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EX-21 - EXHIBIT 21 - COACHMEN INDUSTRIES INCexhibit_21.htm
EX-23.2 - EXHIBIT 23.2 - COACHMEN INDUSTRIES INCexhibit_232.htm
EX-31.1 - EXHIBIT 31.1 - COACHMEN INDUSTRIES INCexhibit_311.htm
EX-23.1 - EXHIBIT 23.1 - COACHMEN INDUSTRIES INCexhibit_231.htm
EX-32.1 - EXHIBIT 32.1 - COACHMEN INDUSTRIES INCexhibit_321.htm
EX-31.2 - EXHIBIT 31.2 - COACHMEN INDUSTRIES INCexhibit_312.htm
EX-32.2 - EXHIBIT 32.2 - COACHMEN INDUSTRIES INCexhibit_322.htm


FORM 10-K
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009.
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.

Commission file number 1-7160            
 
COACHMEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
 
Indiana
35-1101097
 
 
(State of incorporation or organization)
(IRS Employer Identification No.)
 
       
 
2831 Dexter Drive, Elkhart, Indiana 46514
 
 
(Current Address of principal executive offices) (Zip Code)
 
       
 
(574) 266-2500
 
 
(Registrant's current telephone number, including area code)
 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

 
Common Stock, Without Par Value
 
(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  x
             
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The aggregate market value of Common Stock held by non-affiliates of the registrant on June 30, 2009 (the last business day of the registrant's most recently completed second fiscal quarter) was $20.3 million (based upon the closing price on the New York Stock Exchange and that 95.6% of such shares are owned by non-affiliates).
 
As of February 28, 2010, 16,189,322 shares of the registrant's Common Stock were outstanding.

Documents Incorporated by Reference
Document
Parts of Form 10-K into which the Document is Incorporated
Portions of the Proxy Statement for the Annual Meeting
of Shareholders to be held on April 29, 2010
Part III
 
 

 

Part I

Item 1.                                Business

Coachmen Industries, Inc. (the "Company" or the "Registrant") was incorporated under the laws of the State of Indiana on December 31, 1964, as the successor to a proprietorship established earlier that year. All references to the Company include its wholly-owned subsidiaries and divisions. The Company is publicly held with stock quoted and traded on over-the-counter markets under the ticker symbol COHM.

The Company’s primary business segments are housing and specialty vehicles. The Housing Segment manufactures and distributes system-built modules for residential buildings. The Housing Group comprises one of the nation's largest and most recognized producers of system-built homes and residential structures through its All American Homes®, Mod-U-Kraf®, and All American Building Systems™ brands. The Specialty Vehicles Segment, through a joint venture with ARBOC Mobility,  manufactures a line of low floor ADA (Americans with Disabilities Act)-compliant buses under the Spirit of Mobility brand name.

On December 26, 2008, the Company completed the sale of substantially all of the assets of the Company’s RV Segment, consisting of its recreational vehicle manufacturing and sales business; therefore, these affected businesses are considered discontinued operations and have been reported as such in the accompanying financial statements.

During November 2009, the Company’s Board of Directors approved a name change from Coachmen Industries Inc. to All American Group.  While the name change must be put out to a shareholder vote pursuant to applicable corporate law, the Company intends to place a proposal seeking that approval on the ballot for its 2010 Annual Meeting, scheduled for April 29, 2010.  In the meantime, the Company has been operating under the assumed name, “All American Group”.

The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section of the Company's Internet website (http://www.allamericangroup.com) as soon as practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Housing Segment

Housing Segment Products

The Housing Segment consists of residential structures. The Company's housing subsidiaries (the All American Homes Group, All American Building Systems, LLC, and Mod-U-Kraf Homes, LLC) produce system-built modules for single-family residences, multi-family duplexes, apartments, condominiums, hotels and specialized structures for military use.

All American Homes® and Mod-U-Kraf Homes® design, manufacture and market system-built housing structures. All American Homes is one of the largest producers of system-built homes in the United States and has four operations strategically located in Colorado, Indiana, Iowa and North Carolina. Mod-U-Kraf operates from a plant in Virginia. The Company announced on March 10, 2009 the temporary curtailment of production at the North Carolina facility until backlogs warrant resuming production. Together these plants serve approximately 383 independent builders in 27 states. System-built homes are built to the same local building codes as site-built homes by skilled craftsmen in a factory environment unaffected by weather conditions during production. Production takes place on an assembly line, with components moving from workstation to workstation for framing, electrical, plumbing, drywall, roofing, and cabinet setting, among other operations. An average two-module home can be produced in just a few days. As nearly completed homes when they leave the plant, home modules are delivered to their final locations, typically in two to seven sections, and are crane set onto a waiting basement or crawl space foundation.

All American Building Systems, LLC (AABS) was established by the Company to pursue opportunities beyond the Company’s core single-family residential housing business. AABS designs and markets system-built living facilities such as single-family home subdivisions, apartments, condominiums, townhouses, senior housing facilities, hotels, dormitories, and military housing facilities manufactured by the Company’s housing plants. The modules are delivered to the site location for final installation.

Due to transportation requirements, system-built structures are often built with more structural lumber than site-assembled structures. Faster construction times, as on-site and in-factory work proceed simultaneously, also allow our customers to occupy buildings much sooner when compared to site-built buildings.
 
 
 
 
- 2 -

 
 

Housing Segment Marketing

The Housing Group participates in the system-built or modular subset of the overall housing market. Housing is marketed directly to approximately 383 builders in 27 states who will sell, rent or lease the buildings to the end-user. The Housing Group regularly conducts builder meetings to review the latest in new design options and component upgrades. These meetings provide an opportunity for valuable builder input and suggestions at the planning stage. The system-built traditional homes business has historically been concentrated in the rural, scattered-lot markets in the geographic regions served. The Company has also launched initiatives to go direct in selected venues, with residential “home stores” offering turn-key houses to consumers. All American Home Stores are currently operating in Indiana, Ohio and Virginia.

 The Company has also successfully launched initiatives to supply product into additional markets, including various forms of single and multi-family residential products for more urban-suburban markets, group living facilities, military housing, motels/hotels and other residential structures. All American Building Systems is responsible for expanding sales into additional markets through channels outside the traditional builder/dealer network. Many of these markets are “large project” markets such as dormitories, military barracks and apartments that typically have a long incubation period, but can result in contracts of a substantial size. Major projects have become a core competency for the Company.

The success of system-built buildings in the commercial market is the result of innovative designs that are created by listening to customer needs and taking advantage of advancements in technology. While price is often a key factor in the purchase decision, other factors may also apply, including delivery time, quality and prior experience with manufacturers. A significant benefit to the customer is the speed with which system-built buildings can be made available for use compared to on-site construction. The sales staff calls on prospective customers in addition to maintaining continuing contact with existing customers and assists its customers in developing building specifications to facilitate the preparation of a quotation. The sales staff, in conjunction with the engineering staff, maintains ongoing contact with the customer for the duration of the building project.

Housing Segment Business Factors

As a result of transportation costs, the effective distribution range of system-built homes and residential buildings is limited. The normal shipping area from each manufacturing facility is typically 200 to 300 miles for system-built homes. Major projects can often be shipped greater distances cost effectively.

The overall strength of the economy and the availability and terms of financing used by builders, general contractors and end-users have a direct impact on the sales of the Housing Group. Consequently, increases in interest rates and the tightening of credit due to government action, economic conditions or other causes have adversely affected the Group's sales in the past and could do so in the future. The Housing Group continued to face a challenging housing market in 2009. The December figures on housing starts from the U.S. Census Bureau showed a 28.7% year-to-year decline in new single-family homes nationwide, following a 40.5% decline in 2008.
 
Systems-built homes are financed and mortgaged using the same criteria as “conventional construction” – sometimes with a construction loan pre-delivery. Builders often maintain relationships with local banking institutions. As a result of the tightening credit environment, during 2008 the Company entered into a joint venture with American Home Bank to create All American Choice Mortgage (“AACM”) to provide consumers with a one-stop financing source to obtain construction loan and permanent mortgage financing. There is no recourse to the Housing Group from any homes financed through AACM, and AACM provides a method for the Housing Group to offer incentives to the consumer.
 
 
 
 
- 3 -

 
 

Housing Segment Competition and Regulation

Competition in the system-built building industry is strong, and the Housing Group competes with a number of entities, some of which have greater financial and other resources than the Company. The demand for system-built homes may be impacted by the ultimate purchaser's acceptance of system-built homes as an alternative to site-built homes. To the extent that system-built buildings become more widely accepted as an alternative to conventional on-site construction, competition from local contractors and manufacturers of other pre-engineered building systems may increase. In addition to the competition from companies designing and constructing on-site buildings, the Housing Group competes with numerous system-built building manufacturers and manufactured home producers that operate in particular geographical regions.
 
The Housing Group competes for orders from its customers primarily on the basis of quality, design, timely delivery, engineering capability, reliability and price. The Company is particularly known for the superiority of its product within the modular segment. The Group believes that the principal basis on which it competes with on-site construction is the combination of: the timeliness of factory versus on-site construction, the cost of its products relative to on-site construction, the quality and appearance of its buildings, its ability to design and engineer buildings to meet unique customer requirements, green and sustainable building techniques, and reliability in terms of completion time. Manufacturing efficiencies, quantity purchasing and generally lower labor costs of factory construction, even with the added transportation expense, result in the cost of system-built buildings being equal to or lower than the cost of on-site construction of comparable quality. This process of manufacturing the building modules in a controlled environment, while the builder prepares the site, can significantly increase the quality of the end product and reduce the time to completion on a customer's project. However, competition has been especially fierce in the recession, with many competitors reducing margins in an attempt to salvage cash flow.
 
Customers of the Housing Group are generally required to obtain building installation permits from applicable governmental agencies. Buildings completed by the Group are manufactured and installed in accordance with applicable building codes set forth by the particular state or local regulatory agencies.
 
State building code regulations applicable to system-built buildings vary from state to state. Many states have adopted codes that apply to the design and manufacture of system-built buildings, even if the buildings are manufactured outside the state and delivered to a site within that state's boundaries. Generally, obtaining state approvals is the responsibility of the manufacturer. Some states require certain customers to be licensed in order to sell or lease system-built buildings. Additionally, certain states require a contractor's license from customers for the construction of the foundation, building installation, and other on-site work. On occasion, the Housing Group has experienced regulatory delays in obtaining the various required building plan approvals. In addition to some of its customers, the Group actively seeks assistance from various regulatory agencies in order to facilitate the approval process and reduce the regulatory delays.

Competition in the major projects arena is comprised primarily of traditional site builders and other system-built producers. Major projects are typically awarded through a proposal or bid process, and in the case of large government contracts, such as military barracks projects, a larger prime contractor with adequate bonding capacity will submit bids for all phases of the contract. Once awarded, the prime contractor will arrange for the construction of buildings for the project to various subcontractors, including the Housing Group. Typically, system-built producers have a cost advantage over site builders, particularly relating to the Federal wage requirements of the Davis-Bacon Act, speed of building completion and minimization of weather-related construction delays. With non-government contracts such as apartments and dormitories, the Housing Group may act as a subcontractor or as the prime contractor for the project. In such cases, advantages are held in the overall cost of the project through the speed of completion afforded by the Housing Group’s production methods.
 
The Housing Segment is subject to the regulations promulgated by the Occupational Safety and Health Administration (“OSHA”). Our plants are periodically inspected by federal agencies concerned with health and safety in the work place.

We believe that our products and facilities comply in all material respects with applicable vehicle safety, environmental and OSHA regulations.

We do not believe that ongoing compliance with the regulations discussed above will have a material effect on our capital expenditures, earnings or competitive position.

Specialty Vehicle Segment

Specialty Vehicle Segment and Products

The Specialty Vehicle Segment currently consists of the manufacture of ADA compliant buses, although the Company intends to manufacture other specialty vehicles in the near future.  At December 31, 2009, this Segment consisted of All American Specialty Vehicles, LLC.
 
Through a joint venture with ARBOC Mobility, the Specialty Vehicle Segment currently manufactures a line of low floor ADA (Americans with Disabilities Act)-compliant buses under the Spirit of Mobility brand name. The buses are sold to ARBOC Mobility who in turn sells them to a network of 20 bus dealers covering the United States, with the exception of Missouri, and Canada.  The buses manufactured by the Company consist of small and mid-size products capable of seating 15 to 25 passengers. The products the Company manufactures are ideal for use as mass transit, airport shuttle and commercial ventures.   
 
