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2009
In Review and 2010 Forecast
Annual
Shareholder’s Meeting
April
29, 2010
This
Shareholder Update may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
not to place undue reliance on forward-looking statements, which are inherently
uncertain. Actual results may differ materially from that projected or suggested
due to certain risks and uncertainties including, but not limited to, liquidity,
the ability of the Company to bond major government contracts, availability of
working capital, availability of credit to the Company and its customers, the
depth and duration of the recession, the ability to produce buses to meet
demand, the potential fluctuations in the Company's operating results, price
volatility of raw materials used in production, the availability and cost of
real estate for residential housing, the supply of existing homes within the
company's markets, government regulations, dependence on significant customers
within certain product types, consolidation of distribution channels, consumer
confidence, uncertainties of matters in litigation, and other risks identified
in the Company's SEC filings.
REVIEW
2009 was
a bear of a year. It was the first year Coachmen Industries was no longer an RV
company, and it was also our first year with housing as our core business: out
of the frying pan, into the fire.
The
pressures on management have been intense and unrelenting. We steered the
company away from considerations of bankruptcy twice.
First,
last December when Bank of America unexpectedly declined not only to continue
our banking agreement but even to provide bridge financing, they left us without
any bank line in the depths of winter, our slowest business months, in the midst
of the worst banking crisis since who knows when. We had been assured that we
would have $15 million of bridge financing available if Bank of America chose
not to continue as our banker. Instead, they unilaterally terminated the bank
line, provide no bridge financing and required 100% cash collateral for $7
million of outstanding letters of credit. In essence, this meant that we
suddenly had $22 million less in available working capital in January than we
expected in December. This was a devastating blow.
Everybody
in the Company – the CEO, all executives, down to the administrative assistants
– took salary cuts to help get us through. Payrolls were reduced. The plants
operated only several weeks per month. Employees did double and even triple
duty, wearing several different hats. We exited the RV service business and sold
excess company assets. We cancelled subscriptions and stopped contributions. We
postponed retail expansion plans and cut back on R&D. We did anything and
everything to get us through until the widely predicted mid-year rebound in the
economy.
Then came
the triple whammy. The lack of a “normal” bank line figured greatly in the
auditor’s opinion and led directly to a “going concern” notation on our 2008
financial statements issued in March of 2009. In turn, that led to draconian
bonding requirements for everything from worker compensation insurance to major
project construction. Rather than accepting our balance sheet as security as
they had done in the past, the bonding companies now demanded 100% cash
collateral for the full face amount of the bond. These requirements were so
onerous that we actually could not accept contracts that we desperately needed
because there would have been nothing for working capital to purchase the
materials necessary to perform the contracts. This handcuffed management and by
driving our cash reserves even more, caused an extreme cash crunch. At one
point, we had so much money tied up in letter of credit and bonding collateral
and accounts receivable that we had only $80,000 in the bank to meet
payroll.
We
reached out on multiple occasions to several of our major shareholders as well
as to financial advisors to try to determine the most cost effective and
attractive way to raise capital. Preferred stock seemed to be a good solution
that would have avoided dilution for those shareholders who chose to
participate. However, we were extremely disappointed in May when by a narrow
margin the shareholders turned down our recommendation to authorize the issuance
of preferred stock. Perhaps our communication that we intended to offer it to
our existing shareholders first was insufficient. Regardless, the authorization
did not pass, and we still had no bank line, none, zip, nada - and we still had
an extreme cash crunch.
We gutted
it through with a combination of more belt tightening, tightly managing our
cash, an emergency loan from one of our Directors, and settlement of the Kemlite
RV sidewall litigation.
Prognosticators
had predicted the housing markets would begin to turn in the second half of
2009. As we all know now, that did not happen. Instead, conditions were brutal.
The recession continued to deepen, and home sales continued to decline. Overall,
the markets were down cumulatively about 70% from 2006. I have been told that
one of our former million dollar builders is today driving a truck for Home
Depot. And in August General Motors interrupted our supply of chassis just as
ARBOC Mobility bus sales and production were beginning to ramp up. Lake City
Bank did provide us with a small secured loan of $2 million plus a small credit
line of $500,000, but by October it was déjà vu all over again. The housing
markets were still in a state of collapse, and we foresaw not having sufficient
capital to make it through the slow winter months ahead.
