Exhibit 99.1
GRAND DESIGN RV, LLC
FINANCIAL STATEMENTS (unaudited)
September 30, 2016
GRAND DESIGN RV, LLC
Middlebury, Indiana
FINANCIAL STATEMENTS (unaudited)
September 30, 2016
CONTENTS
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| |
| FINANCIAL STATEMENTS (UNAUDITED) | |
| BALANCE SHEETS | 1 |
| STATEMENTS OF INCOME AND MEMBERS' EQUITY (DEFICIT) | 2 |
| STATEMENTS OF CASH FLOWS | 3 |
| NOTES TO FINANCIAL STATEMENTS | 4 |
GRAND DESIGN RV, LLC
BALANCE SHEETS (UNAUDITED)
September 30, 2016
|
| | | | |
| ASSETS | | |
| Current assets | | |
| Cash and cash equivalents | | $ | 19,659,679 |
|
| Accounts receivable, net | | 25,991,789 |
|
| Vendor rebates receivable | | 1,836,200 |
|
| Inventories | | 14,666,574 |
|
| Prepaid expenses and other current assets | | 1,822,154 |
|
| Total current assets | | 63,976,396 |
|
| | | |
| Property, plant and equipment | | |
| Land improvements | | 219,406 |
|
| Buildings and improvements | | 4,876,430 |
|
| Machinery and equipment | | 2,791,505 |
|
| Vehicles | | 272,756 |
|
| Office equipment | | 580,124 |
|
| Construction in progress | | 1,539,701 |
|
| | | 10,279,922 |
|
| Less accumulated depreciation | | (1,800,798 | ) |
| | | 8,479,124 |
|
| | | |
| | | $ | 72,455,520 |
|
| | | |
| LIABILITIES AND MEMBERS’ EQUITY (DEFICIT) | | |
| Current liabilities | | |
| Accounts payable | | $ | 11,938,160 |
|
| Accrued payroll and related benefits | | 5,576,220 |
|
| Accrued dealer incentives | | 1,907,763 |
|
| Accrued warranty | | 12,712,759 |
|
| Other current liabilities | | 1,553,737 |
|
| Total current liabilities | | 33,688,639 |
|
| | | |
| Redeemable member units | | 80,000,000 |
|
| | | |
| Members' deficit | | (41,233,119 | ) |
| | | |
| | | $ | 72,455,520 |
|
See accompanying notes to financial statements.
GRAND DESIGN RV, LLC
STATEMENTS OF INCOME AND MEMBERS' EQUITY (DEFICIT) (UNAUDITED)
Nine months ended September 30, 2016 and 2015
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| | | | | | | |
| | 2016 | | 2015 |
| Net sales | $ | 360,672,651 |
| | $ | 246,810,152 |
|
| | | | |
| Cost of goods sold | 287,185,442 |
| | 204,423,042 |
|
| | | | |
| Gross margin | 73,487,209 |
| | 42,387,110 |
|
| | | | |
| Selling expenses | 10,653,847 |
| | 7,001,532 |
|
| General and administrative expenses | 11,858,077 |
| | 6,805,288 |
|
| | 22,511,924 |
| | 13,806,820 |
|
| | | | |
| Income before other expenses (income) | 50,975,285 |
| | 28,580,290 |
|
| | | | |
| Other expense (income), net | 158,266 |
| | (3,640 | ) |
| | | | |
| Net income | 50,817,019 |
| | 28,583,930 |
|
| | | | |
| Members' deficit at beginning of year | (44,925,138 | ) | | (65,964,406 | ) |
| | | | |
| Less members' distributions | (47,125,000 | ) | | (13,700,400 | ) |
| | | | |
| Members' deficit at end of year | $ | (41,233,119 | ) | | $ | (51,080,876 | ) |
See accompanying notes to financial statements.
