ITEM 1. BUSINESS
SMC Corporation (SMC or the Company) is one of the largest manufacturers of
high-line motor coaches in the United States. SMC was incorporated in Oregon in
1986 and production operations began in 1987. SMC has relocated its headquarters
to Bend, Oregon from Harrisburg, Oregon and has six operating subsidiaries. The
Company's executive offices are located at 20545 Murphy Road, Bend, Oregon,
97701, and its telephone number is (541) 995-8214. The subsidiaries of the
Company are Safari Motor Coaches, Inc. (Safari), Magnum Manufacturing, Inc.
(Magnum), Beaver Motor Coaches, Inc. (Beaver), Electronic Design & Assembly,
Inc. (ED&A), Composite Technologies, Inc. (CTI), and Harney County Operations,
Inc. (HCO). Safari and Magnum are located in Harrisburg, Oregon; Beaver and ED&A
are located in Bend, Oregon; and CTI and HCO are located in Hines, Oregon.
Within the multi-billion dollar recreational vehicle industry, the majority
of SMC's products are positioned among the most expensive. SMC predominately
builds luxury Class A motor coaches - motorized, fully self-contained motorhomes
with features such as solid hardwood cabinetry, powerful diesel engines, and
residential decor that separate these coaches from the rest of the market.
This select segment was targeted from SMC's founding and the Company
rapidly grew to become a leader in the luxury market. Mathew Perlot, SMC's
founder and Chief Executive Officer, considered this market particularly
attractive - anticipating the aging of the "baby boomers" and believing that
this maturing, affluent group would provide growing support for this product.
The initial product included coaches ranging from 30 to 34 feet and retailed for
about $100,000. Over the next several years SMC expanded its product offerings
to both higher and lower price points, to include coaches ranging in length from
24 to 40 feet, and with retail prices ranging from $70,000 to $230,000.
Magnum began production of chassis for Safari products in 1993 and has
since expanded operations to provide chassis for seven of the eight model lines
of Safari and Beaver products. By manufacturing chassis specially designed for
applications in the recreational vehicle (RV) industry, the Company believes it
has quality, ride and cost advantages over competitors that do not build their
SMC acquired the Beaver brand names and production facilities in 1994. At
that time the Beaver product ranged in retail price from $180,000 to $350,000.
The line has since been broadened to include a lower-priced coach, the Monterey.
This expansion of product offerings has enabled Beaver to expand distribution of
In 1996 the Company began to seek product opportunities in the lower-priced
segment of the recreational vehicle industry when it entered the Class C market
through acquisition of a facility in the Midwest. The Company continued its
penetration into the upper range Class C market in 1997 through its operations
at HCO and the introduction of a Safari brand Class C motor coach. This model
has retail prices ranging from $66,000 to $85,000. In 1998 the Company
introduced the Desperado, another Class C model, as the Company continues to
expand in the Class C market. Although the Company's primary market focus
remains the high-line luxury motor coaches it built its foundation on, the
Company plans to continue to develop this segment of its business.
In 1998 the Company maintained its core market -- high-line motor coaches
with retail prices typically over $150,000. The Company's estimated market share
of high-line retail sales was 25.3%, 27.6%, and 29.1% in 1998, 1997, and 1996,
respectively. Total retail sales in this segment of the market was approximately
4,100 units in 1998.
Also, at the HCO facility, the Renegade, a new Class A motor coach, was
introduced in 1998. With retail prices starting at $134,000, the Renegade is
targeted toward the entry-level of the Class A market --buyers that are
value-oriented but still demanding features and quality. This segment of the
market has become very popular. The Company sold 178 Renegade units in 1998. The
production facility in Hines, Oregon has ample production capacity to meet
expected demand for both the Renegade Class A coaches as well as the Class C
At the Beaver facility, the newly designed Contessa Class A model was
introduced in December 1997. The Contessa had been a Beaver product before the
Company acquired Beaver in 1994, but had been dormant since that time. Priced
below the existing Patriot model but above the Monterey, the Contessa has been
resurrected with a new design and feature set that has been widely accepted.
Sales for the Contessa were very favorable in 1998, with sales of 112 units.
At the Safari facility, a new Class A model, the Zanzibar, was introduced
in June 1998. This model is priced at the lower range of the Class A market,
targeting a market similar to that of the Renegade, but designed with the
distinction of a Safari brand product. The sales for the Zanzibar unit were 148
At the Magnum facility, a new chassis was developed for the Beaver Marquis.