 
- 4 -

 
The Spirit of Mobility bus is a low-floor bus built on a conventional GM cutaway chassis. Our low-floor is a rear wheel drive bus without the use of an expensive dropbox. The manual wheelchair ramp allows for easy loading and unloading through the 39” clear door opening. The interior offers theater seating for better viewing for all riders. The patent pending Spirit of Mobility low-floor bus offers a full air-ride suspension with a standard kneeling feature that allows an entrance of less than 5” from the curb without deploying the ramp.  

The bus production facility in Middlebury, Indiana produces buses on an assembly line basis. The vehicles are produced according to specific orders which are obtained through the joint venture and the network of approved dealers.

The chassis and some of the seating and other components used in the production of the buses are purchased in finished form.  The principal raw materials used in the manufacturing of our buses are fiberglass, steel, aluminum, plywood, and plastic. We purchase most of the raw materials and components from numerous suppliers, while the chassis is purchased from General Motors. We believe that, except for chassis, raw materials and components could be purchased from other sources, if necessary, with no material impact on our operations. While we do not expect the current condition of the U.S. economy and the auto industry, including the recent bankruptcy filings and reorganizations of General Motors, to have a significant impact on our supply of chassis going forward, if availability of the GM cutaway chassis is limited or interrupted for an extended period, this could have a material impact on the sales and earnings of the Specialty Vehicle Segment. The Company did experience production disruptions in 2009 because of interruption of the supply of chassis. Further, introduction of new products in the specialty vehicle field have been delayed in 2009 and 2010 due to the limited availability of chassis.

Specialty Vehicle Segment Marketing

Our joint venture partner, ARBOC Mobility, is responsible for the marketing of the Spirit of Mobility buses through a network of 20 independent dealers in the United States (except for Missouri) and Canada. AROBC Mobility has established minimum requirements for the independent dealers, including sales expectations. Terms of sale are typically cash on delivery.

Specialty Vehicle Segment Business Factors

Beginning on January 1, 2010 and continuing through December 31, 2010, the Company has the exclusive right to purchase the ownership interest of the other party to the joint venture (the ARBOC Group).  The valuation of each party’s ownership interest is  to be calculated using a discounted projected cash flow valuation agreed to by each party.  If no agreement is reached, then valuation experts will be utilized as specified in the joint venture agreement.

Effective January 1, 2011, the ARBOC Group has the right to sell their ownership interest to a third party, while the Company has a non-exclusive right to purchase their ownership interest and the right to match the offer of any third party that makes a bonafide offer to purchase the ownership interest of the ARBOC Group.

Specialty Vehicle Segment Competition and Regulation

The bus industry is highly competitive, and there are numerous competitors and potential competitors for small and mid-size buses, although none have the full complement of features that we offer. Initial capital requirements for entry into the manufacture of buses, particularly low-floor units, are moderate; however, the patent pending designs, codes, standards, testing and safety requirements should act as deterrents to potential competitors. Nonetheless, competitors have begun to reduce their prices in response to the introduction of the better featured ARBOC bus.

As 2009 represented our first full year of production of the Spirit of Mobility product line, market share statistics are not yet available for the units we produce. Our competitors offer lines of buses which compete with the Spirit of Mobility product. Price, quality and delivery are all key competitive factors, in addition to factors such as seating access, comfort and ease of use for passengers with disabilities, up time and maximum seat utilization.

As the manufacturer, the Specialty Vehicle Group is subject to the provisions of the National Traffic and Motor Vehicle Safety Act (“NTMVSA”) and the safety standards for buses and bus components which have been promulgated thereunder by the U.S. Department of Transportation. Because of sales in Canada, we are also governed by similar laws and regulations issued by the Canadian government.

State and Federal environmental laws also impact both the production and operation of the buses we manufacture. The Company has an Environmental Department dedicated to efforts to comply with applicable environmental regulations. To date, the Specialty Vehicle Segment has not experienced any material adverse effect from existing federal, state or local environmental regulations.  We rely upon certifications obtained by chassis manufacturers with respect to compliance by our vehicles with all applicable emission control standards.

Trademarks and Patents

ARBOC Mobility, LLC, has the exclusive license for certain patents necessary for the design and manufacture of the Spirit of Mobility products and has assigned its rights under the exclusive license to the Company to manufacture the products.  The Company has an exclusive long-term supply agreement with ARBOC Mobility to produce the products through December 2012.

The Company also has the exclusive right to use the licensed patents to make, use and sell other products (beyond buses) using the low floor technology until the expiration of all the applicable patents or the failure of the Company to maintain minimum royalty quotas.
 
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General
(Applicable to all of the Company's principal markets)

Business Segments

The table below sets forth the composition of the Company's net sales from continuing operations for each of the last two years (dollar amounts in millions):

 
 
2009
 
2008
 
 
Amount
 
 
Amount
 
Housing
 
$
47.1
 
 
77.7
 
$
117.2
 
 
98.0
                         
Specialty Vehicles
   
13.5
   
22.3
   
2.4
   
2.0
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
60.6
 
 
100.0
 
$
119.6
 
 
100.0

Additional information concerning business segments is included in Note 3 of the Notes to Consolidated Financial Statements.

Seasonality

Historically, the Company has experienced greater sales during the second and third quarters with lesser sales during the first and fourth quarters. This reflects the adverse impact of weather on general construction for the system-built building applications.

Employees

At December 31, 2009, Coachmen employed 612 people, 172 of whom are salaried and involved in operations, engineering, purchasing, manufacturing, service and warranty, sales, distribution, marketing, human resources, accounting and administration. The Company provides group life, dental, vision services, hospitalization, and major medical plans under which the employee pays a portion of the cost. In addition, employees can participate in a 401(k) plan and a stock purchase plan. The Company considers its relations with employees to be good.

Research and Development

During 2009, the Company’s continuing operations spent approximately $1.4 million on research related to the development of new products and improvement of existing products. The amount spent in 2008 was approximately $2.2 million.
 
Item 1.A.                            Risk Factors

Not required as smaller reporting company.
 
 
 
- 6 -

 
 

Item 2.                                Properties

At December 31, 2009, the Company owns or leases 1,579,894 square feet of plant and office space, located on 392.9 acres, of which 1,287,156 square feet are used for manufacturing, 196,414 square feet are available for warehousing and distribution, and 96,324 square feet are offices. Included in these numbers are 129,753 square feet leased to others and 205,825 square feet available for sale or lease. The properties that are shown as available for sale or lease under the Housing Group are classified as real estate held for sale in the consolidated financial statements but the properties listed under Other as available for sale or lease is not classified as real estate held for sale in the consolidated financial statements as they do not meet the criteria for such classification according to generally accepted accounting principles. We believe that our present facilities, consisting primarily of steel clad, steel frame or wood frame construction and the machinery and equipment contained therein, are well maintained and in good condition. 

The following table indicates the location, number and size of our properties by segment as of December 31, 2009:

Location
Acreage
 
No. of Buildings
 
Building Area (Sq. Ft.)
 
                     
Properties Owned and Used by Registrant:                    
Housing Group
                   
Milliken, Colorado
   
23.0
   
1
   
151,675
 
Decatur, Indiana
   
40.0
   
2
   
215,995
 
Dyersville, Iowa
   
20.0
   
1
   
168,277
 
Rutherfordton, North Carolina *
   
36.8
   
1
   
169,177
 
Rocky Mount, Virginia
   
44.7
   
6
   
137,693
 
Subtotal
   
164.5
   
11
   
842,817
 
                     
   Specialty Vehicles
                   
        Middlebury, Indiana
   
13.5
   
1
   
111,962
 
Subtotal
   
13.5
   
1
   
111,962
 
Other
                   
Elkhart, Indiana
   
16.2
   
3
   
53,841
 
Fitzgerald, Georgia
   
12.6
   
2
   
103,600
 
Middlebury, Indiana
   
1.3
   
2
   
4,800
 
Subtotal
   
30.1
   
7
   
162,241
 
Total owned and used
   
208.10
   
19
   
1,117,020
 
                     
Properties Leased  by Registrant:
                   
Other
                   
Chino, California
   
4.7
   
3
   
84,296
 
Elkhart, Indiana
   
2.8
   
1
   
43,000
 
Total leased
   
7.5
   
4
   
127,296
 
                     
Properties Owned by Registrant and Available for Sale or Lease:
                 
Housing Group
 
                 
Decatur, Indiana
   
3.3
   
2
   
86,310
 
Zanesville, Ohio
 
 
23.0
   
2
   
129,753
 
Subtotal
 
 
26.3
   
4
   
216,063
 
Other
 
                 
Crooksville, Ohio
   
10.0
   
2
   
39,310
 
Elkhart, Indiana
   
6.1
   
2
   
80,205
 
Pigeon Forge, Tennessee
   
2.1
   
0
   
0
 
Middlebury, Indiana
   
132.8
   
0
   
0
 
Subtotal
   
151
   
4
   
119,515
 
Total owned and available for sale or lease
   
177.3
   
8
   
335,578
 
                     
Total Company
   
392.9
   
31
   
1,579,894
 

 *The Company announced on March 10, 2009 the temporary curtailment of production at the North Carolina facility until backlogs warrant resuming production.


 
 
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Item 3.                                Legal Proceedings

In February 2009, the Company received a favorable verdict against Crane Composites, Inc. f/k/a Kemlite for breach of contract and multiple warranty claims arising from the sale of defective sidewall material to Coachmen Industries, Inc. and subsidiaries. All of the counts alleged in the original complaint were found in favor of the Company. On April 17, 2009, the Company entered into a settlement agreement with Crane Composites, Inc., f/k/a Kemlite, with respect to this verdict rendered in favor of the Company and its subsidiaries, on the liability portion of this lawsuit.  Pursuant to the terms of the settlement, Crane Composites paid the Company a total of $17.75 million in three installments, with the first installment of $10 million paid on May 8, 2009, the second installment of $3.875 million on June 1, 2009 and the final installment of $3.875 million on July 1, 2009.

The settlement with Crane Composites, Inc. resulted in income of $14.9 million net of contingent attorney fees recorded in the first quarter of 2009.  The parent Company acquired the claims that were subject to the settlement for fair value from its RV Group subsidiaries during the fourth quarter of 2008, prior to trial.  Because the settlement is related to damages originally incurred by the recreational vehicle business, accounting rules required the Company to record this income under discontinued operations, even though the settlement is owned by the parent Company and not the RV Group.

The Company was named as a defendant in a number of lawsuits alleging that the plaintiffs were exposed to levels of formaldehyde in FEMA-supplied trailers manufactured by the Company's subsidiaries (and other manufacturers) and that such exposure entitles plaintiffs to an award, including injunctive relief, a court-supervised medical monitoring fund, removal of formaldehyde-existing materials, repair and testing, compensatory, punitive and other damages, including attorneys’ fees and costs. The litigation proceeded through the class certification process. In December 2008, class certification was denied.

In the third quarter of 2008, as a result of the favorable settlement of a lawsuit involving an insurance recovery, the Company recorded income of approximately $0.4 million. During the second quarter of 2008, as a result of the favorable settlement of two lawsuits involving insurance recoveries, the Company recorded income of approximately $1.0 million. During the first quarter of 2008, the Company also recorded income of approximately $1.0 million as a result of the favorable settlement of two lawsuits involving insurance recoveries. These favorable settlements are classified as a reduction to general and administrative expenses on the consolidated statement of operations.

The Company is involved in various other legal proceedings, most of which are ordinary disputes incidental to the industry and most of which are covered in whole or in part by insurance. Management believes that the ultimate outcome of these matters and any liabilities in excess of insurance coverage and self-insurance accruals will not have a material adverse impact on the Company's consolidated financial position, future business operations or cash flows.

 
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Executive Officers of the Registrant

The following table sets forth the executive officers of the Company, as of December 31, 2009:
   
Name
Position
   
Richard M. Lavers
President and Chief Executive Officer
   
Colleen A. Zuhl
Chief Financial Officer
   
Rick J. Bedell
President, CBI dba Coachmen Housing Group
   
Leslie G. Thimlar
Vice President, Human Resources
   
W. Todd Woelfer
General Counsel
   

Richard M. Lavers (age 62) was named Chief Executive Officer of the Company in August 2006. He was elected to the Board in April 2007, and made President that same year. In 2005, he was first named Chief Administrative Officer and later Chief Financial Officer of the Company. Mr. Lavers assumed the position of Executive Vice President of the Company in May 2000 and served as General Counsel and Secretary of the Company from March 1999. He joined the Company in October 1997 as General Counsel. From 1994 through 1997, Mr. Lavers was Vice President, Secretary and General Counsel of RMT, Inc. and Heartland Environmental Holding Company. Mr. Lavers earned both his B.A. degree and his J.D. degree from the University of Michigan.