GRAND DESIGN RV, LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 2016 and 2015
|
| | | | | | | |
| | 2016 | | 2015 |
| Cash flows from operating activities | | | |
| Net income | $ | 50,817,019 |
| | $ | 28,583,930 |
|
| Adjustment to reconcile net income to net cash from operating activities | | | |
| Depreciation | 638,608 |
| | 433,504 |
|
| Provision for bad debts | 18,000 |
| | 18,000 |
|
| Provision for repurchase obligations | 174,452 |
| | 118,404 |
|
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (8,863,758 | ) | | 124,415 |
|
| Vendor rebates receivable | (677,505 | ) | | (115,617 | ) |
| Inventories | (4,845,015 | ) | | (7,448,938 | ) |
| Prepaids expenses and other current assets | (392,409 | ) | | 1,015,672 |
|
| Checks in excess of bank balance | — |
| | (3,286,260 | ) |
| Accounts payable | 10,152,648 |
| | 7,451,622 |
|
| Accrued payroll and related benefits | 2,689,772 |
| | 2,692,131 |
|
| Accrued dealer incentives | (1,499,551 | ) | | (14,748 | ) |
| Accrued warranty | 3,704,541 |
| | 2,971,973 |
|
| Other current liabilities | 624,112 |
| | 401,475 |
|
| Net cash from operating activities | 52,540,914 |
| | 32,945,563 |
|
| | | | |
| | | | |
| Cash flows from investing activities | | | |
| Purchase of property, plant and equipment | (2,220,654 | ) | | (2,456,950 | ) |
| Net cash from investing activities | (2,220,654 | ) | | (2,456,950 | ) |
| | | | |
| Cash flows from financing activities | | | |
| Net proceeds from revolving line of credit | — |
| | (80,145 | ) |
| Members’ distributions | (47,125,000 | ) | | (13,700,400 | ) |
| Net cash from financing activities | (47,125,000 | ) | | (13,780,545 | ) |
| | | | |
| | | | |
| Net change in cash and cash equivalents | 3,195,260 |
| | 16,708,068 |
|
| | | | |
| Cash and cash equivalents at beginning of year | 16,464,419 |
| | — |
|
| | | | |
| Cash and cash equivalents at end of year | $ | 19,659,679 |
| | $ | 16,708,068 |
|
| | | | |
| Supplemental disclosure of cash flow information: | | | |
| Cash paid during the year for interest | $ | — |
| | $ | 435 |
|
See accompanying notes to financial statements.
GRAND DESIGN RV, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2016 and 2015
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Grand Design RV, LLC (the “Company”) is a manufacturer of towable recreational vehicles. The Company has manufacturing facilities in Middlebury, Indiana and sells its units in the United States and Canada through an independent dealer network.
Use of Estimates in Preparation of Financial Statements: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Significant estimates in the accompanying financial statements include: allowance for doubtful accounts, valuation of inventories, accrued warranty and reserves for contingent liabilities under repurchase agreements. Actual results may differ from the estimates. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly our financial position as of September 30, 2016 and the statements of income and members’ equity (deficit) and cash flows for the nine months ended September 30, 2016 and 2015.
Cash and Cash Equivalents: The Company maintains its cash primarily at one financial institution, which at times may exceed federally insured limits. All investments, with an original maturity date of three months or less are included in cash and cash equivalents.
Accounts Receivable: The Company accounts for trade receivables based on the amounts billed to customers. Past due receivables are determined based on due date. The Company does not charge interest on its trade receivables.
Allowance for Doubtful Accounts: The allowance for doubtful accounts is determined by management based on the Company's historical losses, specific customer circumstances and general economic conditions. Periodically, management reviews accounts receivable and records an allowance for specific customers based on customer circumstances, with the receivable to be charged off against the allowance when all attempts to collect the receivable have failed. Management determined the allowance for doubtful accounts at September 30, 2016 was $66,000.
Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred. Depreciation is provided using the straight-line method over their estimated useful lives as follows:
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| | | | |
| | Buildings and improvements | | 3 to 15 years | |
| | Machinery and equipment | | 3 to 15 years | |
| | Vehicles | | 5 years | |
| | Office equipment | | 3 to 7 years | |
Property, plant and equipment is evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis) from an asset over its anticipated holding period is less than its net book value. Management determined there was no impairment on these assets at September 30, 2016.
Members’ Equity that includes Redemption Feature: Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks”, requires the redemption value, as defined, of members’ equity with redemption features that are not solely within the control of the Company to be stated separately from permanent members’ equity. See Note 7.
GRAND DESIGN RV, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
September 30, 2016 and 2015
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Revenue Recognition: The Company generally manufactures products based on specific orders from its customers. Further, the Company receives written or verbal approval for payment from customer floorplan financing institutions prior to shipment. Shipments are generally made by common carrier or picked up by its customers after receiving authorization from the customer. Revenue is recognized upon pick up by the common carrier or customer.