During
these months, the search for capital was constant. Once again, the specter of
bankruptcy raised it ugly head. We entered into the HIG transaction in October
of 2009.
It is
important that the shareholders understand that this transaction was the
culmination of about 18 months of seeking capital, equity or debt, it did not
matter. While we thought we had solved the problem with the sale of the RV group
on December 26 of 2008, Bank of America’s unilateral termination of our
financing agreement changed the situation quite literally
overnight.
Before we
entered into the HIG transaction, we had spoken with virtually all of our major
shareholders, unsuccessfully sought preferred stock authorization, retained
three investment banking firms (two concentrating primarily on equity, the third
concentrating on debt) , and directly or through them
communicated with over 30 investment groups, financial and strategic.
We made presentation after presentation, exploring pipes, stock offerings, loans
and sale of all or part of the company. Time and again we were told, “We are not
increasing our exposure to the real estate market at this time.” At various
times, we did receive three loan term sheets, only to have them withdrawn before
we could close. Strategic buyers had financial concerns of their own. By the
time we closed with HIG, over 60 manufactured homes competitors had closed their
doors or filed for bankruptcy.
The HIG
transaction avoided a similar fate for Coachmen. A dispassionate analysis allows
only one conclusion: without the HIG transaction or something like
it, we would not be here today. Today, we are in the middle of a proxy fight
because several shareholders were unhappy with this transaction. There is no
denying that the HIG capital is expensive, but their terms were clearly better
than the other alternatives available at the time. However the proxy contest
turns out, I can only say that a reduced share of something, especially
something with a great growth potential, is better than 100% of
nothing.
In 2009,
we managed a complete transformation of the Company, always keeping within the
jetstream of the vision for the housing group that we articulated in
2007. In 2009, 78% of our revenues generated from the housing sector.
We reduced our cost of operations, reduced our payroll by$5 million, or 38%, and
reduced our salaried headcount by 32%. By the fourth quarter, G and A expenses
were 39% less than they had been in the first quarter. As a result, our net loss
in 2009 was hugely reduced from 2008. Through it all, we are proud to say that
we have met our obligations, kept our best employees, maintained good relations
with our suppliers and paid the tail liabilities of the RV group that so worried
investors a year ago.
FORECAST
Today,
the company is in better condition than it as been for a long time. Clearly, we
are leaner. As the vision for the group demands our revenue streams are also
more balanced among builder network home sales, direct home sales through our
homestores, commercial major projects such as hotels and condominiums, and
military projects. In the first quarter of 2009, we did not have a
single major housing project to help carry us. In the first quarter of 2010,
when nationwide single family homes starts hovered near record lows, we had 8
major projects in progress, including barracks, dormitories and apartment
complexes. Bonding collateral requirements are greatly reduced – a direct result
of the HIG transaction and HIG’s relationship with our new broker. The ARBOC
Mobility bus line anchors a specialty vehicle business that was profitable in
the second half of 2009, and is projected to be more so as 2010 advances. As of
March 31, we had $10.4 million in cash and trade accounts receivable, plus $14.3
million in restricted cash.
This does
not mean that all is rosy. Our deliveries in the first quarter are based on
orders generally placed in the 3rd and
4th
quarters, which were lower than anticipated as the predicted 2009 “turnaround”
did not occur. Combined with 4 foot snows that prevented deliveries and sets of
orders we did have, and delays in several anticipated major projects due to our
customer’s financing difficulties, this caused us to miss our revenue targets,
and our EBITDA covenants with HIG in January and February. The HIG financing
agreement had to be amended to cure those defaults, as we have previously
announced. That has been accomplished, and as we announced last week, we have
met our new EBITDA covenants for March.
Some say
the worst of the new construction crunch is likely behind us, but nobody can
with certainty say where home building’s bottom will be, or has been, or how
quickly it will rebound.