Colleen A. Zuhl (age 43) assumed the position of Chief Financial Officer in August 2006 and had previously served as the Company’s Vice President and Controller since joining the Company in April 2004. In December 2005, Mrs. Zuhl also assumed the duties of Chief Accounting Officer for the Company. From 1988 to 2004, Mrs. Zuhl was employed by Ernst & Young, LLP, most recently as a Senior Audit Manager. Mrs. Zuhl earned a B.S. degree from Hillsdale College.

Rick J. Bedell (age 57) rejoined the Company as the President of Consolidated Building Industries, LLC, dba The Coachmen Housing Group. Mr. Bedell was formerly the President of Miller Building Systems and served on its Board of Directors for four years. Prior to that, he was Executive Vice President/COO, while Miller was a publicly held company, with overall responsibility for sales, engineering, and plant operations since 1998. Prior to his promotion to Executive Vice President, Mr. Bedell served as Vice President of Operations in Miller’s Kansas facility from 1996 to 1998 and also in the California Division from 1989 to 1996. Before joining Miller Building Systems in 1989, Mr. Bedell’s career in the modular construction industry began in 1978, with PBS Building Systems followed by Modulaire Industries in capacities including field project management, sales management, and general management.

Leslie G. Thimlar (age 54) was appointed Vice President, Human Resources for Coachmen Industries in 2001. Prior to that, he was Assistant Vice President, Human Resources from 1996 through 2001 with responsibility for corporate human resource functions. From 1986 until 1996, Mr. Thimlar served as Vice President, Human Resources for Ancilla Health Care. He received his B.S. and M.P.A. degrees from Indiana University.

W. Todd Woelfer (age 42) was appointed General Counsel in May of 2007. Mr. Woelfer practices law as a partner at the firm of May Oberfell Lorber where he focuses on the representation of corporate clients, including Coachmen Industries. Mr. Woelfer earned both his B.S. in Business Administration and his J.D. degrees from Valparaiso University.

 
 
- 9 -

 
 

Part II

Item 5.                                Market for Registrant's Common Equity and Related Stockholder Matters

The following table discloses the high and low sales prices for Coachmen's common stock during the past two years, along with information on dividends declared per share during the same periods.  For the period April 9, 2009 through December 31, 2009, the Company’s stock was quoted and traded on over-the-counter markets under the ticker symbol COHM.  For the period January 1, 2008 through April 8, 2009, the Company’s stock was listed on the New York Stock Exchange under the ticker symbol COA.

   
High & Low Sales Prices
 
Dividends Declared
 
   
2009
 
2008
 
2009
 
2008
 
                           
1st Quarter
 
$
2.03 - 0.52
 
$
6.01 - 2.75
 
$
-
 
$
-
 
                           
2nd Quarter
   
1.45 - 0.25
   
3.78 - 2.11
   
-
   
-
 
                           
3rd Quarter
   
1.55 - 1.02
   
2.64 - 1.65
   
-
   
-
 
                           
4th Quarter
 
$
1.55 - 1.00
 
$
2.53 - 0.48
 
$
-
 
$
-
 

Holders of Record

The Company's common stock is currently traded on over-the-counter markets: stock symbol COHM. The number of shareholders of record as of January 31, 2010 was 1,769.

Market for the Company’s Common Stock

During April 2009, the Company received written notice from NYSE Regulation, Inc. that trading of the Company’s common stock on the New York Stock Exchange (“NYSE”) would be suspended before the NYSE opened on April 9, 2009 because it did not maintain an average global market capitalization of at least $15.0 million over a consecutive 30 trading day period.

As a result of the suspension by NYSE, since April 9, 2009 the Company’s stock has been quoted and traded on over-the-counter markets under the ticker symbol COHM.

Dividends

Future payment of dividends are prohibited under the Company’s convertible debt agreement.

Other Matters

See Note 9 Common Stock Matters and Earnings Per Share.

See Item 10 for the Equity Compensation Table.

The Company repurchased 24,914 shares of its stock during the first quarter of the fiscal year ended December 31, 2009.

The Company repurchased 30,815 shares of its stock during the fourth quarter of the fiscal year ended December 31, 2008.

Item 6.                                Selected Financial Data
 
Not required as smaller reporting company.
 
 
 
 
- 10 -

 
 

Item 7.                                Management's Discussion and Analysis of Financial Condition and Results of Operations

Basis of Presentation

This MD&A should be read in conjunction with the accompanying consolidated financial statements which have been prepared assuming that we will continue as a going concern, which is management’s intention.  Note 2 of the Notes to the Consolidated Financial Statements discuss management’s viability plans.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

EXECUTIVE SUMMARY

The Company was founded in 1964 as a manufacturer of recreational vehicles and began manufacturing system-built homes in 1982. Since that time, the Company has evolved into a leading manufacturer in the housing business through a combination of internal growth and strategic acquisitions. Through a joint venture with ARBOC Mobility, Coachmen Industries also manufactures a line of low floor ADA-compliant buses under the Spirit of Mobility brand name.
 
The Company's housing business is subject to certain seasonal demand cycles and changes in general economic and political conditions. Demand generally declines during the winter season, while sales and profits are generally highest during the spring and summer months. Inflation and changing prices have had minimal direct impact on the Company in the past in that selling prices and material costs have generally followed the rate of inflation. However, since 2004, rapid escalations of prices for certain raw materials combined with a number of price protected sales contracts have at times adversely affected profits. Material surcharges are added to the price when appropriate and allowed. Changes in interest rates may impact the Housing Segment with rising interest rates potentially dampening sales.
 
In order to supplement the Company’s single-family residential housing business, the Housing Segment continues to pursue opportunities for larger projects in multi-family residential and commercial markets. The results of the Company’s All American Building Systems (AABS) major projects efforts significantly contributed to revenues and earnings in 2008 and 2009, primarily through the production of military barracks. In 2008, AABS provided military housing at Ft. Carson in Colorado. This project resulted in revenues of over $40 million during 2008. During 2009, the Company provided military housing to Ft. Bliss, Texas which provided over $10.0 million in 2009 revenues.

Restructuring Plan

When describing the impact of these restructuring plans, all determinations of the fair value of long-lived assets were based upon comparable market values for similar assets.

On December 26, 2008, the Company completed the sale of substantially all of the assets of the Company’s RV Segment, consisting of its recreational vehicle manufacturing and sales business, to Forest River, Inc. The closing consideration paid was approximately $40.6 million. Of the closing consideration, approximately $11.5 million was paid into two escrow accounts and is subject to reduction for indemnification and certain other claims including warranty. Proceeds were applied in accordance with the terms of the purchase agreement and were reduced by $1.9 million to settle a contingent liability of approximately $11.0 million related to the Registrant’s bailment chassis pool with Ford Motor Company and by $2.0 million to purchase the required 5-year term of tail insurance. The net proceeds after the escrow, contingent liability settlement, purchase of insurance and closing costs were approximately $25.2 million. This transaction resulted in a pre-tax loss of $(7.9) million and $(0.9) million on the sale of inventory and fixed assets, respectively.

In accordance with generally accepted accounting principles, the recreational vehicle operations qualified as a separate component of the Company’s business and as a result, the operating results of the recreational vehicle business have been accounted for as a discontinued operation. Financial results for all periods presented have been adjusted to reflect this business as a discontinued operation. Net sales of the recreational vehicle business for the year ended December 31, 2008 was $212.3 million, and the pre-tax (loss) for the year ended December 31, 2008 was $(50.3) million.

In connection with the sale of the assets of the RV business, a liability of $1.6 million was established for existing but unused facilities subject to operating leases that were part of the activities which were exited and is included in the Impairments line of the consolidated financial statements.

During the fourth quarter of 2008, the Company sold a former RV production facility for $1.8 million, resulting in a pre-tax (loss) of approximately $(0.8) million.
 
 
 
 
- 11 -

 
 
Housing Segment

The Housing Group continued to face a challenging housing market in 2009. The December figures on housing starts from the U.S. Census Bureau showed a 28.7% year-to-year decline in new single-family homes nationwide, following a 40.5% decline in 2008.

In the backdrop of such a difficult market, the Housing Group has seen weakness in its core Midwestern markets, as well as in the Southeast and Middle Atlantic regions, negatively impacting the Group’s operations in Indiana, Iowa, North Carolina and Virginia. All of the Group’s markets have experienced lower sales volumes, sharp discounts, larger incentives, and increased levels of new home inventories. As the downward pressure on new home sales persists, the Group will likely see the more aggressive discounts and incentives by home builders continue. To mitigate these conditions, management is placing more emphasis on providing value to builders and consumers through the Group’s products. Driven by consumer interest and increasing energy costs, the housing industry is recognizing the increasing need for energy efficiency and the use of sustainable materials in the construction of new homes. The Company has taken a leadership position in this market transformation with the introduction of the “Green Catalog” and the Solar Village® product line. All American has also made green affordable by offering a free Energy Savers Package on new homes.  This promotion launched in July 2009 and helped to save consumers up to 40% on their utility costs.

The Group is working with design/build architectural firms that specialize in sustainable, innovative, high-quality modular architecture. Off-site modular technology is a means to create beautiful, eco-friendly homes and buildings. The Group’s initiative in energy efficiency and sustainable construction resulted in the mkSolaire® home which is prominently displayed in the “Smart Home: Green & Wired” exhibit at the Museum of Science and Industry in Chicago. The Group was also selected by the U.S. Department of Energy to build the Living Zero Home.  This traveling home received national exposure and featured all of the latest green and energy efficient features.  These endeavors have put modular construction in a new light for the general public and fit well with our commitment to sustainable construction. Management’s overriding goal with these actions is to provide the Group’s builders with the products and tools they need to best meet the challenges of their markets.

Management continued to work to mitigate the Group’s dependence on traditional scattered-lot single-family housing markets by increasing the expansion into multi-family residential structures through All American Building Systems, or AABS. Many of these multi-family structures markets are “large project” markets such as dormitories, military barracks and apartments that typically have a long incubation period, but generally result in a significant contract. In 2008, the Company provided modules for barracks construction at Fort Carson in Colorado, while in 2009, the Company provided barracks for Ft. Bliss, Texas. AABS continues to pursue military opportunities with our partners, and AABS expects to make proposals for additional military housing contracts. The Company has delivered homes to the Gulf Coast region and our major projects sales group continues to pursue additional opportunities in the Gulf region. The Group has also targeted other “large projects” such as dormitories, condominiums and apartment complexes, and has secured several dormitory or apartment complex projects at the beginning of 2010.

Overall, both 2008 and 2009 were difficult years for the housing industry, but management has taken aggressive steps to reduce operating costs despite the challenging economic conditions. Management is also aggressively seeking new ways to strengthen the Group’s traditional markets while pursuing growth in new areas.
 
Specialty Vehicles

Through a joint venture with ARBOC Mobility, Coachmen Motor Works manufactures a line of low floor ADA compliant buses under the Spirit of Mobility brand name. This line of buses incorporates patent pending technologies provided by ARBOC Mobility. The vehicles are specially designed with a low-floor, “kneeling” air suspension chassis and ramp system. This product line represents a value breakthrough in low-floor bus technology, providing premium accessibility features at a cost that is less than competing low floor products, while fully endorsing the spirit of the Americans with Disabilities Act. These features allow easy access for all passengers, including those in wheel chairs, to enter and exit through the same entrance, without the need for a complex lift system. The easy access features also make it ideal for passengers pulling luggage or pushing children in strollers. These accessible transit and shuttle buses are designed for use by municipalities or in airports, hotels, retirement communities, assisted living centers, resorts and other venues where short haul transportation and accessibility are required.
 
