Exhibit 99(a)(1)(L)
MONACO COACH CORPORATION
STATEMENT REGARDING TENDER OFFER
As previously announced, Monaco Coach Corporation and SMC Corporation have
entered into a merger agreement under which a wholly owned subsidiary of Monaco
Coach Corporation, Salmon Acquisition Inc., commenced an all-cash tender offer
on July 5, 2001 for all of SMC Corporation's outstanding common stock at a price
of $3.70 per share. The tender offer is conditioned upon, among other things,
there being tendered and not withdrawn prior to the expiration date of the
tender offer at least 51% of the outstanding shares of common stock.
The tender offer and withdrawal rights are scheduled to expire at 12:00
midnight, New York City time, on Wednesday, August 1, 2001, unless the tender
offer is extended.
The tender offer may be extended on the terms and conditions stated in the offer
to purchase sent to shareholders in connection with the tender offer. Any
extension of the tender offer will be followed as promptly as practicable by a
public announcement, which will be issued no later than 9:00 a.m. New York City
time on the next business day after the previously scheduled expiration date.
Further information and a copy of the offer to purchase may be obtained from the
information agent for the offer: Innisfree M&A Incorporated, 501 Madison Avenue,
20th Floor, New York, NY 10022; (212) 750-5833 (banks and brokers); (888)
750-5834 (all others). Salomon Smith Barney ((800) 220-7501) is the Dealer
Manager for the tender offer.
IMPORTANT DISCLAIMER
The discussion contained in this conference call is neither an offer to purchase
nor a solicitation of an offer to sell shares of SMC Corporation. Monaco Coach
Corporation has filed a Tender Offer Statement and SMC Corporation has filed a
Solicitation/Recommendation Statement with respect to the tender offer. The
Tender Offer Statement (including an offer to purchase, a related letter of
transmittal and other offer documents) and the Solicitation/Recommendation
Statement, in each case as amended from time to time, contain important
information, and investors and security holders are strongly advised to read
both such statements and all subsequent amendments thereto carefully before any
decision is made with respect to the offer. The offer to purchase, the related
letter of transmittal and certain other documents, as well as the
Solicitation/Recommendation Statement, and any amendments thereto, are available
to all shareholders of SMC Corporation, at no expense to them. The Tender Offer
Statement (including an offer to purchase, a related letter of transmittal and
other offer documents) and the Solicitation/Recommendation Statement and any
amendments thereto are also available at no charge at the SEC's website at
WWW.SEC.GOV.
1
MONACO COACH CORPORATION
MODERATOR: KAY TOOLSON
JULY 24, 2001
11:00 AM CT
Operator: Good day everyone and welcome to today's Monaco Coach
Corporation Second Quarter Earnings Release conference call.
Today's call is being recorded. Before we begin let me read
the following Safe Harbor statement.
This conference may contain certain forward-looking
statements that are subject to the risks and uncertainties
that could cause actual results to differ materially from
those projected. Such risks and uncertainties include but
are not limited to those set forth in the company's most
recent form 10Q and the company's most recent form 10K.
These documents can be accessed at WWW.SEC.GOV.
We will now turn the call over to Mr. Kay Toolson, Chairman
and CEO. Please go ahead, sir.
Kay Toolson: Thank you, Justin. I'd like to welcome all of you to our
second quarter, first half conference call. Joining me today
is John Nepute - our company President, Marty Daley - our
Vice President and Chief Financial Officer as well as other
senior members of our management team along with Mike
Duncan, our Investor Relations Manager.
2
We're very excited to have you on the call today and look
forward to going through our results and to our question and
answer period later. And with that I'll turn it over to
Marty Daley.
Marty Daley: Thank you, Kay. I'm pleased to report our sales and profit
for the second quarter of 2001. Net sales were 223 million
compared to 226 million in 2000, a decrease of 1.2%. Gross
motorized sales dollars were down 1.1% while towables were
up 4%. Towables accounting for approximately 10% of our
second quarter gross sales.
Gross profit for the second quarter of 2001 decreased to
25.8 million or 11.5% of sales which was down from 14.2% of
sales in the second quarter of 2000. The decrease in gross
margin was due to a combination of factors - above normal
sales discounts which net against gross sales accounted for
a significant portion of the decrease.