Previously, the Marquis was constructed on a Gillig brand chassis. Gillig ceased
production of the chassis in 1997. Magnum acquired the rights to manufacture the
chassis from Gillig and, after making some modifications for the Marquis'
specific requirements, now produces the chassis at a lower overall cost to the
Company. With the new chassis, Magnum now produces the chassis for all of the
Company's models except the Trek and Class C models, resulting in significant
overall costs savings to the Company.
Originally the Company had acquired the Midwest facility to gain entrance
into the Class C market. However in 1996 the Company determined that the losses
being incurred through operation of the Midwest facility were not acceptable.
The Midwest facility was
closed in 1996 and a pre-tax restructuring charge of $2.4 million was incurred
related to this decision in 1996. The exit plan was completed as planned, and no
further restructuring charges were necessary in 1997. Production of Class C
motor coaches has been transferred to the Company's HCO production facilities in
Hines, Oregon. This facility now produces the Renegade (Class A), Safari (Class
C) and the Desperado (Class C) products.
In 1998, the Company opened a service center facility in Tampa, Florida to
provide better, more timely, and cost effective customer service. This service
center operation is a branch of the existing service centers located in
Harrisburg and Bend, Oregon, and the Company is able to use the resources of
skilled technicians during slow service periods in Oregon at the facility in
Recreational vehicles encompass a wide range of mobile housing options,
including folding camping trailers, van conversions, truck campers, fifth wheel
trailers, Class A, B and C motor coaches, and bus conversions. The retail prices
of these vehicles range from under $3,000 for the simplest folding camping
trailer to over $750,000 for the most expensive bus conversion. The Recreational
Vehicle Industry Association (RVIA) has reported that one in ten households in
the U.S. owns a recreational vehicle, resulting in a total ownership of
approximately nine million recreational vehicles.
Although retail sales of recreational vehicles and Class A motor coaches
have fluctuated over the last five years, retail sales of high-line motor
coaches have remained steady during this period according to Statistical
Surveys, Inc. The following table shows (i) unit shipments to dealers of all
recreational vehicles, all motor coaches, and Class A motor coaches in the U.S.,
based on RVIA data, and (ii) unit retail sales of high-line motor coaches in the
U.S. and unit retail sales of Safari and Beaver coaches as a percentage of the
high-line market, based on data distributed by Statistical Surveys, Inc.
1994 1995 1996 1997 1998
(In thousands, except percentage data)
Unit shipments from manufacturers to dealers:
All recreational vehicles 518.8 475.2 466.8 438.8 441.3
All motor coaches 58.1 52.8 55.3 55.0 63.5
Class A motor coaches 37.3 33.0 36.5 37.6 42.9
Unit retail sales and market share data:
High-line motor coaches 3.6 3.9 4.2 4.4 4.1
SMC percentage of high-line market:* 24.6% 24.5% 29.1% 27.6% 25.3%
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* For all years includes sales for both Safari and Beaver motor coaches
SMC focuses primarily on the high-line segment of the Class A motor coach
market. Class A motor coaches incorporate kitchen, sleeping and bathroom
facilities built on a self-powered chassis. The term "high-line motor coach" is
almost synonymous with "diesel pusher." For reasons of cooling and drive train
engineering, almost all motor coaches are powered either by a gasoline engine
mounted in the front or a diesel engine mounted in the rear. Diesel pushers are
more expensive, but can be built longer and are generally more powerful. Thus
most high-line coaches are diesel pushers - with horse power ratings over 300,
and at this time nearly all high-line diesel pushers retail for over $150,000.
All of SMC's products except the Trek, Desperado, Safari Class C, and
Renegade models are high-line coaches with retail prices over $150,000. Although
the Trek shares many high-line features of the Company's other models, its
retail price ranges from $83,000 to $105,000, and it is therefore excluded from
market data compiled for high-line products. The Desperado is a Class C motor
coach with retail prices ranging from $61,000 to $80,000. The Safari Class C
price ranges from $66,000 to 85,000. The new Class A Renegade model retails in
the price range of $134,000 to $145,000.
The high-line segment of the Class A RV market has seen consistent growth
since 1989, and in recent years this market has attracted many other companies.