- 12 -

 


RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items reflected in the Consolidated Statements of Operations and the percentage change in the dollar amount of each such item from that in the indicated previous year (in thousands):

         
Percentage
   
 
   
Percentage
   
Percentage
 
         
of
         
of
   
Change
 
   
2009
   
Net Sales
   
2008
   
Net Sales
   
2009 to 2008
 
Net sales:
                             
Housing
  $ 47,130       77.7 %   $ 117,191       98.0 %     (59.8 )%
Specialty Vehicles
    13,493       22.3       2,406       2.0       460.8  
      60,623       100.0       119,596       100.0       49.3  
                                         
Gross profit (loss):
                                       
Housing
    (1,275 )     (2.1 )     18,014       15.0       (107.0 )
Specialty Vehicles
    310       0.5       (635 )     (0.5 )     148.8  
Other
    (71 )     (0.1 )     -       -       n/m  
      (1,036 )     (1.7 )     17,379       14.5       (106.0 )
                                         
Operating expenses:
                                       
Selling
    3,633       6.0       7,077       5.9       (48.7 )
General and administrative
    11,155       18.4       13,018       10.9       (14.3 )
Impairments
    -       -       18,605       15.6       n/m  
Gain on sale of assets, net
    (67 )     (.1 )     (44 )     (0.1 )     (52.3 )
      14,721       24.3       38,656       32.3       (61.9 )
                                         
Nonoperating (income) expense
    4,826       8.0       (1,059 )     (0.9 )     (555.7 )
                                         
Loss from continuing operations before income taxes
    (20,583 )     (34.0 )     (20,218 )     (16.9 )     (1.8 )
Tax expense (credit)
    (346 )     (0.6 )     (1,539 )     (1.3 )     (77.5 )
Loss from continuing operations
    (20,237 )     (33.4 )     (18,679 )     (15.6 )     (8.3 )
                                         
Discontinued operations:
                                       
Income (loss) from operations of discontinued entities (net of taxes)
    597       1.0       (40,884 )     (34.2 )     101.5  
Loss on sale of discontinued RV assets (net of taxes)
    -       -       (9,439 )     (7.9 )     100.0  
Income from legal settlement (net of taxes)
    14,910       24.6       -       -       n/m  
Income (loss) from discontinued  operations
    15,507       25.6       (50,323 )     (42.1 )     130.8  
                                         
Net loss
  $ (4,730 )     (7.8 )%   $ (69,002 )     (57.7 )%     93.1 %
                                         
n/m - not meaningful
                                       


Note: The Results of Operations above have been restated to reflect discontinued operations and should be read in conjunction with Note 12, Restructuring Charges and Discontinued Operations, of the Notes to the Consolidated Financial Statements appearing in this report.

 
 
- 13 -

 
 
The following table presents key items impacting the results of operations for the periods presented (in thousands):
 
   
2009
   
2008
 
(Gain) loss on sale of assets:
           
Continuing operations:
           
 Other
  $ (67 )   $ (44 )
Total
    (67 )     (44 )
                 
Discontinued operations (see Note 12):
               
RV Group
    -       9,439  
Total
            9,439  
                 
Total (gain) loss on sale of assets
  $ (67 )   $ 9,395  
                 
Impairments:
               
Real property
  $ -     $ 984  
Note receivable / investments
    -       4,628  
Goodwill impairment charge
    -       12,993  
Total impairments
  $ -     $ 18,605  
                 
Legal settlements/expense recoveries – (income)
               
    Continuing operations:
               
    Legal expense recoveries (see Note 13)
  $ -     $ (2,364 )
                 
    Discontinued operations:
               
    RV Group (see Note 12)
    (14,910 )     -  
                 
Total legal settlements/expense recoveries
  $ (14,910 )   $ (2,364 )
                 
 
 
- 14 -

 

Comparison of  2009 to 2008

NET SALES

Consolidated net sales from continuing operations decreased $59.0 million or 49.3% to $60.6 million in 2009 from $119.6 million in 2008. The Housing Segment had a net sales decrease in 2009 of $70.1 million, or 59.8%. The Segment’s results were impacted by the rapidly deepening recession and continuing weakness in its core Midwest, Southeast and Middle Atlantic housing markets. The most recent statistics on new home sales from the U.S. Census Bureau showed a 28.7% year-to-year decline in new single-family homes nationwide, a 25.6% decline in year over year comparison in the Midwest region, and a 28.5% decline in the South. This is consistent with the challenges faced by the Housing Group operations in Indiana, Iowa, North Carolina, Colorado and Virginia throughout 2009. The challenges created by the on going housing recession were partially mitigated by successful major projects multi-family living unit revenue, including apartments and town homes, motels, and military contracts.

GROSS PROFIT (LOSS)

Gross profit (loss) from continuing operations was ($1.0) million, or less than 0.1% of net sales, in 2009, compared to $17.4 million, or 14.5% of net sales, in 2008. Gross profit declined in 2009 as a result of decreased operating capacity at certain plants.

OPERATING EXPENSES

Operating expenses for continuing operations, consisting of selling and general and administrative expenses, were $14.8 million and $20.1 million, or as a percentage of net sales, 24.4% and 16.8% for 2009 and 2008. Selling expenses for 2009 were $3.6 million, or 6.0% of net sales, a 0.1 percentage point increase from the $7.1 million, or 5.9% of net sales, experienced in 2008. The $3.4 million decrease in selling expense was primarily the result of reductions in payroll and travel related expenses of $1.4 million as a result of headcount reductions and the overall lower revenues plus $1.8 million of reductions in sales promotion expenses. General and administrative expenses were $11.2 million in 2009, or 18.4% of net sales, compared with $13.0 million, or 10.9% of net sales, in 2008. The decrease of $1.9 million in general and administrative expenses was a result of a $3.5 million reduction in payroll and related fringe benefits offset by a $2.1 million increase in professional service expenses.  In 2008, the Company realized $2.4 million of legal settlements and insurance recoveries which artificially lowered general and administrative costs and professional service costs in particular.

IMPAIRMENT CHARGES

Long-lived assets held and used by the Company, including property, plant and equipment, notes receivable and investments, and intangible assets are reviewed to determine whether events or changes in circumstances indicate that the carrying amounts may not be recoverable.

During 2008, the Company determined that certain note receivable and equity investments amounting to $4.6 million were impaired based on our determination of the financial condition of the corresponding entity. The related expense is included in the Impairments line item on the consolidated statement of operations.

The Company’s review of its property plant and equipment resulted in an asset impairment charge of approximately $1.0 million in 2008 relating to a former Housing Group manufacturing plant that is currently listed for sale.

At January 1, 2008, the Company had $13.0 million of goodwill, all attributable to the Housing reporting unit. The Company conducted its annual goodwill impairment test as required by generally accepted accounting principles, during the fourth quarter of 2008 and the results indicated that the goodwill was fully impaired. Accordingly, the Company recorded a non-cash goodwill impairment charge of $13.0 million in the quarter ended December 31, 2008.

GAIN ON THE SALE OF ASSETS, NET

For both the years ended December 31, 2009 and 2008, the gain on the sale of assets was approximately $0.1 million. Assets are continually analyzed and every effort is made to sell or dispose of properties that are determined to be excess or unproductive. 
 
 
- 15 -

 
OPERATING LOSS

Operating loss from continuing operations in 2009 of $15.7 million decreased $5.6 million compared with the operating loss of $21.3 million in 2008. This decrease is a result of impairment charges of $18.6 million incurred in 2008, not being incurred in 2009, plus the decrease of $5.3 million in operating expenses in 2009 offset by an $18.3 million decrease in gross profits in 2009.

INTEREST EXPENSE

Interest expense from continuing operations for 2009 and 2008 was $7.3 million and $1.6 million, respectively. Interest expense increased significantly due to the HIG convertible debt transaction (see Note 7 of Notes to Consolidated Financial Statements).  This transaction resulted in $3.8 million in non-cash interest expense.  This included the difference between the deferred debt discount of $10.0 million and the fair value of the warrants and the beneficial conversion feature of $13.0 million, which resulted in $3.0 million being recorded as a non-cash interest expense, as well as the amortization of debt discount on the convertible notes which amounted to $0.8 million for the year ended December 31, 2009. Additionally, the higher amount of average outstanding balances of short-term borrowings including the borrowings on the cash surrender value of company-owned life insurance policies incurred by the Company. During 2009, the Company continued to borrow against the cash surrender value of its investment in life insurance contracts until the majority of the policies were surrendered in October 2009.

INVESTMENT INCOME

Investment income from continuing operations for 2009 and 2008 was $1.4 million and $1.1 million, respectively. Investment income is principally attributable to earnings of the life insurance policies held (see Note 1 of Notes to Consolidated Financial Statements).

PRE-TAX LOSS

Pre-tax loss from continuing operations for 2009 was $20.6 million compared with a pre-tax loss of $20.2 million for 2008. 

INCOME TAXES

The provision for income taxes related to continuing operations was a credit of $0.3 million for 2009 and a credit of $1.5 million for 2008. Given the losses incurred by the Company over the recent years, a non-cash charge from continuing operations of $0.8 million and $5.4 million was recorded to establish a valuation allowance for the full value of its deferred tax assets as of December 31, 2009 and December 31, 2008, respectively (see Note 11 of Notes to Consolidated Financial Statements).

DISCONTINUED OPERATIONS

On December 26, 2008, the Company completed the sale of substantially all of the assets of the Company’s RV Segment, consisting of its recreational vehicle manufacturing and sales business, to Forest River, Inc. The closing consideration paid was approximately $40.6 million. Of the closing consideration, approximately $11.5 million was paid into two escrow accounts and is subject to reduction for indemnification and certain other claims including warranty. Of the $11.5 million escrow total, $10.0 million was paid into an indemnity escrow account and $1.5 million was paid into an accounts receivable escrow account. The $1.5 million accounts receivable escrow account is included in cash and cash equivalents on the 2008 consolidated balance sheet as it is scheduled to be payable and was paid to the Company within forty-five days of the sale closing. The $10.0 million indemnity escrow account, which is subject to reduction for warranty and other claims, is included in long-term restricted cash at December 31, 2008. The balance remaining in the indemnity escrow account will be payable to the Company two years after the sale closing, subject to pending claims, if any. Interim distributions from the indemnity escrow account to the Company are possible according to a predetermined formula at nine months and eighteen months after the sale date. Proceeds were applied in accordance with the terms of the purchase agreement and were reduced by $1.9 million to settle a contingent liability of approximately $11.0 million related to the Registrant’s bailment chassis pool with Ford Motor Company and by $2.0 million to purchase the required 5-year term of tail insurance. The net proceeds after the escrow, contingent liability settlement, purchase of insurance and closing costs were approximately $25.2 million. This transaction resulted in a pre-tax (loss) of $(7.9) million and $(0.9) million on the sale of inventory and fixed assets, respectively.

In accordance with generally accepted accounting principles, the recreational vehicle operations qualified as a separate component of the Company’s business and as a result, the operating results of the recreational vehicle business have been accounted for as a discontinued operation. Financial results for all periods presented have been adjusted to reflect this business as a discontinued operation. Net sales of the recreational vehicle business for the year ended December 31, 2008 was $212.3 million, and the pre-tax (loss) for the year ended December 31, 2008 was $(50.3) million.

The 2008 pre-tax loss of the discontinued recreational vehicle business was due to the downturn in the economy and the RV market, as the Company’s RV sales declined 42% in 2008 compared to 2007, resulting in reduced operating leverage despite numerous cost cutting and manufacturing consolidation efforts. The pre-tax loss on the sale of the recreational vehicle business assets of ($8.8) million also contributed to the increased loss.
 
- 16 -

 
 
NET LOSS

Net loss from continuing operations for the year ended December 31, 2009 was $(20.2) million (a loss of $1.26 per diluted share) compared to net loss from continuing operations of $(18.7) million (a loss of $1.18 per diluted share) for 2008. Net loss for the year ended December 31, 2009 was $(4.7) million (a loss of $0.29 per diluted share) compared to net loss of $(69.0) million (a loss of $4.37 per diluted share) for 2008.