Sales discounts ran about 3.8% of gross sales in the second
quarter while 2.2% is what we would consider normal. This
level of discounting allowed us to sell all our 2001
products and reduce our finished goods inventory by 13.4
million since the beginning of the quarter.
The remainder of the difference was a result of production
inefficiencies created from reduced production, shifting our
volume among the production lines in our plants and shifting
the mix of products on those lines.
Going forward we are expecting a reduction on the
discounting side but expect a continuation of some
inefficiencies from our reduced production levels in the
second half of the year until we begin a ramp up of
production and fully integrate some of SMC's production with
our own.
SG&A as a percentage of sales was 7.4% compared to 6.1% in
last year's second quarter. The bulk of this change was
related to the significant increase in our retail promotion
efforts which are reflected in SG&A.
3
Operating income for the second quarter was 9.2 million or
4.1% of sales, down from 18.2 million and 8% of sales in the
second quarter of 2000. Net interest expense for the second
quarter was 414,000 versus last year's 127,000 reflecting a
higher level of borrowing during the second quarter of 2001.
The company's net income for the second quarter was 5.5
million versus last year's 11.1 million and earnings were 28
cents per share versus 58 cents per share.
For the first half of the year net sales were down 6.3%
((inaudible)) (34.7) million. Gross profit was 51.3 million
versus 69.4 million last year. Operating income for the
first two quarters was 18.2 million and net income was 10.7
million or 55 cents per share.
On the balance sheet side corporate borrowings were 14.1
million at the end of the second quarter, down from 20.6
million at the first of the year. Accounts receivable was
79.4 million, up from 68 million at the beginning of the
year.
Our inventory balance of 97 million was down almost 18
million from the first of the year. The finished goods
component of our inventory was down to 23.2 million.
Notes receivable were 7.6 million, an increase of 4.8
million since the beginning of the year which were advances
to fund a portion of the development costs of upscale Motor
Coach Resorts in Las Vegas, Nevada, ((inaudible)),
California, and Naples, Florida.
Capital expenditures for the first half of the year were 3.8
million which included costs for completing the company's
warranty and service ((inaudible)) projects. We're expecting
capex of approximately 10 to 12 million in 2001 which
includes additional spending for minor modifications of our
existing manufacturing facilities and $4 to $5 million of
routine capex.
And with that I'll turn this over to John.
4
John Nepute: Thank you, Marty. In April I indicated our markets continue
to be very challenging from both a retail and wholesale
perspective and the remainder of the second quarter
continued that pattern. Class A retail numbers were down 25%
in the month of May and down 22% for the year through May.
However our retail activity continues to outpace the rest of
the market. Our unit sales for the same periods are
essentially flat with last year's numbers. As a result we
continue to take market share improving to 16.9% of Class A
sales through May 2001 which is up from 13.3% in the same
period of 2000. For the month of May our retail market share
in Class A rose to 17.7% which made us the number one Class
A manufacturer for the month.
The diesel segment continues to be the strongest part of
Class A sales. Diesels were only down 8% through May 2001
and our diesel retail numbers were actually up 7% for the
same period. Our share of this market grew 4 percentage
points to 28.7% from 24.7% last year. Diesel motor homes now
account for 44% of the Class A sales compared to only 36% in
the same period of 2000.
On the towable side of our business retail sales were down
11.6% through May while Monaco's towable products were down
6.4%. Despite slightly outperforming the industry our market
share is still small at 2.2% versus 2.1% last year.
We are now focused on rating our sales and service teams for
the rallies and shows in August and September. These events
will be the first opportunity for many consumers to see our
2002 models. We're encouraged by the positive dealer
response to the `02s at our recent dealer meeting in South
Bend, Indiana, at the end of the second quarter.
5
The orders taken at the dealer meeting and in the weeks
since have noticeably improved our order position. In
addition we were very pleased to see the enthusiasm
displayed by the dealer body regarding the market going
forward. We plan to help them by continuing to work hard to
deliver innovative products that hit what we believe are
attractive price points in the RV market. Supplementing our
product efforts the retail promotions like our free gas and
diesel program help insure we maintain our hard-earned
market share gains.