According
to Lockwood Advisors, the first quarter of 2010 confirms that the expected
economic recovery may not be fast moving. Although the U.S. equity markets
posted an extremely strong performance, domestic and international concerns
contribute to a subdued outlook for economic growth. Budgetary concerns
throughout the European Union and fears of the spread of the “Greek disease”
threaten to derail economic growth in that region, which as of this morning
appears to have spread to both Portugal and Spain, curbing optimism that had
slowly grown toward the end of 2009. U.S. unemployment remains high and is
predicted to remain in or near double digits. According to the Fed, “real
disposable income in January was virtually unchanged from a year
earlier”. According to the Commerce Department’s Bureau of Economic
Analysis, real personal income has actually dropped in the U.S. 3.2% since
January 2009. Most importantly to us, the housing market, which had
shown some positive signs of stabilizing in the second half of 2009, began to
show renewed weakness in the first quarter of 2010. Toward the end of the first
quarter, economic data seemed to suggest a degree of improvement. Monthly
housing starts increased sharply year-over-year in March. However, also
according to the Fed, “while recent data pointed to a noticeable pick up in the
pace of consumer spending during the first quarter, participants agreed that
household spending was likely to be constrained by weak labor market conditions,
lower housing wealth, tight credit and modest income growth”. Financing is
critical to the housing market recovery, and financing remains extremely tight
for the single family home buyer.
Our first
solution to this uncertainty is to boost efficiency while continuing to cut
costs. We have continued these efforts through the first quarter of
2010. You will see another large improvement in G & A expense
year-over- year when we release details of our first quarter in early
May. Our gross profit in the first quarter is up over 100%
year-over-year.
The real
problem confronting us now is top line, and our second solution is to create
more alternative revenue streams and improve our marketing in order to increase
the top line. Once again within the jetstream of the Company’s vision statement.
Examples of these efforts just last month were the introduction of our cost
competitive Simple Living Series for the first homebuyer, the launch of an
industry-first “Ballpark Pricing” for all of our homes through the Internet, and
the opening of two new direct-to-the-homebuyer homestore centers in Tennessee
and Iowa. Last month, we also launched our Modern Series of homes that are aimed
at the well-heeled new-urbanist buyer. As we speak, we are building a large
apartment complex in Dubuque, Iowa. We are also protecting and widening our
competitive advantages in green and sustainable construction. Aside from being
the wave of the present, truly sustainable construction, anchored in cost saving
energy efficiency, is critical to participation in major projects. On the
Specialty Vehicle side, we have leveraged that unique kneeling chassis into
other types of specialty vehicle applications, and introduced hybrid fuel
systems for the ARBOC Mobility line of small transit buses. That innovation
garnered us new orders for 38 buses just this week.
As a
result of these efforts and what appear to be improving market conditions, based
on current backlogs and projections, we should have revenues in 2010 40% higher
than in 2009. Coupled with improved gross margins, 2010 performance
should show vast improvement over 2009. We expect to be cash flowing
positively by the third quarter.
As we
enter the Spring, we hope that the uptick we have
seen in the housing markets is a harbinger of good things to come, and will not
prove to be a false indicator due only to the tax credit for new home buyers. To
qualify for that credit, purchase contracts have to be signed by April 30, so we
should soon know. In the meantime, we intend to proceed cautiously.
I am sure
that all of us wish for a better 2010 than 2009. Thank you for your
attention.
Richard
M. Lavers
President
& Chief Executive Officer
Coachmen
Industries, Inc.
Coachmen
Industries, Inc., doing business as All American Group, is one of America's
premier systems-built construction companies under the ALL AMERICAN BUILDING
SYSTEMS®, ALL
AMERICAN HOMES® and
MOD-U-KRAF®
brands, as well as a manufacturer of specialty vehicles. All American
Group is a publicly held company with stock quoted and traded on the
over-the-counter markets under the ticker COHM.PK.
For
investor or financial information:
Martin
Miranda
Corporate
Secretary & Treasurer
574-266-2500