Delivery Revenue and Expense: The Company reports amounts billed to customers for delivery services in net sales. The costs of these services are included in cost of goods sold.
Accrued Dealer Incentives and Advertising Costs: The Company has certain dealer incentive programs related to specific products with dealer retail sale by a specified date and dealer holding costs. Estimated costs related to dealer sales incentives are accrued as a reduction of net sales at the date products are retail sold. Advertising costs, which consist primarily of tradeshows, are expensed as incurred, and were $531,512 and $478,580 during 2016 and 2015, respectively.
Income Taxes and Allocation of Company Profits and Losses: The operating agreement of the Company provides that the Company’s net income or loss for each year is allocated to its members in accordance with the terms of the agreement. Since the Company’s net income is allocated to its members, there is no income tax provision or liability for federal and state income taxes in the financial statements.
The Company is subject to federal and multistate tax jurisdictions. The Company is subject to possible income tax examination by tax authorities for open tax years from 2012 through 2015.
The Company accounts for uncertain tax positions if it is more likely than not the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recorded is the largest amount that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Based on the Company's analysis of the “more likely than not” tax positions there has been no liability recorded for uncertain tax positions. The Company does not expect the total amount of uncertain tax positions to significantly change in the next twelve months.
The Company would recognize interest and penalties related to unrecognized tax benefits in interest and income tax expense, respectively. The Company has no amounts accrued for interest or penalties as of September 30, 2016 and 2015.
New Accounting Pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which specifies how and when to recognize revenue as well as providing informative, relevant disclosures. In August 2015, the FASB deferred the effective date of this standard by one year, which would become effective retrospectively or on a modified retrospective basis for public companies for fiscal years beginning after December 15, 2017. For nonpublic entities, the updated standard is effective for annual reporting periods beginning after December 15, 2018. In connection with the sale of the Company as described in Note 8, the Company will review with management of Winnebago Industries, Inc. the impact of adopting this pronouncement on its financial results.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is effective retrospectively or on a modified retrospective basis for public companies for fiscal years beginning after December 15, 2018. For nonpublic entities, the standard is effective for annual reporting periods beginning after December 15, 2019. In connection with the sale of the Company as described in Note 8, the Company will review with management of Winnebago Industries, Inc. the impact of adopting this pronouncement on its financial results.
GRAND DESIGN RV, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
September 30, 2016 and 2015
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires inventory measured using any method other than last-in, first-out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 will become effective prospectively for public companies for fiscal years beginning after December 15, 2016. For nonpublic entities, the standard is effective for fiscal years beginning after December 15, 2017. In connection with the sale of the Company as described in Note 8, the Company will review with management of Winnebago Industries, Inc. the impact of adopting this pronouncement on its financial results.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), which provides guidance for eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective retrospectively for public companies for annual reporting periods beginning after December 15, 2017. For nonpublic entities, the standard is effective for fiscal years beginning after December 15, 2018. In connection with the sale of the Company as described in Note 8, the Company will review with management of Winnebago Industries, Inc. the impact of adopting this pronouncement on its financial results.
There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s financial statements.
NOTE 2 - INVENTORIES
Inventories consist of the following:
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| | | | |
| Raw materials | | $ | 11,993,552 |
|
| Work in process | | 1,415,772 |
|
| Finished goods | | 1,257,250 |
|
| | | 14,666,574 |
|
NOTE 3 - PRODUCT WARRANTY
The Company provides a limited warranty covering defects in material or workmanship of its products for a period of one year from the date of retail sale and a three year limited warranty for structural defects. The Company records a liability based on estimated amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors used in estimating the warranty liability include a history of units sold, existing dealer inventory, average cost incurred and a profile of the distribution of warranty expenditures over the warranty period. Estimates are adjusted as required to reflect actual costs incurred, as information becomes available.