Many "mainstream" RV builders, such as Fleetwood, Winnebago, and Coachmen, have
developed offerings in this market. Meanwhile, some luxury builders, such as
Monaco Coach and Country Coach, have broadened their product lines. Some
companies are not surviving. Beaver Coaches was acquired by SMC in 1994, Holiday
Rambler was purchased by Monaco Coach in early 1996, and Country Coach was
acquired by National RV Holdings in late 1996.
Several long-term trends favor the luxury segment of the RV industry. The
most significant indicator of future growth potential is the change in RV-owner
demographics. Households over fifty years old form the principal market for
luxury RVs. As the "baby-boom" generation ages, this demographic group is
expected to increase from approximately 50 million people today to 70 million by
the year 2005. The Company believes that on average this generation is expected
to retire earlier and have more discretionary income than preceding generations,
which is expected to provide a growing base for RV sales.
This trend is also reflected in the substantial increase in the number and
quality of facilities available for RV use and in companies serving the RV
market. The increased availability of accessories and facilities will continue
to make the RV lifestyle more attractive.
Three other factors also have a lesser impact on the RV industry:
Fuel Availability and Price Stability
Diesel fuel has been relatively abundant and inexpensive since the
beginning of the 1980's. The Company believes the needs of the transportation
industry for diesel fuel may contribute to continued availability and pricing
stability. All of the Company's Class A motor coaches are powered by diesel
engines. Consequently, an interruption in the supply or a significant increase
in the price of or tax on the sale of diesel fuel on a regional or national
basis could have a material adverse effect on the Company's results of
operations. Diesel fuel has from time to time been difficult to obtain, and
there is no assurance that the supply of diesel fuel will continue
uninterrupted, that rationing of diesel fuel will not be imposed or that the
price of or tax on diesel fuel will not significantly increase in the future.
Low Interest Rates
Interest rate levels affect the cost of a motor coach for consumers who
finance their purchase and, more significantly, the cost of inventory
maintenance for motor coach dealers. Recent periods of relatively low interest
rates have facilitated dealer financing resulting in generally higher dealer
Favorable Tax Treatment
U.S. tax laws generally allow individuals who itemize deductions to deduct
interest paid on loans used to finance the purchase of either a first or second
residence. The definition of "residence" has been interpreted to include motor
coaches of the type manufactured by the Company. The Company believes the tax
deductibility of interest paid on loans used to purchase a Class A motor coach
increases the attractiveness of ownership. These laws, however, have
historically been amended frequently, and it is likely that further amendments
and additional tax laws will be applicable to financing the purchase of motor
coaches in the future. There is no assurance that favorable tax treatment for
financing the purchase of motor coaches will not be amended or repealed.
Sales and Marketing
SMC has two distinctive brands that are marketed through separate dealer
networks. (Sales of Class C motor coaches to date have not been a significant
part of the Company's business.) The Beaver and Safari product are deliberately
kept differentiated to help increase total penetration of the high-line market.
The Beaver product is marketed as a "traditional" luxury RV. Its fiberglass wall
construction, air suspension, and "classic" RV styling places the Beaver models
near the mainstream of high-line coaches. The Safari product is avant-garde in
comparison. Its aluminum exterior is unique in this market, and innovations such
as the Velvet-Ride(TM) Suspension and power disk brakes further separate the
Safari from the rest of the luxury RV market. This two-pronged attack on the
luxury market has allowed SMC to successfully maintain a market share in this
niche, with an estimated market share of over 25% in 1998.
The Company markets its products through independent dealers throughout the
United States and Canada. Few dealers carry both the Safari and Beaver brand
products. SMC has made dealer development a priority, because it believes that
an expanded dealer base results in greater retail sales exposure and ultimately
more retail sales volume. Total Class A dealer locations were 94, 87 and 107 as
of December 31, 1998, 1997 and 1996 respectively.
The Company grants exclusive distribution rights to a dealer within a
geographic region. Dealers are selected based on location, financial stability,
marketing expertise, sales history, integrity and repair and service capability.
The Company provides a variety of support services to its dealers, including
promptly supplied product literature, display materials and space rental
subsidies for trade shows and exhibitions and a dealer newsletter with updates
on product development and other product information. The Company offers
training and technical support to dealer salespeople, including a plant tour
video and a product handbook, and Company representatives visit dealers on a
regular basis for sales training and assistance.