Liquidity and Capital Resources

The Company generally relies on funds from operations and availability from various lines of credit as its primary sources of working capital and liquidity. Previously, the Company had maintained a $55.0 million line of credit to meet its seasonal working capital needs (see Note 6 of Notes to Consolidated Financial Statements). At December 31, 2008 this bank line of credit had been fully paid and was terminated by Bank of America except for outstanding letters of credit totaling $7.5 million that were fully backed by cash collateral which is reflected as restricted cash on the consolidated balance sheet. The combination of the new cash collateral requirements and the absence of any bank line severely constricted the Company’s capital resources in 2009. As of December 31, 2008, $47.0 million had been borrowed against the cash surrender value of Company-owned life insurance contracts. The Company has paid the premiums on these contracts in 2008 with borrowings against the cash surrender value of the contracts. As of December 31, 2008, the cash surrender value of life insurance was approximately $51.7 million, with $47.0 million borrowed, resulting in a cash surrender value net of loans of $4.7 million.  During 2009 the Company determined it to be most advantageous to surrender the majority of Company-owned life insurance policies effective October 2009.  As a result, the Company received the cash surrender value of the policies redeemed, and eliminated the related borrowings, associated interest expense and future premium obligations on the policies.  Cash of $2.7 million was received related to the surrendered policies in the fourth quarter of 2009.  At December 31, 2009 the carrying amount of the remaining life insurance policies, which equaled their fair value, was $0.5 million ($6.0 million less $5.5 million of policy loans).

On April 9, 2009, Coachmen Industries, Inc. and Lake City Bank entered into an agreement for a $2 million three-year note in exchange for cash loaned to the Company by Lake City Bank.  The note is fully collateralized by certain properties, bears interest at the rate of 6.250% per annum, and has a maturity date of April 9, 2012.  At December 31, 2009, the amount outstanding was approximately $1.9 million.

 On April 9, 2009, Coachmen Industries, Inc. gave a promissory note to Lake City Bank in connection with the bank’s provision of a $0.5 million working capital line of credit.  The note is fully collateralized by certain properties, and borrowings against this line will bear interest at a variable rate, with a minimum interest rate of 5% per annum.  This line of credit has a maturity date of March 31, 2012.  At December 31, 2009, there were no borrowings against this line of credit.

On October 27, 2009, the Company completed a two-year $20.0 million loan agreement as borrowers with H.I.G. All American, LLC (H.I.G.) for $10.0 million of senior secured revolving notes and $10.0 million of convertible debt (Secured Subordinated Convertible Tranche B Notes).  This loan agreement is collateralized by substantially all of the assets of the Company. As part of the Secured Subordinated Convertible Tranche B Notes, the Company also issued to H.I.G. an aggregate of approximately 6.7 million Common Stock Purchase Warrants exercisable at a price of $0.00001 per share upon the occurrence of a triggering event (as defined in the agreement) and prior to the tenth anniversary from the date of the loan agreement.  The revolving notes bear interest at a rate equal to LIBOR plus 5%, payable in cash monthly.  The convertible debt bears interest at the rate of 20% per annum, payable in either cash semiannually or as PIK interest that accrues and increases the principal amount.  All principal and accrued interest on the Secured Subordinated Convertible Tranche B Notes is convertible into shares of the Company’s common stock at the election of H.I.G. and is exercisable at any time up until the end of the two-year term of the notes at the conversion price of $0.979 per share, the 90-day average stock price prior to the Letter of Intent.
 
Both the Warrant and the Tranche B Note contain anti-dilution protection to the lender. In addition, the Tranche B Note has a price protection feature that reduces the conversion price if the 90-day average price of the Company’s common stock falls below $0.979 at any time prior to April 27, 2010. The conversion price of the Tranche B Note is also subject to reduction if the Company defaults on certain of its financial covenants contained in the Loan Agreement.  
 
The Company recorded a debt discount on the convertible notes for the full $10.0 million due to the issuance of the Common Stock Purchase Warrants, as well as the existence of a beneficial conversion feature.  The fair value of the warrants and the beneficial conversion feature were determined to be $7.6 million and $5.4 million, respectively, and the resulting $13.0 million has been recorded as a long-term liability on the Consolidated Balance Sheet.  The Company recorded a debt discount on the convertible notes for the full $10.0 million due to the issuance of the warrants and beneficial conversion feature whose fair value exceeded the value of the debt. The difference between the deferred debt discount of $10.0 million and the fair value of the warrants and the beneficial conversion feature of $13.0 million resulted in $3.0 million being recorded as a non-cash interest expense.  Future changes in the fair value of the warrants and the beneficial conversion feature will result in additional adjustments to this liability and non-cash interest expense in future periods. The amortization of the $10.0 million in debt discounts will be reported as an increase in long-term debt and additional interest expense over the two-year term of the loan agreement.  Amortization of debt discount on the convertible notes amounted to $0.8 million for the year ended December 31, 2009. The remaining unamortized discount was $9.2 million at December 31, 2009.
 
 
- 17 -

 
 
On March 11, 2010, the Company learned that HIG All American, LLC (HIG), its lender, and the Company had differing interpretations of the definition of EBITDA for purposes of covenant calculations under the HIG All American Credit Agreement.  HIG views the Company's calculations prior to February of 2010 to have been erroneous and believes the Company breached its financial covenants in December of 2009. The Company disagrees. On March 25, 2010, the Company and HIG agreed to a term sheet whereby HIG agreed to waive the covenants for December 2009. The term sheet is subject to final documentation as an amendment to the Credit agreement. If the Company and HIG are unable to finalize the amendment, HIG would have the rights accorded to them under the terms of the loan agreement which include, among other rights, the right to declare the Company in default of the agreement and demand repayment of the $10 million note.
 
Subsequent to year-end, the Company failed to meet certain financial covenants of the HIG All American Credit Agreement. HIG did not declare the Company to be in default of any covenant and on March 25, 2010, the Company and HIG reached agreement (subject to final documentation) on revised covenants and other modifications, including the issue of additional warrants to HIG, to the credit agreement. As a result of the modifications, the Company will only have partial access to the $10 million revolving line of credit, for specified purposes, until the Company is in compliance with the original financial covenants of the loan agreement.

During 2009 operations used cash of $22.5 million as a result of reductions in accounts payable, accrued expenses and other liabilities.  Of the $22.5 million used in 2009, $13.9 million was used to satisfy liabilities from the discontinued recreational vehicle business. During 2008 operations used cash of $9.6 million as reductions in inventories due to the sale of the assets of the RV Group were offset by the net loss and reductions in accounts payable, accrued expenses and other liabilities.

Investing activities provided cash of $7.7 million in 2009, and $15.7 million in 2008.  In 2009, proceeds from death benefits and the surrender of life insurance policies provided $3.5 million while the release of restricted cash provided $4.3 million. In 2008 proceeds from sales of properties and assets of the recreational vehicle business provided cash of $25.6 million, offset by purchases of property and equipment and restricted cash held as collateral for letters of credit.

In 2009, financing activities provided cash flows of $5.4 million. During 2009, the Company entered into new debt arrangements with a bank and entered a convertible debt agreement with a third party.  In connection with the convertible debt agreement, the Company paid off certain other long-term debt arrangements totaling $2.9 million.  In 2008, financing activities provided cash flows of $8.1 million. Payments to pay off the line of credit were offset by borrowings against the cash value of life insurance policies.   For a more detailed analysis of the Company's cash flows for each of the last two years, see the Consolidated Statements of Cash Flows.

The Company's cash and cash equivalents at December 31, 2009 were $6.4 million or a decrease of $9.4 million from the $15.7 million in 2008.  As of December 31, 2009, the Company has $500,000 in availability under a line of credit with a bank.  In addition, the Company has $10 million of availability under the line of credit portion of the convertible debt agreement subject to the conditional availability of these funds. The Company anticipates that available funds, together with anticipated cash flows generated from future operations will be sufficient to fund future planned capital expenditures and other operating cash requirements through the end of 2010.

Any downturn in the U.S. economy, the failure of the economy to recover from the recession, a decline in consumer confidence and other factors may adversely impact the housing industries. This may have a negative impact on the Company's sales and also increases the Company's risk of loss under repurchase agreements with lenders to the Company's independent builders (see Note 13 of Notes to Consolidated Financial Statements). Increases in interest rates could also adversely affect the sale of single-family homes.

In 2009, working capital increased $26.8 million, to $31.5 million from $4.7 million. The $1.0 million increase in current assets at December 31, 2009 versus December 31, 2008 was primarily due to increases in current restricted cash balances, trade receivables, inventories and assets held for sale offset by the decrease in cash. Current liabilities at December 31, 2009 were $25.8 million lower than at December 31, 2008, primarily due to the decrease in accounts payable, and accrued expenses and other liabilities (see Note 8 of Notes to Consolidated Financial Statements) as well as the payment of RV floorplan notes payable.

The Company anticipates capital expenditures in 2010 of less than $2.0 million. The planned capital expenditures for 2010 will be for purchase or replacement of machinery and equipment and transportation equipment to be used in the ordinary course of business. The Company plans to finance these expenditures with funds generated from operating cash flows.
 
Critical Accounting Policies and Estimates

The following discussion of accounting policies is intended to supplement the summary of significant accounting policies presented in Note 1 of Notes to Consolidated Financial Statements. These policies were selected because they are broadly applicable within our operating units and they involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related income statement, asset and/or liability amounts.
 
 
- 18 -

 
Long-Lived Assets - Long-lived assets held and used by the Company, including property, plant and equipment and intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable (see Note 12 of Notes to Consolidated Financial Statements for impairments recorded in 2008, including impairments of intangible assets).
 
Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually in accordance with FASB generally accepted accounting principles. The Company reviews the carrying amounts of goodwill assets annually by segment to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon a discounted cash flow analysis, such assets are reduced by the estimated shortfall of fair value to recorded value. At January 1, 2008, the Company had $13.0 million of goodwill, all attributable to the Housing reporting unit. The Company conducted its annual goodwill impairment test as required by SFAS No. 142, during the fourth quarter of 2008 and the results indicated that the goodwill was impaired. Accordingly, the Company recorded a non-cash goodwill impairment charge of $13.0 million in the quarter ended December 31, 2008. The goodwill impairment charges in 2008 were recorded at the corporate level because this goodwill was carried at that level. The Company had no remaining goodwill as of December 31, 2008 or 2009.
Revenue Recognition - For the Housing Segment, the shipping terms are either FOB shipping point or FOB destination. For traditional home sales, shipping terms are generally FOB destination and title and risk of ownership are generally transferred when the Company completes installation of the product. For traditional home sales with FOB destination shipping terms, the Company generally recognizes the revenue at the time delivery and installation are completed. Revenue from final set-up procedures, which are perfunctory, is deferred and recognized when such set-up procedures are completed. Major project shipping terms are usually detailed in the contract, and title and risk of ownership are transferred per the contract. In the case of these major projects, the Company recognizes the revenue when title and risk of ownership are transferred according to the terms of the contract.

For the Specialty Vehicle Segment, the shipping terms are FOB shipping point and title and risk of ownership are transferred to the joint venture or independent dealers at that time. Accordingly, sales are recognized as revenue at the time the products are shipped.

Warranty Reserves - The Company provides customers of its products with a warranty covering defects in material or workmanship for periods generally ranging from one to two years in length and up to ten years on certain structural components. The Company records a liability based on its estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Estimated costs related to product warranty are accrued at the time of sale and included in cost of sales. General warranty reserves are estimated based upon past warranty claims and unit sales history and adjusted as required to reflect actual costs incurred, as information becomes available. Specific warranty reserves are based on specific identified issues with the amounts accrued based on the estimated cost to correct the problem. While the Company believes this method to be consistent and appropriate, changes in estimates could materially affect the Company’s recorded liability for loss. Warranty expense from continuing operations totaled $1.9 million and $3.7 million in 2009 and 2008, respectively. Accrued liabilities for warranty expense at December 31, 2009 and 2008 were $4.2 million and $9.7 million, respectively. The Company has retained the liability for the warranty on the recreational vehicles it sold prior to the asset sale of the recreational vehicle business, and the warranty payments are to be paid from the escrow account established as a result of the asset sale.

Litigation and Insurance Reserves - At December 31, 2009 the Company had reserves for certain other loss exposures, such as product liability, workers compensation and group health insurance ($3.1 million) and litigation ($0.1 million) (see Note 13 of Notes to Consolidated Financial Statements). The Company's litigation reserve is determined based on an individual case evaluation process and generally accepted accounting principles. The Company is self-insured for a portion of its product liability, workers compensation and certain other liability exposures. Depending on the nature of the claim and the date of occurrence, the Company's maximum exposure ranges from $250,000 to $500,000 per claim. The Company accrues an estimated liability based on historical losses, insurance coverage and the amount of outstanding claims. Management believes the liability recorded (see Note 8 of Notes to Consolidated Financial Statements) is adequate to cover the Company's self-insured risk. The Company's estimated loss reserves for product liability and workers compensation are determined using loss triangles established by the Company's management reflecting historical claims incurred by the Company. While the Company believes this method to be consistent and appropriate, changes in estimates based on historical trends could materially affect the Company's recorded liabilities for loss.

