $1,048,805 includes a note receivable of $400,000. These investments are accounted for using the equity method. K. ACQUISITION On February 9, 1998, the Company purchased certain assets and liabilities of Champion Motor Coach, Inc. (now Champion Bus, Inc.). The cash price of the acquisition was approximately $9,671,000 which was paid from internal funds. The revenues and operating results of the entity are reflected in the consolidated statements of income of Thor Industries from time of acquisition forward. The consolidated results of operations for the current and prior year had this transaction occurred as of August 1, 1998 and August 1, 1997, respectively are as follows: <TABLE> <CAPTION> (Unaudited) ----------------------------------- 1998 1997 ----------------------------------- <S> <C> <C> Net sales...................................................... $746,467,000 $686,770,000 Operating income............................................... 35,959,000 28,788,000 Net income..................................................... 19,859,000 17,170,000 </TABLE> 27
28 L. DIVESTMENT OF SUBSIDIARIES A pre-tax loss of $3,990,000 was recognized in 1998 resulting from the divestment of the Company's Thor West operations. Thor West's net sales and operating loss included in the 1998 consolidated statements of income of Thor Industries are $29,156,641 and $3,854,275, respectively. As part of the transaction the Company agreed to guarantee $750,000 of debt of the acquirer. On December 31, 1997, the Company sold for $2,934,973 certain assets and liabilities of Henschen Corp., a division of Airstream, Inc. The transaction resulted in a one time pre-tax gain of approximately $1,269,000. M. BUSINESS SEGMENTS <TABLE> <CAPTION> --------------------------------------------------- 1998 1997 1996 --------------------------------------------------- NET SALES: ($000) ($000) ($000) - ---------- <S> <C> <C> <C> Recreational vehicles: United States $522,022 $462,734 $477,573 Canada 25,463 22,276 18,418 Buses: United States 168,115 139,425 106,087 --------------------------------------------------- Total $715,600 $624,435 $602,078 =================================================== OPERATING INCOME (LOSS): Recreational vehicles: United States $ 24,373 $ 19,942 $ 20,404 Canada 1,754 792 (168) Buses: United States 8,969 6,569 4,535 --------------------------------------------------- Total $ 35,096 $ 27,303 $ 24,771 =================================================== IDENTIFIABLE ASSETS: Recreational vehicles: United States $148,824 $122,509 $126,347 Canada 7,910 7,325 11,596 Buses: United States 57,247 41,135 35,875 --------------------------------------------------- Total $213,981 $170,969 $173,818 =================================================== DEPRECIATION AND AMORTIZATION EXPENSE: Recreational vehicles $ 3,444 $ 3,668 $ 4,218 Buses 925 793 797 --------------------------------------------------- Total $ 4,369 $ 4,461 $ 5,015 =================================================== CAPITAL EXPENDITURES: Recreational vehicles $ 1,749 $ 1,217 $ 4,345 Buses 340 577 377 --------------------------------------------------- Total $ 2,089 $ 1,794 $ 4,722 =================================================== </TABLE> 28
29 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Balance at Charged to Write-offs Balance Beginning Costs and Net of at End of Description of Period Expenses Recoveries Period ----------------------------------------------------------- <S> <C> <C> <C> <C> Year Ended July 31, 1998: Allowance for doubtful accounts............ $ 516,535 $ 14,017 $(415,117) $ 115,435 =========================================================== Accumulated amortization of goodwill and other intangibles (1)...........$16,693,704 $4,043,924 -- $20,737,628 =========================================================== Year Ended July 31, 1997: Allowance for doubtful accounts............. $ 52,190 $ 491,755 $ (27,410) $ 516,535 =========================================================== Accumulated amortization of goodwill and other intangibles...............$14,609,392 $2,084,312 -- $16,693,704 =========================================================== Year Ended July 31, 1996: Allowance for doubtful accounts............. $ 52,190 $ 80,306 $ (80,306) $ 52,190 =========================================================== Accumulated amortization of goodwill and other intangibles...............$11,860,540 $2,748,852 -- $14,609,392 =========================================================== </TABLE> (1) Includes write-off of intangibles of Thor West of $2,139,530. 29