The Company focuses its advertising on consumer publications which
emphasize the RV lifestyle. In 1995, the Company consolidated all of its media
production in-house because it was cost-effective to do so. In-house media
development has also added flexibility and responsiveness to the process, which
frequently involves "rush" jobs to take advantage of market opportunities.
A key part of the Company's marketing effort is the sponsorship and active
promotion of Safari International and the Beaver Ambassador Club, both of which
are active owners clubs for owners of Safari and Beaver products, respectively.
Members of these groups socialize, discuss common experiences and enjoy motor
coaching activities together, thus helping to build customer loyalty and
enthusiasm. The Company publishes quarterly newsletters for members of the
owners' clubs, as well as a quarterly magazine, the "Rendezvous," which is
circulated to owners, prospective purchasers, suppliers, dealers
and employees. In addition, the Company annually sponsors "homecoming" rallies
at the Safari and Beaver factories, open to all Safari and Beaver coach owners.
Dealers typically finance their inventory through revolving credit
facilities established with asset-based lending institutions, including
specialized finance companies and banks. It is industry practice for these
"floor plan" financiers to require motor coach manufacturers to repurchase motor
coaches previously sold to the dealer if the dealer defaults on its financing
agreements or if the lender otherwise has a reasonable basis to be concerned
about the ability of the dealer to meet its obligations to the lender. This
agreement typically applies for a period of 12 to 18 months from the date of the
dealer's purchase from the manufacturer. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
The Company takes several steps to reduce its exposure to coach repurchase
risk. A dealer is typically required to make periodic payments of principal,
referred to as "curtailment," to the flooring financing institution commencing
in the seventh month after purchase of the coach. A coach manufacturer may waive
these curtailment payments at the request of a dealer, but the Company generally
will not do so and, in any event, will do so only if the dealer owes to the
flooring institution no more than 90% of the wholesale price of the coach. The
Company also monitors the inventory levels and financial circumstances of its
dealers through reports generated by the flooring institutions and through
frequent contact by its sales personnel with the dealers. If a dealer is
experiencing undue difficulty in selling the Company's coaches, the Company will
often work with that dealer to voluntarily move the coaches to a dealer that can
sell additional inventory. The Company believes, however, that its most
fundamental protection against significant loss due to repurchase obligations is
the production and marketing of motor coaches that are sufficiently popular to
enable the Company quickly to resell, at satisfactory prices, any coaches it may
be required to repurchase. For 1996 the Company made no repurchase payments
under flooring arrangements. In both 1997 and 1998, the Company repurchased a
total of 8 motor homes in each year under the requirements of the repurchase
obligations with two of its flooring financing institutions when two separate
motor home dealerships went out-of-business. No significant losses were incurred
upon the subsequent resale of the motor homes.
For 1997, sales to one of the largest motor coach dealers in the U.S. and
located just a few miles from the Safari facility, accounted for approximately
10% of net sales. Another large dealer, with two locations in Oregon, accounted
for 12% of net sales in 1997, and 14% of net sales in 1998.
Product Information By Subsidiary
The Marquis is positioned at the top of the Beaver product line. With
retail prices of over $390,000, it is one of the most expensive and luxurious
motor coaches in production today. The Marquis has traditionally been the most
visible and best recognized of the Beaver models. The Marquis motor coach was
further upgraded in 1997 to its current ultra-luxury position. As part of this
strategy, production of the Marquis was slowed and a craftsman-intensive team
production program was developed to produce each vehicle. New cabinet
technologies were introduced, allowing the use of exotic veneers and richer
lacquers. The Marquis is now positioned as a limited production, prestige
product. Previously built on a chassis supplied by an outside supplier, in 1997
the Company began building the Marquis on a chassis developed by Magnum at an
overall cost savings for the Company.
In July 1995, SMC introduced the 1996 Patriot on the all-new Magnum
B-Series chassis. This new Magnum chassis replaced a chassis from an outside
chassis vendor used since the Patriot model was introduced in 1992. The Patriot
model has a retail price ranging from $223,000 to $309,000, depending upon
options which include the upgraded Thunder option which features a powerful
425-horsepower engine and a heavy-duty transmission.
In 1997, the Company introduced the completely redesigned Contessa, which
had been a Beaver model prior to the acquisition of Beaver in 1994. The Contessa
is a high-end coach powered by a 330-horsepower engine which retails from
$196,000 to $244,000, depending upon options.