The activity for accrued warranty for the nine months ended September 30, 2016 and 2015 is as follows:
|
| | | | | | | |
| | 2016 | | 2015 |
| Balance at beginning of period | $ | 9,008,217 |
| | $ | 5,847,131 |
|
| Warranty expense | 10,788,968 |
| | 7,345,756 |
|
| Claims paid | (7,084,426 | ) | | (4,373,783 | ) |
| |
|
| |
|
|
| Balance at end of period | $ | 12,712,759 |
| | $ | 8,819,104 |
|
GRAND DESIGN RV, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
September 30, 2016 and 2015
NOTE 4 - REVOLVING LINE OF CREDIT
The Company has a revolving line of credit agreement through December 31, 2017 that provides for borrowings up to $20,000,000 that are secured by substantially all assets of the Company. Interest on outstanding borrowings under the revolving line of credit are payable monthly at the 1-month LIBOR plus 2.50% (3.03% at September 30, 2016). The agreement contains restrictive covenants relating to maintenance of total debt to tangible net worth ratio as well as minimum net worth, as defined. At September 30, 2016, the Company was in compliance with these requirements.
The Company classifies this debt as current in its balance sheet because the debt can fluctuate significantly as a result of working capital fluctuations.
NOTE 5 - LEASE COMMITMENTS
The Company leases real estate from entities related by common ownership through 2024. The Company also leases equipment from unrelated parties. Future minimum lease payments are as follows:
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| | | | | | | | | | | |
| | Related Party | | Other | | Total |
| 2017 | $ | 1,450,002 |
| | $ | 116,664 |
| | $ | 1,566,666 |
|
| 2018 | 1,800,000 |
| | 87,498 |
| | 1,887,498 |
|
| 2019 | 1,800,000 |
| | — |
| | 1,800,000 |
|
| 2020 | 1,800,000 |
| | — |
| | 1,800,000 |
|
| 2021 | 1,800,000 |
| | — |
| | 1,800,000 |
|
| Thereafter | 8,224,000 |
| | — |
| | 8,224,000 |
|
| | $ | 16,874,002 |
| | $ | 204,162 |
| | $ | 17,078,164 |
|
Rent expense for the nine months ended September 30, 2016 and 2015 was $956,532 and $921,246, respectively, including $675,000 of rent expense to a related party in both periods.
NOTE 6 - CONTINGENCIES
Repurchase Agreements: The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of their products. The terms of the repurchase obligations vary based upon the terms of the floor plan arrangements and require the Company to repurchase its product from the financial institutions in the event of dealer default. Such agreements are customary in the recreational vehicle industry. The estimated potential obligations under repurchase agreements approximated $181,653,000 at September 30, 2016. The risk of loss under such agreements is reduced by the resale value of the products repurchased and is spread over the Company’s numerous dealers.
There were no losses resulting from repurchase obligations for the nine months ended September 30, 2016 and 2015. The Company records the fair value of repurchase reserves based on prior experience, known events and other significant inputs that are not observable in the market. The Company recorded repurchase liabilities of $514,897 and $296,771 at September 30, 2016 and 2015, respectively, which is included in other current liabilities in the balance sheets.
GRAND DESIGN RV, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
September 30, 2016 and 2015
NOTE 6 - CONTINGENCIES (Continued)
Partially Self-Insured Group Health Plan: During 2015, the Company implemented a partially self-insured health insurance program that covers eligible employees and dependents’ medical care costs. The Plan provides for the Company to pay all health care claims up to $100,000 per individual per policy year. In addition, the Company’s liability is limited to an annual aggregate limit of approximately $2,100,000. Prior to 2015, the Company paid premiums to a fully funded external group health plan. Total group health insurance expense for the nine months ended September 30, 2016 and 2015 was $630,224 and $813,192, respectively. Management does not anticipate any significant losses for claims that were incurred during 2016.
Partially Self-Insured Worker’s Compensation Plan: During 2015, the Company implemented a partial self-insured worker's compensation plan which provides for certain specific stop loss coverage. The plan provides for the Company to pay all worker compensation claims up to $250,000 per individual per policy year. The Company's does not have an aggregate limit on its total worker’s compensation exposure. Prior to 2015, the Company paid premiums to a fully funded external worker’s compensation plan. Total worker's compensation expense for the nine months ended September 30, 2016 and 2015 was $233,969 and $653,811, respectively. Management does not anticipate any significant losses for claims that were incurred during 2016.
Litigation: The Company is involved in various warranty and product liability matters which are ordinary, routine proceedings inherent to the industry. Management believes that any liability which may result from these matters will not be significant.
