More than two years in development, the 1999 Ultimate Advantage was designed by Winnebago Industries to meet the market demand for luxurious rear-engine diesel motor homes.
Incorporated under the laws of the state of Iowa on February 12, 1958, Winnebago Industries, Inc. celebrated its 40th Anniversary during fiscal 1998. The Company adopted its present name on February 28, 1961. Winnebago Industries is a leading United States manufacturer of motor homes, self-contained recreation vehicles used primarily in leisure travel and outdoor recreation activities. These vehicles are sold through dealer organizations primarily under the WinnebagoÒ , ItascaÒ , VectraÒ , RialtaÒ , and UltimateÔ brand names. The Company markets its recreation vehicles on a wholesale basis to a broadly diversified dealer organization located throughout the United States, and to a limited extent, in Canada. As of August 29, 1998, the motor home dealer organization in the United States and Canada included approximately 350 dealers. Motor home sales by Winnebago Industries represented more than 87 percent of its revenues in each of the past five years. In addition, the Company’s subsidiary, Winnebago Acceptance Corporation (WAC), engages in floor plan and rental unit financing for a limited number of the Company's dealers.
The Company builds quality motor homes with state-of-the-art computer-aided design and manufacturing systems on automotive-styled assembly lines. Other products manufactured by the Company consist principally of a variety of component products for other manufacturers. The motor homes and component parts conform to what the Company believes to be the most rigorous testing in the RV industry.
Note 1: Nature of Business and Significant Accounting Policies
In fiscal 1998, the Company's operations were conducted predominantly in two industry segments: the manufacture and sale of recreation vehicles and other manufactured products, and floor plan financing for selected Winnebago, Itasca, Vectra, Rialta, and Luxor dealers. The recreation vehicle market is highly competitive, both as to price and quality of the product. The Company believes its principal marketing advantages are the quality of its products, its dealer organization, its warranty and service capability and its marketing techniques. The Company also believes that its prices are competitive with the competitions' units of comparable size and quality.
Principles of Consolidation. The consolidated financial statements include the parent company and subsidiary companies. All material intercompany balances and transactions with subsidiaries have been eliminated.
For all fiscal years presented, except fiscal 1998, the Consolidated Financial Statements reflect the Company's Cycle-Sat and electronic component assembly segments as discontinued operations.
Statements of Cash Flows. For purposes of these statements, cash equivalents primarily consisted of commercial paper, tax exempt money market preferreds and variable rate auction preferred stock with an original maturity of three months or less. For cash equivalents, the carrying amount is a reasonable estimate of fair value.
Fiscal Period. The Company follows a 52/53 week fiscal year period. The financial statements for fiscal 1998 and 1997 are based on a 52-week period, fiscal 1996 is on a 53-week basis.
Revenue Recognition. Sales are recorded by the Company when products are shipped to independent dealers. Interest income from dealer floor plan receivables are recorded on the accrual basis in accordance with the terms of the loan agreements.
Inventories. Inventories are valued at the lower of cost or market, with cost being determined by using the last-in, first-out (LIFO) method and market defined as net realizable value.
Property and Equipment. Depreciation of property and equipment is computed using the straight-line method on the cost of the assets, less allowance for salvage value where appropriate, at rates based upon their estimated service lives. Accelerated depreciation methods are used for tax purposes whenever permitted.
Management periodically reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing the review for recoverability, management estimates the nondiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The Company incurred an impairment charge of $400,000 to write down one of its buildings to estimated net realizable value during fiscal 1998 as a result of this review.
Provision for Warranty Claims. Estimated warranty costs are provided at the time of sale of the warranted products. Estimates of future warranty costs are based on prior experience and known current events.
Income Taxes. The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." This Statement requires recognition of deferred assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse.
Allowance for Doubtful Accounts. Allowance for doubtful accounts are based on previous loss experience. Additional amounts are provided through charges to income as management believes necessary after evaluation of receivables and current economic conditions. Amounts which are considered to be uncollectible are charged off and recoveries of amounts previously charged off are credited to the allowance upon recovery.