The Monterey was the first all-new Beaver product since the acquisition of
Beaver in 1994. Retailing from $156,000 to $201,000, depending upon options, the
Monterey provides Beaver with a product priced for broader appeal. The Monterey
uses chassis and floor plans that are similar to the Safari Sahara, but differs
considerably from the Safari product in styling options. In addition, an
air-ride option has been developed to provide the traditional RV owner an
alternative which is typically seen in high-line motor coaches.
The Continental is the flagship product from Safari. Its design and
technology features include disk brakes, B.F. Goodrich's Torsilastic suspension
system, and Magnum Intellidrive computerized monitoring display, all as standard
equipment. The Continental retails from $233,000 to $298,000, depending upon
options, including the Panther option which features a powerful 425-horsepower
engine and a heavy-duty transmission.
Serengeti and Ivory
As the oldest of the Safari brand names, the Serengeti has been the core
Safari product since its introduction in 1988. The Serengeti retails from
$191,000 to $251,000, depending upon options, and its sibling, the Ivory model,
occupies the higher end of that price range.
The Sahara model was introduced in 1993 and then repositioned in 1994 to
stand as a value-oriented luxury coach. The Sahara model retails from $148,000
to $200,000, depending upon options. The product provides many of the features
of the Serengeti and Ivory at a lower cost to the customer.
The Zanzibar was introduced in 1998. The standard equipment offers an array
of features found on higher priced models, but at an entry level price. It is
constructed on the Magnum `R' chassis. The Zanzibar model retails from $147,000
to $160,000, depending on the options.
The Trek is constructed on a Chevrolet chassis. As the lowest priced SMC
Class A motor coach, it also has a lower profit margin and is intended to
acquaint new customers with SMC's products and attract them to the RV lifestyle.
The Trek retails from $83,000 to $105,000, depending upon options.
Harney County Operations (DBA Harney Coach Works)
Safari Class C and Desperado
The Safari Class C and the Desperado are both constructed on a Ford or
Chevrolet van chassis. The first sales of the Safari Class C were made in 1997
and initial sales of the Desperado were in 1998. These units retail from $61,000
to $85,000, depending upon options, and occupy the high-end of the Class C motor
Renegade Class A
The Renegade is presently constructed on Magnum `R' series chassis with a
Cat 275 engine. Shipments began in January 1998. With retail sales prices
ranging from $134,000 to $145,000, depending upon options, the Renegade is
priced lower than any of the Company's Class A product, except for the Safari
Trek. The Renegade is targeted to the expanding entry level Class A market which
offers many features of the higher-line models, but at a more affordable pricing
Motor coach dealers, particularly those with a relatively large sales
volume, from time to time indicate to motor coach manufacturers the number of
coaches they expect to purchase in the following months. While the Company
regularly receives such indications, the Company includes in its backlog only
purchase orders it has received that are sufficiently complete as to
specifications (color, floor plan, options, etc.) to permit the Company to
schedule production of the coach. Consequently, backlog generally represents
orders for coaches scheduled to be manufactured and shipped in the following 45
to 60 days. The Company's backlog at December 31, 1998 was $12.8 million,
compared to backlog of $21.3 million at December 31, 1997. Backlog can fluctuate
substantially as the result of the receipt of purchase orders in connection with
various major motor coach shows and rallies, which are not held at even
intervals throughout the year. Consequently, and because orders are generally
cancelable without penalty, the amount of backlog at any date is not necessarily
indicative of sales in future periods. To date, order cancellations have not
The Company believes one of the most important elements in the success of
its business is understanding its customers and their preferences and providing
excellent customer service. Customer service is important because many of the
Company's customers are repeat purchasers and because a high level of service is
expected by purchasers of high quality coaches. In addition, because motor coach
purchasers tend to communicate freely their views on the quality of various
coaches and business reputations of motor coach manufacturers, the quality of
post-sale customer service provided by a motor coach manufacturer is a key
factor in establishing a manufacturer's reputation among this group.