NOTE 7 - MEMBERS' EQUITY AND REDEEMABLE MEMBER UNITS
Grand Design RV, LLC was formed in 2012, as a Limited Liability Company under State of Indiana statutes, with initial sales incurring in January 2013. On November 19, 2014, the Company amended its operating agreement (the “Amended and Restated Operating Agreement”) in connection with the Managing Members’ sale of 4,999,999.90 Class A Units to new members (“New Members”). At December 31, 2015 and 2014, the Company has authorized and issued 5,000,000.10 of Common Units held by the Managing Members, and 4,999,999.90 Class A Units held by New Members. The Common Units and Class A Units have certain rights and obligations as more fully described in the Amended and Restated Operating Agreement, including, but not limited to voting, distribution and liquidation rights. With respect to voting, the Common Units and Class A Units vote in proportion to ownership without respect to class, except for certain consent rights, as defined. Finally, the Class A Units retain certain redemption rights, as defined, which are exercisable on November 19, 2021. The redemption price is equal to the greater of fair market value or the original issue price of $16 per unit totaling $80,000,000; plus a preferred return of 7.5%, payable at redemption.
Under Accounting Series Release No. 268, Presentation in Financial Statements of “Redeemable Preferred Stocks” (“ASR 268”), with respect to financial statements filed with the Securities and Exchange Commission, the redemption rights attained by the New Members require that the member units acquired be stated separately from permanent members’ equity and included in the balance sheet as redeemable member units. The value ascribed to the redeemable member units is equal to the fair value of the Class A Units purchased by the New Members from the Managing Members on November 19, 2014 which totaled $80,000,000. Under the guidance of ASR 268, the Company has assessed that the amount is not subject to re-measurement as it believes it is not probable that the redemption will be exercised due to the likelihood of a liquidity event, as defined, occurring prior to the exercise date.
GRAND DESIGN RV, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - Continued
September 30, 2016 and 2015
NOTE 7 - MEMBERS' EQUITY AND REDEEMABLE MEMBER UNITS (Continued)
Unit Incentive Plan: The Company maintains an Incentive Compensation Stock Tracking Unit Plan (the "Plan"). The Plan authorizes the granting of awards of up to 7.5% of the total outstanding value of the Common Units and Class A Units shares to key executives of the Company. The Plan is administered by the Board of Managers of the Company, which can determine, at their discretion, the participants, granted units, and conditions of each award. Outstanding awards issued under the Plan have been in the form of Stock Tracking Units (“STUs”). The STUs vest immediately upon issuance. STUs are not an ownership interest in the Company and they have no rights to vote or receive dividends or distributions other than Eligible Distributions, as defined. All rights under the STUs shall be forfeited and void if the holders employment with the Company terminates for any reason including as a result of death, disability, or retirement. The STUs are not transferable.
The holders of the STUs are entitled to receive payments from the Company upon the occurrence of an Eligible Distribution and upon the occurrence of a Sale of Business, as defined in the Plan. Eligible Distributions will be recognized when they become probable. During May and July 2016, the Company declared Eligible Distributions which resulted in payments totaling $1,475,000 to the STUs which were expensed and have been included in general and administrative expense in the statements of income. Payments to STUs resulting from the occurrence of a sale will be recognized as compensation expense when the event occurs.
During 2014, the Company granted STUs representing 7.5% of the total value of the outstanding Common Units and Class A Units shares. During 2015, an individual holder of 2% of the total 7.5% STU’s left the Company, and as a result, forfeited the STU’s. During 2016, the Company granted STU’s representing 0.5% bringing the total STU’s issued to 6% of the original 7.5% issued.
NOTE 8 - SUBSEQUENT EVENTS
Management has analyzed the activities and transactions subsequent to September 30, 2016 to determine the need for any adjustments to or disclosures within the financial statements for the nine months ended September 30, 2016. Management has performed their analysis through January 13, 2017, the date the financial statements were available to be issued.
Effective November 8, 2016, 100% of the ownership interests of the Company was acquired by Winnebago Industries, Inc. for a purchase price of $520,649,000, which was comprised of $396,583,000 of cash and $124,066,000 of stock.
In connection with the sale of the Company, the following events occurred:
| |
| 1. | The lease agreements with related parties were modified. Note 5 reflects such modified terms and future minimum lease payments accordingly. |
| |
| 2. | Subsequent to September 30, 2016, the holders of the STUs received distributions totaling $29,759,515 as defined by the Plan. |
| |
| 3. | The revolving line of credit agreement described in Note 4 was terminated. |