The RV market continues to be challenging however we
continue to be encouraged by the recent interest rate
announcements from the Fed. That combined with the decline
in fuel prices should translate into improved consumer
confidence leading to an upturn in our market. In the
interim we continue to focus on product innovation and
taking care of our dealers and customers.
I'd now like to turn this over to Kay.
Kay Toolson: Well thank you, John, thank you Marty. As John said we are
encouraged by our strengthening order picture and by the
incredibly positive reaction received from our dealers at
our dealer meeting on our '02 products.
As you know we're only a few days away from finalizing our
acquisition of SMC Corporation. During the last few weeks
we've completed our due diligence process and while
discovering the normal challenges we expected because of
SMC's struggles these past two years we however have been
more surprised by the enthusiastic response we've gotten not
just from the existing SMC dealer body but also our existing
Monaco and Holiday Rambler dealers.
Both the Safari and Beaver brand names are well respected in
our industry. When you combine that with the strong
operations managers and dedicated workforce we've found at
SMC mixed with our exceptional managers and employees the
possibilities going forward are very exciting.
6
SMC currently has approximately 65 dealers with only 20
being current Monaco dealers. Our plan will be to expand the
retail networks of these two products and to over time
introduce new price points helping us continue capturing
additional market share and growing our combined revenues.
Now Marty, John and I are pleased to open up for any
questions you may have. Again thank you for your interest in
our company. Justin?
Operator: Thank you and if anyone would like to ask a question today
you may do so by pressing the star key followed by the digit
1 on your telephone keypad. We will take questions in the
order that you signal us and we will pause for a moment to
assemble our roster. Again that's star 1 now.
And we'll first go to Jordan Hymowitz with Robertson
Stephens. Mr. Hymowitz, did you have a question?
Jordan Hymowitz: Yes, yes. There's a wide range of guidance for you guys for
2001 and 2002. Do you have any sense on where the
management's guidance is at this point at least if not going
forward for the third quarter?
John Nepute: I haven't talked to the analysts today. I think Mike's
talked to them a little bit but I think as they've gone
through the year they've kind of waited until the preceding
quarter to adjust their expectations for the coming quarter
based on where the market's at.
Originally I think most of the numbers out there for the
third and fourth quarter were originating back in December
of 2000 with the expectation that by the second half the
market would have turned and rebounded. I think what we're
seeing is that that rebound is taking a little bit longer
than people were originally forecasting. So I'm not sure
where they're going to end up.
7
I think our expectations are that while the order picture is
getting stronger we've always got one last production week
in both the third and fourth quarters plus we've got some
holidays in the fourth quarter so that our expectation would
be that more than likely just from the existing Monaco side
you wouldn't see results that were appreciably better than
what we hit in the first half of the year. And it's a little
hard to gauge until we actually take over SMC exactly what
we'll be able to do with that although I think Marty talked
about SMC a little bit in our last conference call in terms
of the expectations of when we thought we'd get into
breakeven and how we go from there.
Jordan Hymowitz: So given that SMC loses money now, you know, and it's going
to take at least a couple of months if not a couple of
quarters to turn them around you would anticipate the second
half of the year would probably be, you know, as well as the
work stoppage for two weeks as it happens every second half
of the year that the second half would be probably no better
then even with the first half given trends continuing?
John Nepute: I think that would be our expectation.
Jordan Hymowitz: Okay so the guys closer to $1 are probably more close to the
right numbers than the guys closer to $1.40 or $1.50?
John Nepute: I think that's correct.
Jordan Hymowitz: Thank you.
Operator: And your next question comes from Michael Millman and
Salomon Smith Barney.
Michael Millman: Thank you, I've got some other questions but I'd like to
follow up a little bit on that and to say an excellent and
maybe even surprising performance, I'm not sure what you
think and you might want to comment on that also.
8
Maybe you could quantify a little bit more when you say a
better order picture. Where are we seeing the improvement?
How much improvement are you seeing? Also when you talk
about the second half being similar and while you did give
some bottom line are you really talking about it being
similar in terms of shipments? And maybe it will be better
because it looks like margins are improving significantly or
improved significantly with the '02 models.
And in the second quarter I guess it was I imagine touch and
go right to the end of the quarter. Was there any unusual
bulge or the continuation of the dealer squeeze at the end
of the quarter and do you see that mitigating at all?