Income Taxes - Deferred tax assets and liabilities are established for the expected future tax consequences of events that have been included in the financial statements or tax returns using enacted tax rates in effect for the years in which the differences are expected to reverse and are subject to ongoing assessment of realizability. Deferred income tax expense (benefit) represents the change in net deferred tax assets and liabilities during the year. Deferred tax assets may be recognized for temporary differences that will result in deductible amounts in future periods and for loss carry forwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Primarily due to the Company’s losses from continuing operations over recent years, noncash charges from continuing operations of $0.8 million and $5.4 million were recorded as a valuation allowance for the full value of its deferred tax assets as of December 31, 2009 and 2008, respectively. Depending on future operating results it is possible the valuation allowance could be reversed which would increase deferred tax assets and the Company’s income tax benefit.
 
New and Pending Accounting Policies

(See Recent Accounting Pronouncements in Note 1 of Notes to Consolidated Financial Statements.)
 
- 19 -

 

Forward-Looking Statements

This Form 10-K Report contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on management’s expectations and beliefs concerning future events. Forward-looking statements are subject to risks and uncertainties, and are dependent on various factors, many of which are outside the control of the Company. These uncertainties and other factors include, but are not limited to:
 
liquidity;
the ability of the management team to achieve desired results;
interest rates, which affect the affordability of the Company's products;
consumer confidence and the availability of consumer credit;
the availability and related costs of working capital and financing to the Company;
uncertainties regarding the length and depth of the recession and timing and speed of recovery in the housing market;
the ability of the Company to obtain adequate bid and performance bonds with reasonable collateral requirements;
the ability to produce buses to meet demand;
the availability of chassis utilized for bus production;
the availability of financing to the Company’s customers;
the Company’s ability to introduce new homes and features that achieve consumer acceptance;
the margins associated with the mix of products the Company sells in a particular period;
the impact of sub-prime lending on the availability of credit for the broader housing market;
adverse weather conditions affecting home deliveries;
potential liabilities under repurchase agreements and guarantees;
tax law changes could make home ownership more expensive or less attractive;
legislation governing the relationships of the Company with its builders;
the price volatility of materials used in production and the ability to pass on rapidly increasing costs of product components and raw materials to end buyers;
the availability and cost of real estate for residential housing;
the increased size and scope of work of major projects, as compared to the Company's traditional single-family homes business, with increased reliance on third parties for performance which could impact the Company; 
the ability to perform in new market segments or geographic areas where it has limited experience;
the over supply of existing homes and the inventory of foreclosed properties within the Company’s markets;
the impact of home values on housing demand;
changing government regulations, including those covering accounting standards;
environmental matters or product warranties and recalls, which may affect costs of operations, revenues, product acceptance and profitability;
changes in property taxes and energy costs;
changes in federal income tax laws and federal mortgage financing programs;
competition in the industries in which the Company operates;
further developments in the war on terrorism and related international crises;
uncertainties of matters in litigation and other risks and uncertainties;
the ability of the Company to generate taxable income in future years to utilize deferred tax assets and net operating loss carry forwards that may be available, and the tax interpretations as to their availability;
the Company’s ability to increase gross margins which are critical whether or not there are increased sales;
the Company’s use of incentives at either the wholesale or retail level;
the dependence on key customers within certain product types;
the potential fluctuation in the Company’s operating results;
the addition or loss of builders;
the introduction and marketing of competitive product by others, including significant price discounting offered by others;
uncertainties regarding the impact of the disclosed restructuring steps;
the ability to sell excess properties held by the Company;
the ability to attract and retain qualified senior managers;
the ability to obtain government and other major projects;
our ability to improve plant utilization and to achieve or maintain reductions in costs as a result of actions taken;
customer’s confidence in our viability as a continuing entity and our ability to continue to attract customers, particularly for major projects;
our ability to minimize contingent liabilities and other draws upon our liquidity;
changes in the fair value of warrants and beneficial conversion features;
the ability to meet financial covenants contained in the Company’s loan agreements.
 
 
 
- 20 -

 
 

In addition, investors should be aware that generally accepted accounting principles prescribe when a company must disclose or reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods. The foregoing lists are not exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.

At times, the Company's actual performance differs materially from its projections and estimates regarding the economy, the housing and specialty vehicle industries and other key performance indicators. Readers of this Report are cautioned that reliance on any forward-looking statements involves risks and uncertainties. Although the Company believes that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. There can be no assurance that the forward-looking statements contained in this Report will prove to be accurate. The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's objectives will be achieved.

Item 7A.                  Quantitative and Qualitative Disclosures about Market Risk

Not required as a smaller reporting company.
 
 
- 21 -

 
Item 8.                      Financial Statements and Supplementary Data
 
 
- 22 -

 
 
Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders
Coachmen Industries, Inc.

We have audited the accompanying consolidated balance sheet of Coachmen Industries, Inc. and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coachmen Industries, Inc. and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and continues to operate in an industry where economic recovery has been very slow.  This raises substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We were not engaged to examine management's assessment of the effectiveness of Coachmen Industries, Inc. and subsidiaries internal control over financial reporting as of December 31, 2009, included in 9A(T) – Controls and Procedures and, accordingly, we do not express an opinion thereon.


 

/s/ McGladrey & Pullen LLP

Elkhart, Indiana
March 29, 2010

 
 
- 23 -

 
Report of Independent Registered Public Accounting Firm

 
The Board of Directors and Shareholders
Coachmen Industries, Inc.


We have audited the accompanying consolidated balance sheets of Coachmen Industries, Inc. and subsidiaries (the Company) as of December 31, 2008 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 2008.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Coachmen Industries, Inc. and subsidiaries at December 31, 2008 and the consolidated results of their operations and their cash flows for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. 
 
As discussed in Note 2 to the financial statements, the Company's recurring losses from operations and lack of liquidity raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters also are described in Note 2. The 2008 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Ernst & Young LLP

Grand Rapids, Michigan
March 23, 2009
 

 
- 24 -

 
Coachmen Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
as of December 31
(in thousands)
   
2009
   
2008
 
Assets
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 6,352     $ 15,745  
Restricted cash
    10,191       1,600  
Trade receivables, less allowance for doubtful receivables 2009- $1,234 and 2008- $1,676
    3,163       1,837  
Other receivables
    1,426       4,666  
Refundable income taxes
    1,939       1,559  
Inventories
    21,566       19,910  
Prepaid expenses and other
    4,325       4,390  
Assets held for sale
    4,659       2,913  
                 
Total current assets
    53,621       52,620  
                 
Property, plant and equipment, net
    28,787       30,922  
Cash value of life insurance, net of loans
    515       4,710  
Restricted cash
    4,607       17,321  
Other
    2,519       1,831  
                 
TOTAL ASSETS
  $ 90,049     $ 107,404  
                 
Liabilities and Shareholders' Equity
               
                 
CURRENT LIABILITIES
               
        Accounts payable, trade
  $ 9,132     $ 11,414  
Accrued income taxes
    691       1,470  
Accrued expenses and other liabilities
    11,933       31,127  
Floorplan notes payable
    -       3,096  
Current maturities of long-term debt
    369       819  
                 
Total current liabilities
    22,125       47,926  
                 
Long-term debt
    2,828       2,190  
Fair value of derivative instruments
    13,030       -  
Deferred income taxes
    508       457  
Postretirement deferred compensation benefits
    2,753       3,104  
Other
    448       1,038  
Total liabilities
    41,692       54,715  
                 
COMMITMENTS AND CONTINGENCIES (Note 13)
               
                 
SHAREHOLDERS' EQUITY
               
Common shares, without par value: authorized 60,000 shares; issued 2009- 21,257 shares and 2008- 21,236 shares
    92,710       92,688  
Additional paid-in capital
    6,547       7,213  
Accumulated other comprehensive loss
    -       (75 )
Retained earnings
    6,195       10,925  
Treasury shares, at cost, 2009 - 5,074 shares and 2008- 5,236 shares
    (57,095 )     (58,062 )
Total shareholders' equity
    48,357       52,689  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 90,049     $ 107,404  
                 
 

 
- 25 -

Coachmen Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31
(in thousands, except per share amounts)
   
2009
   
2008
 
Net sales
           
Products
  $ 56,521     $ 107,609  
Delivery and set
    4,102       11,987  
      60,623       119,596  
Cost of sales
               
Products
    56,703       89,593  
Delivery and set
    4,956       12,624  
      61,659       102,217  
                 
Gross profit (loss)
    (1,036 )     17,379  
                 
Operating expenses:
               
Selling
    3,633       7,077  
General and administrative
    11,155       13,018  
Impairments
    -       18,605  
Gain on sale of assets, net
    (67 )     (44 )
      14,721       38,656  
                 
Operating loss
    (15,757 )     (21,277 )
                 
Nonoperating (income) expense:
               
Interest expense
    7,256       1,635  
Investment income
    (1,422 )     (1,094 )
Other income, net
    (1,008 )     (1,600 )
      4,826       (1,059
                 
Loss from continuing operations before income taxes
    (20,583 )     (20,218 )
                 
Income taxes (credits)
    (346 )     (1,539 )
                 
Net loss from continuing operations
    (20,237 )     (18,679 )
                 
Discontinued operations
               
Income (loss) from operations of discontinued entities (net of taxes (credits) of $0 and $947, respectively)
    597       (40,884
Loss on sale of assets of discontinued entities (net of taxes of $0)
    -       (9,439
Income from legal settlement (net of taxes of $0)
    14,910       -  
Income (loss) from discontinued operations
    15,507       (50,323
                 
Net loss
  $ (4,730 )   $ (69,002 )
                 
Earnings (loss) per share - Basic
               
Continuing operations
  $ (1.26 )   $ (1.18 )
Discontinued operations
    0.97       (3.19
Net loss per share
    (0.29 )     (4.37 )
Earnings (loss) per share - Diluted
               
Continuing operations
    (1.26 )     (1.18 )
Discontinued operations
    0.97       (3.19
Net loss per share
  $ (0.29 )   $ (4.37 )
                 
Number of common shares used in the computation of loss per share:
               
Basic
    16,073       15,799  
Diluted
    16,073       15,799  
 
 
- 26 -

 
Coachmen Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2009 and 2008
(in thousands, except per share amounts)
 
                   
Accumulated
                 
               
Additional
 
Other
             
Total
 
   
Comprehensive
 
Common
 
Shares
 
Paid-In
 
Comprehensive
 
Retained
 
Treasury
 
Shares
 
Shareholders'
 
   
Income (Loss)
 
Number
 
Amount
 
Capital
 
Income(Loss)
 
Earnings
 
Number
 
Amount
 
Equity
 
Balance at January 1, 2008
         
21,180
 
$
92,552
 
$
7,856
 
$
(48
)
$
79,927
   
(5,402
)
$
(59,154
)
$  121,133  
Comprehensive Loss – 2008
                                                       
Net loss
 
$
(69,002
)
 
-
   
-
   
-
   
-
   
(69,002
)
 
-
   
-
   
(69,002
)
Net unrealized (loss) on cash flow hedges
   
(27
)
 
-
   
-
   
-
   
(27
)
 
-
   
-
   
-
   
(27
)
Total comprehensive loss
 
$
(69,029
                                               
Shares repurchased for the treasury
         
-
   
-
   
-
   
-
   
-
   
(31
)
 
(55
)
 
(55
)
Issuance of common shares under employee stock purchase plan
         
56
   
136
   
-
   
-
   
-
   
-
   
-
   
136
 
Issuance (cancellations) of common shares from treasury
         
-
   
-
   
(643
)
 
-
   
-
   
197
   
1,147
   
504
 
Balance at December 31, 2008
         
21,236
 
$
92,688
 
$
7,213
 
$
(75
)
$
10,925
   
(5,236
)
$
(58,062
)
$
52,689
 
                                                         
Comprehensive Loss – 2009
                                                       
Net loss
 
$
(4,730
)
 
-
   
-
   
-
   
-
   
(4,730
)
 