The Company offers a one-year or 12,000-mile warranty, whichever occurs
first, on all coaches. Customers have the option to purchase extended
warranties, written by others, from Company dealers. The Company's warranty
covers all manufacturing-related problems and parts and system failures,
regardless of whether the repair is made at a Company service facility or by one
of the Company's dealers or authorized service centers. In addition to the
Company's warranty, the chassis, drive train, engine and transmission are
covered by separate warranties offered by the manufacturers of those components,
or by the Company on the chassis manufactured by its Magnum Manufacturing
subsidiary. The Company's warranty on the Magnum chassis and drive train is for
three years or 36,000 miles, whichever occurs first. Appliances in the coaches
are covered by the warranties of manufacturers of those items.
The Company maintains toll-free telephone lines for customers to call with
repair or operating questions or problems. Although many questions can be
resolved by telephone, the Company often refers the customer to a local dealer
or repair facility for additional assistance.
The Company also opened a 24-bay service center in Harrisburg in November
1995 to better serve its customers. In 1997, a leased service center was opened
in Tampa, Florida to expand its customer service opportunities further. In late
1998, the Company purchased a service center in Tampa, Florida and moved its
service activities from the leased facility in that area. The Company also
operates a service center adjacent to its Beaver manufacturing facility in Bend,
The Company uses "lean production" techniques in its coach manufacturing
process. These techniques emphasize teamwork, include significant input from
worker teams and employ just-in-time inventory controls to improve product
quality and manufacturing efficiencies.
The Company believes its coach manufacturing operations are vertically
integrated to a substantial degree compared to most other high-line motor coach
builders. Components of the Company's motor coaches produced by the Company
include chassis constructed by Magnum Manufacturing, Inc., the shell or "house"
portion of the coach, fiberglass, countertops, hardwood cabinetry and portions
of the interior upholstery. The Company believes this in-house production of
certain components results in cost savings to the Company and greater control
over quality and inventory.
The construction of each motor coach begins with the preparation of the
chassis on which the superstructure of the "house" is built. The floors, walls
and roof of the motor coach "house" are built off-line. The coach's front and
rear caps are each single pieces molded from fiberglass resins that provide
favorable strength-to-weight ratios. The Company believes the lightweight
construction of its motor coaches combined with the diesel engines used in
nearly all models add significantly to the performance of its motor coaches.
The Company purchases raw materials, parts, subcomponents, electric systems
and appliances from approximately 1,000 suppliers. These items are either placed
directly into the coach or are incorporated into subassemblies by the Company.
All components, subassemblies and finished products are inspected for compliance
with the Company's specifications. The Company attempts to minimize its
inventory costs by ordering inventory only on an as-needed, or just-in-time,
basis. Some supplies, such as fiberglass, are ordered and delivered to the
Company's plant on a daily basis, while other items, particularly engines and
transmissions, are ordered as much as four months in advance of the expected use
date. While the Company generally commences construction on a coach only after
receipt of an order from a dealer, it must nonetheless order certain parts or
components, some of which represent a significant expenditure, in advance of
Certain components and subassemblies included in the Company's motor
coaches are obtained from a single or limited number of suppliers. Transmissions
of the type used in the Company's coaches and those of most of its competitors
are manufactured solely by Allison Transmission. Although the Company believes
it would be able to develop alternate sources
for any of the components, other than transmissions, used in its products,
significant delays or interruptions in the delivery of certain components from
suppliers or difficulties or delays in shifting to new suppliers could have a
material adverse effect on the Company. Presently the company is not
experiencing any interruptions or supply limitations from its major suppliers.
Upon completion of the manufacturing process, each coach undergoes a
thorough inspection and test drive, and problems discovered are corrected prior
The market for manufacture of mid- to high-line motor coaches is very
competitive, and the Company has significant competition in each of its product
lines. Other manufacturers of high-line coaches include Blue Bird Corporation,
Country Coach, Inc. (acquired in late 1996 by National RV Holdings, Inc.),
Fleetwood Enterprises, Inc., Foretravel Inc., Gulf Stream Coach, Inc., Monaco
Coach Corporation, and Holiday Rambler Corporation (acquired in early 1996 by
Monaco Coach Corporation). The Company competes with a number of other
manufacturers, some of which are much larger than the Company and have greater
financial and other resources than the Company. Certain of these larger
manufacturers have also identified value-oriented high-line motor coaches as an
attractive market and have recently developed coaches more directly competitive
with the Company's coaches.