John Nepute: Well let's start with your last question and maybe move
backwards. Hopefully we can remember them all.
In answer to the squeeze I guess yes in terms of the `01
product. We actually had cleaned up most of the `01 product
the first half of June prior to our dealer show which was
actually the last week of June. We had quite a flurry of
activity at that show and shipped a number of '02 products.
I couldn't tell you exactly how many that last week based on
orders generated at the dealer meeting.
So that was good and certainly I would say our order picture
is firm enough right now that assuming that continues that I
wouldn't expect to see that major squeeze that we had over
the last four or five quarters. So from our perspective
that's a very good thing.
In terms of the outlook for the second half I think we're
actually expecting probably sales numbers that aren't a lot,
not even a lot, but not even up to what we hit here
necessarily. Our production rate currently would and I'm
speaking on the Monaco side I have a hard time adjusting to
the
9
combined so let's just talk about the Monaco side for a
second and our sales volume I think would actually be less
in the second half given the reduced weeks of production.
But we're expecting though to see improvement in margin,
certainly the '02 product that's been sold thus far has been
regular invoice and given the order picture I would expect
that to continue. There may be some discounting on specific
floor plans or models going forward but not the level that
we've seen earlier this year.
Michael Millman: John, in regard to the vacation - the more holidays, less
production - I thought that production really wasn't an
issue. As it always is it's sales and shipments are the
issue so I'm not sure.
John Nepute: Well I guess we are going to have some finished goods that
we can spill out into the second half but as Marty said,
we've run our finished goods inventory down to some extent.
So there's not as many units sitting out there in that
basket as there has been for the last four quarters.
Kay Toolson: And Mike, also in the past and I think what may be getting
lost here a little bit is if we were running at full
capacity, if we have less production days in the second half
than we do in the first half and I think that's what John
was getting to is we have a week shutdown for vacation in
July and we have a week shutdown in December and then we
have additional holidays in the second half that aren't in
the first half of the year. However we are ramping up one of
our lines right now in Indiana that builds diesel products
from three a day to four a day because of our strong order
picture in that particular price point which is our Windsor
Imperial sector and Diplomat LE line.
So that's very positive. It's the first time we've had a
ramp up of one of our production lines in well over a year
and a half I think or almost two years. So that is on a
positive side. After the
10
acquisition we will be moving the (Spar) brand from
Harrisburg into our plant here in (Coleburg) which will help
make this plant more efficient. It's been running at a very
reduced production rate which makes it very inefficient
obviously. So that should help with that.
And I think as John said, sorting out exactly how all this
is going to affect - now we haven't made all those final
decisions yet and they won't be made until next week on how
the SMC, when that acquisition's completed next Wednesday or
Thursday how that will all fill into the picture.
Michael Millman: Kay, I guess a couple of things. One is how much time was
involved in ramping up a line? And two, I got the impression
when you first announced the acquisition that by the time
you closed it you'd have the operation at around breakeven.
Kay Toolson: That is our expectation. That is what we said and we still
expect that to be the case.
Operator: And we will move to Scott Stember with Sidoti & Company.
Scott Stember: Good afternoon, gentlemen. I'm not sure if I missed a few
things because I joined you guys late. Did you give any
information on gas versus diesel as far revenues or just
percentages, increases or decreases?
Kay Toolson: I don't think we did. Marty's trying to come up with those
for you.
Scott Stember: And also the second part of my question would be we know
about the amount of discounting that was going on for the
2000 models due to the model year changeover. Did you by any
change mention what you expect on the 2002 models? Are you
seeing a similar discounting, what level and where do you
expect that to go for the next quarter if you could look
into your crystal ball?
11
John Nepute: Well we just actually talked about that quite a bit, Scott.
The `02s we have not seen the discounting that we saw in the
`01s and given the current order status or order picture
that would suggest that the discounting would be much more
closer to normal than what it's been so that's a good thing.
Scott Stember: And would that also include some of the retail stuff like
you've been doing with gasoline as well?