-
   
-
   
(4,730
)
Net realized gain on cash flow hedges
   
75
   
-
   
-
   
-
   
75
   
-
   
-
   
-
   
75
 
Total comprehensive loss
 
$
(4,655
                                               
Shares repurchased for the treasury
         
-
   
-
   
-
   
-
   
-
   
(25
)
 
(47
)
 
(47
)
Issuance of common shares under employee stock purchase plan
         
21
   
22
   
-
   
-
   
-
   
-
   
-
   
22
 
Issuance (cancellations) of common shares from treasury
         
-
   
-
   
(666
)
 
-
   
-
   
187
   
1,014
   
348
 
Balance at December 31, 2009
         
21,257
 
$
92,710
 
$
6,547
 
$
-
 
$
6,195
   
(5,074
)
$
(57,095
)
$
48,357
 
                                                         


 
- 27 -

Coachmen Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31
(in thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
2009
   
2008
 
Net loss
  $ (4,730 )   $ (69,002 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    2,681       4,225  
Amortization of discount on convertible debt
    833       -  
Fair value adjustment to derivative instruments
    3,030       -  
Provision for doubtful receivables
    (407 )     1,140  
Provision for write-down of assets to net realizable value
    -       1,505  
Net realized/unrealized gain (loss) on cash flow hedges
    75       (27 )
Goodwill impairment charge
    -       12,993  
Impairment charges
    -       6,264  
Loss on sale of businesses
    -       9,439  
Gain on sale of properties and other assets, net
    (104 )     (44 )
Increase in cash surrender value of life insurance policies
    (766 )     (90 )
Deferred income tax provision (benefit)
    51       (1,533 )
Other
    (592 )     (3,993 )
Changes in certain assets and liabilities, net of effects of acquisitions and dispositions:
               
Trade receivables
    534       (116 )
Inventories
    (1,656 )     35,819  
Prepaid expenses and other
    1,218       (777 )
Accounts payable, trade
    (2,282 )     (3,628 )
Income taxes - accrued and refundable
    (1,159 )     1,003  
Accrued expenses and other liabilities
    (19,194 )     (2,786 )
Net cash used in operating activities
    (22,469 )     (9,608 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of businesses
    -       25,238  
Proceeds from sale of properties and other assets
    840       357  
Proceeds from (investments in) marketable securities and cash surrender value
    3,509       (667 )
Purchases of property and equipment
    (991 )     (2,088 )
Other
    4,338       (7,154 )
Net cash provided by investing activities
    7,696       15,686  
  
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from short-term borrowings
    2,345       16,813  
Payments of short-term borrowings
    (5,441 )     (37,906 )
Proceeds from long-term debt
    2,584       -  
Payments of long-term debt
    (3,229 )     (853 )
Proceeds from borrowings on cash value of life insurance policies
    1,452       48,983  
Repayment of borrowings on cash value of life insurance policies
    -       (19,000 )
Proceeds from issuance of convertible debt, net of financing costs
    7,694       -  
Issuance of common shares under stock incentive plans
    22       136  
Purchases of common shares for treasury
    (47 )     (55 )
Net cash provided by financing activities
    5,380       8,118  
Increase (decrease) in cash and cash equivalents
    (9,393 )     14,196  
  
               
CASH AND CASH EQUIVALENTS
               
Beginning of year
    15,745       1,549  
End of year
  $ 6,352     $ 15,745  
Supplemental disclosures of cash flow information:
               
Cash paid during the year for interest
  $ 383     $ 599  
Cash paid (refunded) during the year for income taxes
    816       (35 )
Operating cash received related to insurance settlement
    (139     (988
Gain on sale of assets - Continuing operations
    (104 )     (44 )
(Gain) loss on sale of assets - Discontinued operations
    -       9,439  
Cash received from legal settlement
  $ (14,910 )   $ -  

 
- 28 -

 
Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
 
1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES.

Nature of Operations - Coachmen Industries, Inc. and its subsidiaries (the "Company") manufacture system-built housing and specialty vehicles. The system-built products (single-family homes, multi-family dwellings, military housing, motels/hotels, group living facilities, and residential subdivisions) are sold to builders/dealers or directly to the end user for certain specialized structures. Through a joint venture, the Company also manufactures a line of low floor ADA-compliant buses.

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Coachmen Industries, Inc. and its subsidiaries, all of which are wholly or majority-owned. All intercompany transactions have been eliminated in consolidation.

Use of Estimates - The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition - For the Housing Segment, the shipping terms are either FOB shipping point or FOB destination. For traditional home sales, shipping terms are generally FOB destination and title and risk of ownership are generally transferred when the Company completes installation of the product. For traditional home sales with FOB destination shipping terms, the Company generally recognizes the revenue at the time delivery and installation are completed. Revenue from final set-up procedures, which are perfunctory, is deferred and recognized when such set-up procedures are completed. Major projects shipping terms are usually detailed in the contract, and title and risk of ownership are transferred per the contract. In the case of these major projects, the Company recognizes the revenue when title and risk of ownership are transferred according to the terms of the contract.

For the Specialty Vehicle Segment, the shipping terms are FOB shipping point and title and risk of ownership are transferred to the joint venture or independent dealers at that time. Accordingly, sales are recognized as revenue at the time the products are shipped.

Cash Flows and Non-cash Activities - For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, cash investments and any highly liquid investments purchased with original maturities of three months or less.

Non-cash investing and financing activities are as follows (in thousands):
  
 
2009
   
2008
 
Issuance (cancellations) of common shares, at market value, in lieu of cash compensation
  $ 101     $ 234  

Restricted Cash

The Company had $14.8 million and $18.9 million of restricted cash as of December 31, 2009 and 2008, respectively.
 
Restricted cash amounts are as follows (in thousands): 
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Cash collateral for letters of credit (1)
 
 $
8,550
   
$
7,492
 
Indemnity escrow account (2)
   
5,147
     
10,000
 
Cash collateral for workers compensation trust accounts
   
1,101
     
1,429
 
Total restricted cash
 
 $
14,798
   
 $
18,921
 
 
(1)   The amount classified as current assets is $5.0 million and $1.6 million as of December 31, 2009 and 2008, respectively.
(2)  The indemnity escrow account is related to the agreement for the asset sale of the recreational vehicle business (see Note 12, Discontinued Operations).
 
 
Concentrations of Credit Risk - Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents and trade receivables.

At December 31, 2009 and 2008, no cash and cash equivalents were invested in money market accounts or certificates of deposit.

At December 31, 2009 and 2008, restricted cash invested in money market accounts or certificates of deposit were $6.5 million and $0.0 million, respectively.
 
 
- 29 -

 
Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued
 
1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.

The Company has a concentration of credit risk in the housing industry. A single major products customer accounted for approximately 16.9% of the Company’s consolidated net sales in 2009 and 58.5% of trade accounts receivable at December 31, 2009. This same major products customer accounted for approximately 38% of the Company’s consolidated net sales in 2008 and 5% of trade receivables at December 31, 2008.  The Company performs ongoing credit evaluations of its customers' financial conditions and sales to its traditional home builders are generally cash on delivery whereby the Company is paid upon delivery or shortly thereafter. Payments related to major projects are received in accordance with the terms of the contract. Payments related to buses are generally received within 30 days of delivery to the joint venture entity.  Future credit losses are provided for currently through the allowance for doubtful receivables, and actual credit losses are charged to the allowance when incurred.

Investment income from continuing operations consists of the following for the years ended December 31 (in thousands):

   
2009
   
2008
 
Interest income
  $ 345     $ 288  
Increase in cash value of life insurance policies
    999       1,255  
Dividend income on preferred stocks
    3       7  
Net gain (loss) on investment in joint ventures
    75       (456
                 
Total
  $ 1,422     $ 1,094  

Joint Venture - In December 2007, the Company entered into an agreement to produce ADA compliant low floor accessible buses for ARBOC Mobility LLC, a marketer of specialized transit and shuttle buses designed for users with mobility challenges. This bus incorporates patent pending technologies provided by ARBOC Mobility. In connection with the agreement with ARBOC Mobility LLC, the Company agreed to finance up to $1.0 million of start up cash requirements. As of December 31, 2009 and 2008, the Company had a note receivable of $0.9 million due from ARBOC Mobility LLC for start up cash requirements. The note is on a month-by-month basis and bears interest at the rate of 1% per month on the principal balance. The note is included in other receivables on the Consolidated Balance Sheet at a net amount of $0.5 million and $0.4 million at December 31, 2009 and 2008 respectively, after write-down for the Company’s portion of joint venture losses to date. The Company has a 30% interest in this entity and therefore accounts for this investment on the equity basis. Related party transactions with ARBOC Mobility LLC include sales of $12.5 million in 2009 and $2.4 million in 2008 and outstanding accounts receivable of approximately $1.7 million at December 31, 2009 and $1.0 million at December 31, 2008.

Deferred Financing Costs – The Company recognized deferred financing costs in connection with its convertible debt transaction.  These costs will be amortized over the term of the debt and represent fees paid in connection with the issuance of the debt.

Fair Value of Financial Instruments - The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of December 31, 2009 and 2008, because of the relatively short maturities of these instruments. The carrying amount of long-term debt, including current maturities, approximated fair value as of December 31, 2009 and 2008, based upon terms and conditions currently available to the Company in comparison to terms and conditions of the existing long-term debt. The Company also has investments in life insurance contracts. At December 31, 2008, the carrying amount of life insurance policies, which equaled their fair value, was $4.7 million ($51.7 million, less $47.0 million of policy loans).

Based on outside analysis, it was determined to be most advantageous to surrender the majority of Company-owned life insurance policies effective October 2009.  As a result, the Company received the cash surrender value of the policies redeemed, and eliminated the related borrowings, associated interest expense and future premium obligations on the policies.  Cash of $2.7 million was received related to the surrendered policies in the fourth quarter.  At December 31, 2009 the carrying amount of the remaining life insurance policies, which equaled their fair value, was $0.5 million ($6.0 million less $5.5 million of policy loans).


 
- 30 -

 
Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.

The Company accounts for all derivative instruments on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company has entered into various interest rate swap agreements to manage the economic risks associated with fluctuations in interest rates by converting a portion of the Company's variable rate debt to a fixed rate basis, thus reducing the impact of changes in interest rates on future interest expense. These financial instruments were designated as cash flow hedges, with changes in fair value being included as a component of other comprehensive income (loss) within shareholders' equity. Hedge effectiveness is evaluated by the hypothetical derivative method and any hedge ineffectiveness is reported as interest expense. Hedge ineffectiveness was not material in 2009 or 2008.  As of December 31, 2009 the Company had terminated all remaining interest rate swaps and the related variable rate debt instruments.

Inventories - Inventories are valued at the lower of cost (first-in, first-out method) or market.
 
Property, Plant and Equipment - Property, plant and equipment are carried at cost less accumulated depreciation. Amortization of assets held under capital leases is included in depreciation and amortized over the estimated useful life of the asset. Depreciation is computed using the straight-line method on the costs of the assets, at rates based on their estimated useful lives as follows:

Land improvements
3-15 years
Buildings and improvements
10-30 years
Machinery and equipment
3-10 years
Transportation equipment
2-7 years
Office furniture and fixtures, including capitalized computer software
2-10 years

Upon sale or retirement of property, plant and equipment, including long-lived assets deemed held for sale and rental properties, the asset cost and related accumulated depreciation is removed from the accounts and any resulting gain or loss is included in earnings.
 

 
- 31 -


Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.

Long-Lived Assets - Long-lived assets held and used by the Company, including property, plant and equipment and intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable (see Note 12 for asset impairments recorded in 2008, including impairments of intangible assets).

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill assets deemed to have indefinite lives are not amortized, but are subject to impairment tests at least annually in accordance with generally accepted accounting principles. The Company reviews the carrying amounts of goodwill assets annually by segment to determine if such assets may be impaired. If the carrying amounts of these assets are not recoverable based upon a discounted cash flow analysis, such assets are reduced by the estimated shortfall of fair value to recorded value. At January 1, 2008, the Company had $13.0 million of goodwill, all attributable to the Housing reporting unit. The Company conducted its annual goodwill impairment test during the fourth quarter of 2008 and the results indicated that the goodwill was fully impaired. Accordingly, the Company recorded a non-cash goodwill impairment charge of $13.0 million in the quarter ended December 31, 2008. The goodwill impairment charges in 2008 were recorded at the corporate level because this goodwill was carried at that level.   The Company had no remaining goodwill as of December 31, 2008 or 2009.