The Company believes the principal competitive factors in the manufacture
and sale of high-line motor coaches are product quality and design, price,
customer service, performance and reliability. The Company believes it is
competitive with respect to each of these factors and believes its customer
service and the performance and reliability of its products compare favorably to
those of its competitors.
Product Design; Patents
The Company strives to be a design innovator in motor coach floor plans,
interior features, coach amenities and mechanical systems and believes it is
generally recognized in the industry as a design leader. Among the innovations
introduced by the Company are the first use of a side aisle floor plan, the
Electro-Majic bed, a rear-mounted cooling system, 110 volt residential-style
lighting and the successful use of Torsilastic suspension on a high-line motor
coach. The Company updates the fabrics, carpets, fixtures and floor plans of its
coaches each year and plans for a complete redesign of each model every three to
The Company began development of its Electro-Majic bed in 1988 and in 1992
obtained a patent for this electric powered bed system. Using a hidden electric
motor, the system uses small gear tracks attached to the living room walls to
lower a double-size bed from the ceiling down to a desired sleeping level. The
Electro-Majic bed is used in most Trek models. In two of the Company's
best-selling Trek floor plans, the Electro-Majic bed is the primary sleeping
space, which allows the entire coach to be used for living, kitchen and bathroom
areas. The Company believes there is no comparable motor coach floor plan on the
The Company designed and patented an all new air ride suspension system in
1996 for use in its Beaver Patriot and Marquis models. The suspension system is
designed to optimize the stability of the moving coach, while at the same time
maximizing ride comfort.
Motor coach manufacturers, such as the Company, are subject to federal,
state, and local regulations governing the manufacture and sale of their
products, including the provisions of the Motor Vehicle Act. The Motor Vehicle
Act provides for, among other things, the recall for modification, repair or
replacement of vehicles that contain defects which are potentially dangerous, or
which fail to comply with applicable standards. The Company's motor coaches also
may be subject to recall by chassis manufacturers in the event the chassis fail
to comply with applicable standards. The Company relies upon certifications from
its engine suppliers and chassis manufacturers that the Company's motor coaches
comply with all applicable emission control standards. Although motor coaches
manufactured by the Company have been voluntarily recalled for repair from time
to time in the past, the Company has not incurred significant expenses in
connection with recalls. Because the Company sells its products in Canada, it is
also governed by similar laws and regulations issued by the Canadian government.
There is no assurance that future recalls of the Company's products will not
occur or that any such recalls will not adversely affect the Company's
operations or financial condition.
The Company is also subject to regulations promulgated by the Occupational
Safety and Health Administration ("OSHA") concerning workplace health and
safety. The Company's plants are periodically inspected by OSHA.
The business and operations of the Company are affected by federal, state,
and local environmental regulations relating to air and water pollution,
hazardous wastes, and noise. These regulations control the Company's use,
storage, and disposal of production chemicals and other wastes. The regulations
also restrict the Company's air contaminant emissions and waste water discharges
and prohibit noise in excess of certain levels.
The Company holds a federal operating permit as required by Title V of the
federal Clean Air Act Amendments of 1990 (a "Title V Permit") for its Safari and
Beaver motor coach manufacturing facilities. The combined CTI and HCO facility
holds an air contaminant discharge permit ("ACDP"), issued by the Oregon
Department of Environmental Quality and has applied for a Title V permit. The
Company believes it will be issued the permits necessary to allow it to operate
these facilities. The ACDPs and the Title V permits, however, are issued for
operations at specified levels, and any increase in emissions beyond those
levels, including increases resulting from expanded operations or process
modifications, will require permit amendments.
To date, the Company has not been required to make significant expenditures
for environmental compliance. The promulgation of additional safety or
environmental regulations, or the need to acquire permit amendments, in the
future, however, could require the Company to incur additional expense which
could adversely impact the Company's results of operations. There is no
assurance that the Company will not be required to make significant expenditures
in the future with respect to such safety or environmental regulations.
The Company believes it is in material compliance with applicable laws
relating to the manufacture and operation of motor coaches and operations of its
manufacturing facilities. There is no assurance, however, that future
governmental regulations will not be more
stringent, and that compliance with those regulations will not require the
Company to incur additional cost.
At December 31, 1998 the Company had 1,661 full-time employees. None of the
Company's employees are represented by a labor union, and the Company has never
experienced a work stoppage, slowdown or strike. The Company believes it
maintains good employee relations.