John Nepute: Actually that's been a pretty good promotion for us. I'm
just saying we're going to continue that. I think we have
decided to continue that at least through the third quarter
and we're also running some other coop advertising with
dealers that we'll probably continue maybe not quite to the
same levels. It's actually been very effective in terms of
dealing product and dealer loss so we'd like to keep the
pressure on by doing that.
Scott Stember: All right and just with some of the shows coming up, you
briefly alluded to the FMCA show coming up I guess in
August, what are you seeing there, dealer response to that
and what are your expectations for something along those
lines It's obviously a very big show for you guys.
John Nepute: Well you know to put it in perspective I mean they are very
big shows. Even if we have a world record show for
ourselves. I mean it's only about two weeks of production in
terms of the orders we take so it's not life-threatening one
way or the other probably. But it's always a good gauge of
consumer acceptance of our models and certainly we're hoping
to have a good show.
The attendance at least in terms of preregistrations for
both the pre-rallies and the main show looks like it should
be well attended and we're hopeful to do well.
Michael Millman: Okay.
12
Marty Daley: To give you a breakdown on the sales diesel versus gas I did
already mention that towables were about 10% of our sales.
Gas products were about 9% of our sales and 81% was diesel.
Michael Millman: Okay, thanks a lot, guys.
Operator: Rick Fradin at William Blair & Company.
Rick Fradin: Thanks, good morning. My first question is I'm a little bit
surprised to hear you say sort of closer to $1 instead of
$1.40 because of the comment that a lot of this wholesale
discounting on the `02s at least appears to have gone away
and come back to more normal levels. Can you help me sort of
reconcile those two?
John Nepute: Well I guess we're just trying to take sort of a
conservative look at the second half. As Kay said we are
ramping up one line sort of to ramp up more of the lines and
feeling more optimistic. We are seeing some firming of the
markets and if that continues there is hopefully positive
potential in the second half over the numbers that we're
talking about there.
Rick Fradin: Maybe I'm a little bit over-estimating the impact of the
wholesale discounting in the second quarter gross margin.
Would that have been the biggest of the factors in the
almost 300 basis point decline in the gross margin this past
quarter?
John Nepute: I think it was pretty much...
Kay Toolson: It was between that and the inefficiencies in our plan by
shifting our products and reduced production of our plants,
Rick. I mean it was a combination and as said earlier, this
ramp up of the line in Indiana is certainly going to help
that plant be more efficient.
13
If our order picture continues to get stronger as John said
we'll be possibly ramping up another line bringing the SMC
product into this plant. Certainly the Spar brand is
certainly going to help this plant be more efficient. So
there are certainly some positive things that could happen
that could I think bring our yearly earnings number closer
to the $1.40 that you're talking about.
There's also some risk involved in that. If the market
remains soft or gets any softer. So I mean we're just
hedging kind of through that. I mean if the market continues
to strengthen like it has, consumer confidence comes back
and we're able to pull this off smoothly then the $1.40 is
not an expected expectation.
Rick Fradin: Okay and last question along those lines just so I'm clear
that today's level of discounting let's say through July
thus far on the `02s would be not very dissimilar to what
you were doing a year ago on the `01s?
Kay Toolson: Our discounting is less today than it was year ago,
significantly less today than it was a year ago.
Rick Fradin: Than it was in the second quarter of 2000?
Kay Toolson: Yes.
Rick Fradin: Okay, thank you.
Operator: And on to Craig Clark at A.G. Edwards.
Craig Clark: Good morning, guys. My first question is about in the press
release you talked about how dealers at your South Bend
meeting were optimistic about marketing conditions and I
guess I
14
just want a little clarification. Are they truly optimistic
as far as the rebound or are they just optimistic because
they think the worst is past?
John Nepute: Well I think what they were saying at least to me was that
they felt like they've seen the worst of it, that they had
been managing their inventories very well and that they felt
like even if it just kind of putters along here that they're
in good shape to weather whatever happens. But that they
were expecting to see some signs that it starts to get
better. So like I said they were just very optimistic about
prospects going forward.
Craig Clark: Was there any difference in their optimism between motorized
and the towable or is it just kind of in general?
John Nepute: I think it was in general.
Craig Clark: Okay. And as far as the discounting goes I mean we know that
the diesel market's held up a lot better than the gas but as
far as the discounting goes are you guys discounting across
the board or is it more targeted at the gas where it's been
weaker? I mean what's been the strategy?