During 2008, the Company determined that certain notes receivable and equity investments amounting to $4.6 million were impaired based on our determination of the financial condition of the corresponding entity. The related expense is included in the Impairments line item on the consolidated statement of operations.

The Company’s review of its property plant and equipment resulted in an asset impairment charge of approximately $1.0 million in 2008 relating to a former Housing Group manufacturing plant that is currently listed for sale. During 2007, this production facility located in Zanesville, Ohio had been consolidated with a larger facility located in Decatur, Indiana in order to increase capacity utilization at the Indiana plant. This Zanesville, Ohio property and an unused warehouse located in Decatur, Indiana are listed for sale and are classified as real estate held for sale in the consolidated financial statements.

At December 31, 2009 and 2008, the Company had $4.7 million and $2.9 million, respectively, classified in assets held for sale.  These assets were available and listed for sale.  These assets consisted of former Housing Segment property and buildings, including the former manufacturing facility in Zanesville, Ohio that was consolidated into a larger Indiana manufacturing plant, plus a warehouse and office building in Decatur, Indiana.  Additionally, included in 2009 is a former RV paint facility located in Elkhart, Indiana that the Company sold on December 5, 2007 for $2.9 million consisting of cash of $0.3 million and a $2.6 million secured note that was due in full December 2008.  Due to the default on the secured note, the property reverted back to the Company during the third quarter of 2009.
 

 
- 32 -


Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.

Warranty Expense - The Company provides to its customers a variety of warranties on its products ranging from 1 to 2 years in length and up to ten years on certain structural components. Estimated costs related to product warranty are accrued at the time of sale and included in cost of sales. General warranty reserves are based upon past warranty claims and sales history and adjusted as required to reflect actual costs incurred, as information becomes available. Specific warranty reserves are based on specific identified issues with the amounts accrued based on the estimated cost to correct the problem. Warranty expense from continuing operations totaled $1.9 million and $3.7 million in 2009 and 2008, respectively.

At December 31, 2009, warranty reserves include estimated amounts related to recreational vehicle warranty obligations retained by the Company. In December 2008, a $10.0 million indemnity escrow account was created as a result of the recreational vehicle business asset sale.  The escrow account, which was included in long-term restricted cash at December 31, 2008, was established to pay for the recreational vehicle warranty obligations retained by the Company.  At December 31, 2009, $5.1 million remained in the escrow account and was included in current restricted cash, to cover future recreational vehicle warranty obligations.

Changes in the Company's warranty liability during the years ended December 31, 2009 and 2008 were as follows (in thousands):

   
2009
   
2008
 
Balance of accrued warranty at January 1
  $ 9,688     $ 8,123  
Warranties issued during the period and changes in liability for pre-existing warranties
    1,782       14,873  
Settlements made during the period
    (7,308 )     (13,308
                 
Balance of accrued warranty at December 31
  $ 4,162     $ 9,688  
 
Stock-Based Compensation - The Company measures compensation cost for all stock-based awards at fair value on date of grant and recognize compensation expense over the period that the awards are expected to vest. Restricted stock and stock options issued under the Company’s equity plans, as well as, stock purchases under the employee stock purchase plan are subject to this accounting.
 
Stock options generally vest over a four-year service period. The Company has not granted any stock option awards since 2003. The remaining unvested stock options, net of forfeitures, at December 31, 2009 and 2008 were not significant.

Compensation expense related to the Company's Employee Stock Purchase Plan was not significant for the years ended December 31, 2009 and 2008.

Recent Accounting Pronouncements
 
In June 2009, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 168”). SFAS No. 168 replaces the GAAP hierarchy with two levels: authoritative and nonauthoritative. The FASB Accounting Standards Codification (“Codification”) became the single source of authoritative nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”). The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative.
 
Following the Codification, FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead it will issue Accounting Standards Updates (“ASU”), which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on changes to the Codification.
 
GAAP is not intended to be changed as a result of the FASB’s Codification project, but it will change the way guidance is organized and presented. The Company has adopted the provisions of this guidance and as a result it will only affect the specific references to GAAP literature in the notes to our consolidated financial statements.

 
 
- 33 -

 
Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued
 
1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.
 
In December 2007, the FASB issued a new accounting standard related to business combinations. The new standard expands the definition of a business and a business combination; requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date with subsequent changes recognized in earnings; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. The new guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB issued new guidance which clarified the accounting for pre-acquisition contingencies. The Company adopted the new business combination guidance in the first quarter of fiscal 2009.  The adoption did not have an impact on the Company as it did not have any acquisitions.
 
In December 2007, the FASB issued a new accounting standard for noncontrolling interests in consolidated financial statements. The new standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. In addition, the guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The guidance is effective for fiscal years beginning after December 15, 2008, and was adopted by the Company in the first quarter of fiscal year 2009. The adoption of this guidance did not have a material effect on the consolidated results of operations or financial condition.
 
In June 2009, the FASB issued a new accounting standard related to the consolidation of variable interest entities. It eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This new standard also requires additional disclosures about an enterprise’s involvement in variable interest entities. The Company does not expect the adoption of this guidance in the first quarter of 2010 will have a material effect on the consolidated results of operations or financial condition.
 
In October, 2008, the FASB issued a new accounting standard which establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. The standard also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings.  The new accounting standard was adopted as of January 1, 2008 for the Company’s financial assets and liabilities. The adoption in the first quarter of fiscal year 2009 of this guidance related to nonfinancial assets and nonfinancial liabilities did not have a material effect on the consolidated results of operations or financial condition.

In March 2008 the FASB issued new guidance which amended and expanded the disclosure requirements of a previous FASB accounting standard, requiring enhanced disclosures about the Company’s derivative and hedging activities. The new guidance is effective for fiscal years beginning after December 15, 2008. The adoption of this guidance is disclosed in Note 7.
 
Research and Development Expenses - Research and development expenses charged to continuing operations were $1.4 million and $2.2 million for the years ended December 31, 2009 and 2008, respectively.

Shipping and Handling Costs - The Company records freight billed to customers as sales. The Company records delivery expenses as a component of cost of sales.

.

 
- 34 -

Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

1.
NATURE OF OPERATIONS AND ACCOUNTING POLICIES, Continued.

Comprehensive Income (Loss) - Comprehensive income (loss) represents net earnings and any revenues, expenses, gains and losses that, under accounting principles generally accepted in the United States, are excluded from net earnings and recognized directly as a component of shareholders' equity.

Volume-Based Sales and Dealer Incentives - The Company nets certain builder incentives, including volume-based bonuses, interest reimbursements and other rebates, against revenue in accordance with generally accepted accounting principles.

Income Taxes - The Company accounts for corporate income taxes in accordance with generally accepted accounting principles, which requires the Company to evaluate the need to establish a valuation allowance to reduce the carrying value of its deferred tax assets on the balance sheet. Deferred tax assets arise as a result of tax loss carryforwards and various differences between the book value of assets and the values used for income tax purposes. Generally accepted accounting principles state that a valuation allowance is generally required if a company has cumulative losses in recent years. Given the losses incurred by the Company over the last three years, noncash charges from continuing operations of $0.8 million and $5.4 million were recorded as a valuation allowance for the full value of its deferred tax assets as of December 31, 2009 and 2008, respectively.

2.
BASIS OF PRESENTATION.

Going Concern - The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which is management’s intention. The plan to do so contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We have incurred significant losses from 2005 through 2009, attributable in 2005 through 2008 primarily to the RV Group operations and in 2009 attributable to the worst housing market since the Great Depression, characterized by lack of mortgage financing, foreclo­sures at historic levels, billowing home supply inventories, enormous drops in housing starts, and falling home prices.
 
Our previous independent registered public accounting firm included an explanatory paragraph in its audit report for our 2008 consolidated financial statements regarding our ability to continue as a going concern.  Our current independent registered public accounting firm included a similar paragraph in its report for our 2009 consolidated financial statements.
 
We have managed our liquidity during this time through a series of cost reduction initiatives, sales of assets, utilization of Company-owned life insurance policies, as well as with the liquidity provided by the convertible debt transaction with HIG All American, LLC (HIG) completed in the fall of 2009.

Our ability in 2008 and 2009 to obtain traditional bank financing or sell additional assets was extremely limited. Our lack of capital prevented the expansion of our home stores, delayed development of new products, and absorbed inordinate amounts of management attention in a necessary and constant search for eq­uity or bank financing. Throughout 2009, the Company continued the search for capital in increasingly distressed housing mar­kets, and finally in October, closed on the HIG transaction.
 
As of December 31, 2009, $14.8 million of the Company’s cash is held in various restricted cash accounts. The Company believes that $3 million of the restricted cash will be released in the first half of 2010, however, the exact timing of that anticipated release is uncertain. We also believe additional amounts currently restricted will be released, although the amount and timing of such releases is also currently uncertain.

We believe that, barring demands on our cash as a result of modified vendor payment terms or to support bonds or letters of credit, the Company will be able to meet its operating cash needs through currently available cash, the release of restricted cash and collection of various receivable balances.  An adequate level of unrestricted cash is required to provide the necessary working capital to operate our businesses until the economy recovers and our sales levels return to more historical volume levels.

The following is a summary of certain cost reduction and restructuring actions of the Viability Plan:

Manufacturing Operations – During 2009, we temporarily placed our North Carolina facility on an extended shutdown until a sustainable backlog can be obtained that would support the reopening of this facility. Until then, production to serve customers of the North Carolina plant has been shifted to our subsidiary in Virginia.

In addition, during 2009 and continuing into 2010, the other 4 housing facilities are placed on short-term shutdowns, generally 1 or 2 weeks per month, based on production needs. During these short-term shutdowns, in addition to the layoff of the hourly production personnel, the majority of the salaried employees are also placed on layoff to further reduce the Company’s overhead costs. Management will continue to evaluate the capacity needs of the Company and whether any additional extended shutdowns are warranted.

 
- 35 -

 
Coachmen Industries, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements, Continued

2.
BASIS OF PRESENTATION, Continued.
 
 
Labor Costs – We have reduced salaried employment levels by 72 employees or 29% between January 1, 2009 and February 28, 2010.  Management will continue to review salaried employment levels and evaluate labor costs with the objective of lowering our costs while ensuring necessary functions are adequately staffed.

Asset Sales – We have been actively marketing certain assets for sale including a number of idled facilities or vacant land.

The success of our Viability Plan is conditioned upon maintaining a minimum level of financing for working capital needs. The success of our Viability Plan and our ability to meet our cash flow needs inherently depend on the economic conditions and the level of housing sales.

Like many companies weathering this current economic downturn, the Company’s access to sufficient operating capital is crucial to its efforts to maintain positive cash flow and return to profitability. There can be no assurance that the Company's efforts will be successful. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
3.
SEGMENT INFORMATION.

The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its business by product category. The Company's two reportable segments at December 31, 2009 are Specialty Vehicles and Housing. The Company evaluates the performance of its segments based primarily on net sales and pre-tax income and allocates resources to them based on performance. The accounting policies of the segment are the same as those described in Note 1 and there are no inter-segment revenues. The Company allocates certain corporate expenses to these segments based on three dimensions: revenues, subsidiary structure and number of employees. In addition, the data excludes the results of the discontinued operations (see Note 12). Differences between reported segment amounts and corresponding consolidated totals represent corporate and other income or expenses for administrative functions and income, costs or expenses relating to property and equipment that are not allocated to the segments.

As discussed in Note 12, the Company sold substantially all of the assets of its former RV Segment during 2008 and the operations of the RV Segment are included in discontinued operations in the consolidated statement of operations. Accordingly, the RV Segment is no longer deemed a reportable segment, and as such the segment information disclosed in the following tables exclude amounts pertaining to the Company’s former RV Segment.
 
The table below presents information about the segments used by the chief operating decision maker of the Company for the years ended December 31 (in thousands):
 
   
2009
   
2008
 
Net sales
           
Housing
  $ 47,130     $ 117,191  
Specialty Vehicles
    13,493       2,405  
                 
Total
  $ 60,623     $ 119,596  
                 
Gross profit (loss)
               
Housing
  $ (1,275 )   $ 18,014  
Specialty Vehicles
    310       (635
Other reconciling items
    (71 )     -  
                 
Total
  $ (1,036 )   $ 17,379  
 
 
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Coachmen Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

3.
SEGMENT INFORMATION, Continued.
 
 
2009
 
2008