Research and Development. Research and development expenditures are expensed as incurred. Development activities generally relate to creating new products and improving or creating variations of existing products, to meet new applications. During fiscal 1998, 1997 and 1996, the Company spent approximately $1,128,000, $1,695,000 and $801,000, respectively, on research and development activities.
Earnings Per Common Share. Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding during the period.
Diluted earnings per common share is computed by dividing net income by the weighted average common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options (See Note 17).
Fair Value Disclosures of Financial Instruments. All financial instruments are carried at amounts believed to approximate fair value.
Use of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications. Certain prior year information has been reclassified to conform to the current year presentation.
Note 2: Discontinued Operations - Sale of Cycle-Sat Subsidiary
The Company owned an 80% interest in Cycle-Sat, Inc. (Cycle-Sat), a telecommuni-cations service firm that was a leading distributor of television and radio commercials using satellite, fiber-optic and digital technologies. On August 5, 1996 (the measure-ment date), the Company adopted a formal plan to sell Cycle-Sat. Revenues applicable to Cycle-Sat for fiscal years 1997 and 1996 were $7,073,000 and $30,235,000, respectively. Accordingly, Cycle-Sat is accounted for as a discontinued operation in the accompanying consolidated financial statements.
On November 19, 1996, the Company sold all of the assets of Cycle-Sat to Vyvx, Inc., a subsidiary of The Williams Companies, Inc., Tulsa, Oklahoma for approximately $57 million. The transaction resulted in an after-tax gain of $16.5 million or $.64 per diluted share.
Note 3: Discontinued Operations - Disposal of Electronic Component Assembly Segment
In August 1993, the Company agreed to sell certain assets and liabilities of its electronic component assembly business, North Iowa Electronics, Inc. (NIE) to an unaffiliated third party (the buyer) for $100,000 in cash and a $1.6 million promissory note. The transaction was accounted for as a transfer of net assets with recognition of the gain ($285,000) deferred due to uncertainty surrounding the buyer's ability to generate sufficient cash flows to retire the note.
During fiscal 1995, the Company guaranteed certain debt obligations of the buyer totaling $4,500,000. The buyer experienced significant financial difficulties and the Company decided, during fiscal 1996, to make no further financial accommodations and to exit ongoing involvement with this business.
In the fourth quarter of fiscal 1996, the Company provided $4,074,000 for the anticipated loss related to the net cost of resolution of this matter. Cash in an amount approximating the amount provided was paid related to the guarantee to fully resolve this matter during fiscal 1997.
Note 4: Dealer Financing Receivables
Dealer floor plan receivables are collateralized by recreation vehicles and are due upon the dealer's sale of the vehicle, with the entire balance generally due at the end of one year. At August 29, 1998, the Company had certain concentration of credit risks whereby $12,408,000 of dealer financing receivables were due from one dealer.
Note 5: Inventories
Inventories consist of the following:
The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates.
Note 6: Long-Term Notes Receivable
Long-term notes receivable of $5,396,000 and $5,692,000 at August 29, 1998 and August 30, 1997, respectively, are primarily collateralized by dealer inventories and real estate. The notes had weighted average interest rates of 8.2 percent per annum and 8.7 percent per annum at August 29, 1998 and August 30, 1997, respectively, and have various maturity dates ranging through January 2004.
Note 7: Notes Payable
Short-term lines of credit and related borrowings outstanding at fiscal year-end are as follows:
*Based on the approximate average aggregate amount outstanding during the year and the interest rate.
Since March 1992, the Company has had a financing and security agreement with Nations Bank Specialty Lending Unit (formerly NationsCredit Corporation). Terms of the agreement limit borrowings to the lesser of $30,000,000 or 75 percent of eligible inventory (fully manufactured recreation vehicles and motor home chassis and related components). Borrowings are secured by the Company's receivables and inventory. Borrowings under the agreement bear interest at the prime rate, as defined in the agreement, plus 50 basis points. The line of credit is available and continues for successive one-year periods unless either party provides at least 90 days' notice prior to the end of the one-year period to the other party that they wish to terminate the line of credit. The agreement also contains certain restrictive covenants, including maintenance of minimum net worth, working capital and current ratio. As of August 29, 1998, the Company was in compliance with these covenants. There were no outstanding borrowings under the line of credit during fiscal 1997 or fiscal 1998.
Note 8: Long-Term Debt
At August 29, 1998, the Company had no outstanding long-term debt. Long-term debt outstanding at August 30, 1997 was $695,000 with an interest rate of 7.5 percent per annum.
During fiscal year 1993, the Company and Winnebago Industries Europe, GmbH (WIE), a wholly owned subsidiary of the Company, entered into a financing arrangement with Volksbank Saarbrücken-St. Ingebert eG to finance the acquisition and renovation of a new facility in Kirkel, Saarland, Germany. The financing arrangement included four loans with interest rates ranging from 5.5 percent to 8.75 percent per annum. As of August 30, 1997, only one of the loans was outstanding which had an interest rate of 7.5 percent per annum. Borrowings under this agreement at August 30, 1997 were $695,000. The loan was guaranteed by the Company and was secured by real estate and improvements to the new facility. The Company sold the facility in August 1997. During fiscal 1998, the Company paid all amounts outstanding under this agreement.
Note 9: Employee Retirement Plans
The Company has a qualified profit sharing and contributory 401(k) plan and a stock bonus retirement plan for eligible employees. The plans provide for contributions by the Company in such amounts as the Board of Directors may determine. Contributions to the plans in cash for fiscal years 1998, 1997 and 1996 were $1,985,000, $1,933,000 and $2,099,000, respectively.
The Company also has a non-qualified deferred compensation program which permits key employees to annually elect (via individual contracts) to defer a portion of their compensation until their retirement. The retirement benefit to be provided is fixed based upon the amount of compensation deferred and the age of the individual at the time of the contracted deferral. An individual generally vests at the later of age 55 and five years of service since the deferral was made. For deferrals prior to December 1992, vesting occurs at the later of age 55 and five years of service from first deferral or 20 years of service. Deferred compensation expense was $1,487,000, $1,558,000, and $1,556,000 in fiscal 1998, 1997 and 1996, respectively. Total deferred compensation liabilities were $22,024,000 and $21,164,000 at August 29, 1998 and August 30, 1997, respectively.
To assist in funding the deferred compensation liability, the Company has invested in corporate-owned life insurance policies. The cash surrender value of these policies (net of borrowings of $9,254,000 and $10,335,000 at August 29, 1998 and August 30, 1997, respectively) are presented as assets of the Company in the accompanying balance sheets.
The Company has adopted a Directors' Deferred Compensation Plan which permits non-employee directors to receive their fees and retainers as members of the Board of Directors and committees of the Board in a form other than as direct payments.
The Company provides certain health care and other benefits for retired employees who have fulfilled eligibility requirements at age 55 with 15 years of continuous service. Retirees are required to pay a monthly premium for medical coverage based on years of service at retirement and then current age. The Company's postretirement health care plan currently is not funded. The status of the plan is as follows:
Accumulated postretirement benefit obligation at August 29, 1998 and August 30, 1997.
Net postretirement benefit expense for the fiscal years ended August 29, 1998, August 30, 1997, and August 31, 1996 consisted of the following components:
The average assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligations as of August 29, 1998 was 8.9 percent, decreasing each successive year until it reaches 4.5 percent in 2016 after which it remains constant.
A one-percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of August 29, 1998 by approximately $8,455,000. The effect of this change on the net postretirement health care cost for fiscal 1998 would be to increase it by approximately $784,000.
The discount rate used in determining the accumulated postretirement benefit obligation was 6.0 percent at August 29, 1998 and 7.0 percent at August 30, 1997. During fiscal 1996, the Company revised certain provisions of its postretirement health care plan to offer different medical plan options and revised the monthly contribution rate for retirees. The impact of these revisions resulted in a decrease in the accumulated postretirement benefit obligation of approximately $5,695,000 and a decrease in the previously estimated net postretirement benefit expense for fiscal year 1996 of approximately $1,249,000. The unrecognized net gain as of August 31, 1996 is being amortized over the average remaining service period of active plan participants, estimated to be 18 years. The unrecognized prior service cost is being amortized over the average remaining years to full eligibility for benefits of active plan participants, estimated to be 12 years.
Note 10: Contingent Liabilities and Commitments
It is customary practice for companies in the recreation vehicle industry to enter into repurchase agreements with lending institutions which have provided wholesale floor plan financing to dealers. Most dealers are financed on a "floor plan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price, collateralized by a lien upon, or title to, the merchandise purchased. Upon request of a lending institution financing a dealer's purchases of the Company's products, and after completion of a credit investigation of the dealer involved, the Company will execute a repurchase agreement. These agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, the Company will repurchase the financed merchandise. The agreements provide that the Company's liability will not exceed 100 percent of the dealer invoice and provide for periodic liability reductions based on the time since the date of the original invoice. The Company's contingent obligations under these repurchase agreements are reduced by the proceeds received upon the sale of any repurchased unit. The Company's contingent liability on all repurchase agreements was approximately $132,540,000 and $115,637,000 at August 29, 1998 and August 30, 1997, respectively. The Company's losses under repurchase agreements were approximately $153,000, $344,000 and $221,000 during fiscal years 1998, 1997 and 1996, respectively.
Included in these contingent liabilities are certain dealer receivables subject to full recourse to the Company with NationsCredit and Green Tree Financial. Contingent liabilities under these recourse agreements were $18,623,000 and $24,868,000 at August 29, 1998 and August 30, 1997, respectively. The Company incurred no actual losses under these recourse agreements during fiscal years 1998 and 1997 and approximately $85,000 during fiscal year 1996.
The Company self-insures for a portion of product liability claims. Self-insurance retention liability varies annually based on market conditions and for the past three fiscal years was at $2,500,000 per occurrence and ranged from $6,000,000 (fiscal 1998) to $8,500,000 in aggregate per policy year. Liabilities in excess of these amounts are the responsibility of the insurer.
The Company is involved in various legal proceedings which are ordinary routine litigation incident to its business, many of which are covered in whole or in part by insurance. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to this litigation, management is of the opinion that while the final resolution of any such litigation may have an impact on the Company's consolidated results for a particular reporting period, the ultimate disposition of such litigation will not have any material adverse effect on the Company's financial position, results of operations or liquidity.
Note 11: Income Taxes
The components of the provision for income taxes are as follows:
The following is a reconciliation of the U.S. statutory tax rate to the effective income tax rates (benefit) provided:
The tax effect of significant items comprising the Company's net deferred tax assets are as follows:
In the fourth quarter of fiscal 1997, the Company recognized a tax benefit of approximately $3,700,000 due to the sale and closing of WIE.
Note 12: Financial Income and Expense
The following is a reconciliation of financial income (expense):
Note 13: Dividend Declared
On October 15, 1998, the Board of Directors declared a cash dividend of $.10 per common share payable January 11, 1999, to shareholders of record on December 11, 1998.
Note 14: Stock Option Plans
The Company's 1987 stock option plan allowed the granting of non-qualified and incentive stock options to key employees at prices not less than 100 percent of fair market value, determined by the mean of the high and low prices, on the date of grant. The plan expired in fiscal 1997; however, exercisable options representing 347,907 shares remain outstanding at August 29, 1998.
The Company's 1997 stock option plan provides additional incentives to those officers, employees, directors, advisors and consultants of the Company whose substantial contributions are essential to the continued growth and success of the Company's business. A total of 2,000,000 shares of the Company's common stock may be issued or transferred or used as the basis of stock appreciation rights under the 1997 stock option plan. The plan allows the granting of non-qualified and incentive stock options as well as stock appreciation rights. The plan will be administered by the Company's Board of Directors or by a committee appointed by the Board. The option prices for these shares shall not be less than 85 percent of the fair market value of a share at the time of option granting for non-qualified stock options or less than 100 percent for incentive stock options. The term of each option expires and all rights to purchase shares thereunder cease ten years after the date such option is granted or on such date prior thereto as may be fixed by the Committee. Options granted under this plan become exercisable six months after the date the option is granted.
A summary of stock option activity for fiscal years 1998, 1997 and 1996 is as follows:
The following table summarizes information about stock options outstanding at August 29, 1998:
In 1997, the Company adopted SFAS No. 123, "Accounting for Stock Based Compensation." The Company has elected to continue following the accounting guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement and recognition of stock-based transactions with employees. No compensation cost has been recognized for options issued under the stock option plans because the exercise price of all options granted was not less than 100 percent of fair market value of the common stock on the date of grant. Had compensation cost for the stock options issued been determined based on the fair value at the grant date, consistent with provisions of SFAS No. 123, the Company's 1998 and 1997 income and earnings per share would have been changed to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
There were no options granted during fiscal 1996.
Note 15: Supplemental Cash Flow Disclosure
Cash paid during the year for:
Note 16: Business Segment Information
The Company defines its operations into two business segments: Recreation Vehicles and Other Manufactured Products, which includes all data relative to the manufacturing and selling of its recreational and other manufactured products; and Dealer Financing, which relates to the WAC subsidiary operation. Identifiable assets are those assets used in the operations of each industry segment. General Corporate assets consist of cash and cash equivalents, marketable securities, deferred income taxes and other corporate assets. General Corporate income and expenses include administrative costs. Inter-segment sales and expenses are not significant.
For the years ended August 29, 1998, August 30, 1997 and August 31, 1996, the Company's segment information is as follows:
Summary information for WIE is as follows: Net revenues - $9,655, operating loss - $(6,376). The Company sold WIE during August, 1997. As a result of the sale, the Company recorded a capital loss for tax purposes resulting in a tax credit of approximately $3,700,000 due to this loss. These amounts are included in the Recreation Vehicles and Other Manufactured Products segment above.
Summary information from WIE is as follows: Net revenues - $13,773. Operating loss - $(238). Identifiable assets - $10,388. These amounts are included in the Recreation Vehicles and Other Manufactured Products segment above.
Note 17: Earnings Per Share
Effective December 15, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
The following table reflects the calculation of basic and diluted earnings per share for the past three fiscal years.
To the Board of Directors and
We have audited the consolidated balance sheets of Winnebago Industries, Inc. and subsidiaries (the Company) as of August 29, 1998 and August 30, 1997 and the related consolidated statements of earnings, cash flows and changes in stockholders' equity for each of the three years in the period ended August 29, 1998. 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 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 present fairly, in all material respects, the financial position of Winnebago Industries, Inc. and subsidiaries as of August 29, 1998 and August 30, 1997, and the results of their operations and their cash flows for each of the three years in the period ended August 29, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
October 21, 1998
Net Revenues By Major Product Class (Unaudited)
Interim Financial Information (Unaudited)
The Company recorded an inventory write-up of approximately $1,962,000 during the fourth quarter of fiscal 1998 as a result of completing a physical count of work-in-process inventories. It was not possible to identify the adjustment to any specific period. The Company also recorded a reduction in its LIFO reserve due to favorable prices of inventory purchased during the fourth quarter of fiscal 1998 of approximately $1,516,000.
The Company recorded a net gain on the sale of the Cycle-Sat subsidiary of $16,472,000 during the first quarter of fiscal 1997. The Company recorded a tax credit of approximately $3,700,000 during the fourth quarter of fiscal 1997 due to the closing and sale of Winnebago Industries Europe GmbH.
A notice of Annual Meeting of Shareholders and Proxy Statement is furnished to shareholders in advance of the annual meeting.
Copies of the Company's quarterly financial news releases and the annual report on Form 10-K (without exhibits), required to be filed by the Company with the Securities and Exchange Commission, may be obtained without charge from the corporate offices as follows:
Public Relations Department
Shareholder Account Assistance
Registration and Transfer Agent to contact for address changes, account certificates and stock holdings:
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
The Annual Meeting of shareholders will be held on Wednesday, January 20, 1999, at 7:30 p.m. (CST) in Friendship Hall, Highway 69 South, Forest City, Iowa.
Deloitte & Touche LLP
Common Stock Data
The Company's common stock is listed on
the New York, Chicago and Pacific Stock Exchanges.
Cash Dividends Per Share
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