John Nepute: We're not discounting at all on our '02 products.
Craig Clark: Okay. Okay.
Kay Toolson: The only things we have going on as John said earlier are
programs with the free gas for a year and diesel for year on
some of our lower priced diesel and gas products helping our
dealers just to help our dealers move their products through
their systems. That program's been incredibly successful so
we're continuing that. But there has been no discounting of
'02 products.
15
Craig Clark: Okay. And as far as ((inaudible)) you've been selling the
triple slide-outs for several months. Have you seen a big
increase in relative demand versus the double slide-outs or
what's been going on there?
John Nepute: We've seen good interest in the triple slide but I don't
think it's quite the event that the double slide was.
Craig Clark: Okay, okay. And at this point as far as the - now you've had
another month to look at SMC, you're really not changing any
of your material guidance that you gave a month ago about
your targets for SMC?
John Nepute: No.
Craig Clark: Okay. All right, thanks a lot.
Operator: And I show no further questions in the queue. Gentlemen, did
you have any additional comments?
Kay Toolson: Thank you all again very much for joining our conference
call. If you have additional question or would like
additional information just feel free to call Mike Duncan at
our offices here. And we'll look forward to talking to you
next quarter.
Operator: And that does conclude today's conference call. Again we do
thank everyone for their participation.
End of Conference Call
16
THE RISK FACTORS SET FORTH BELOW ARE INCLUDED IN THE QUARTERLY REPORT ON FORM
10-Q FILED WITH THE COMMISSION ON MAY 15, 2001 BY AND ON BEHALF OF MONACO COACH
CORPORATION (THE "COMPANY"). THESE RISK FACTORS WERE REFERRED TO BUT NOT READ IN
THE CONFERENCE CALL TRANSCRIBED ABOVE. THEY ARE INCLUDED HERE FOR DISCLOSURE
PURPOSES SOLELY IN CONNECTION WITH THE ABOVE TRANSCRIPT.
The risk factors set forth below contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements include
without limitation those below marked with an asterisk (*). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, performance or achievements of the Company to differ
materially from those expressed or implied by such forward-looking statements.
The Company cautions the reader, however, that these factors may not be
exhaustive.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS The Company's net sales, gross
margin and operating results may fluctuate significantly from period to period
due to factors such as the mix of products sold, the ability to utilize and
expand manufacturing resources efficiently, material shortages, the introduction
and consumer acceptance of new models offered by the Company, competition, the
addition or loss of dealers, the timing of trade shows and rallies, and factors
affecting the recreational vehicle industry as a whole. In addition, the
Company's overall gross margin on its products may decline in future periods to
the extent the Company increases its sales of lower gross margin towable
products or if the mix of motor coaches sold shifts to lower gross margin units.
Due to the relatively high selling prices of the Company's products (in
particular, its High-Line Class A motor coaches), a relatively small variation
in the number of recreational vehicles sold in any quarter can have a
significant effect on sales and operating results for that quarter. Demand in
the overall recreational vehicle industry generally declines during the winter
months, while sales and revenues are generally higher during the spring and
summer months. With the broader range of recreational vehicles now offered by
the Company, seasonal factors could have a significant impact on the Company's
operating results in the future. In addition, unusually severe weather
conditions in certain markets could delay the timing of shipments from one
quarter to another.
CYCLICALITY The recreational vehicle industry has been characterized by cycles
of growth and contraction in consumer demand, reflecting prevailing economic,
demographic and political conditions that affect disposable income for
leisure-time activities. Unit sales of recreational vehicles (excluding
conversion vehicles) reached a peak of approximately 259,000 units in 1994 and
declined to approximately 247,000 units in 1996. The industry peaked again in
1999 at approximately 321,000 units and began declining thereafter as unit sales
in 2000 were approximately 300,000 units. Furthermore, the Company offers a
broad range of recreational vehicle products and is susceptible to the
cyclicality inherent in the recreational vehicle industry. Factors affecting
cyclicality in the recreational vehicle industry include fuel availability and
fuel prices, prevailing interest rates, the level of discretionary spending, the
availability of credit and overall consumer confidence. In particular, the
decline in consumer confidence and/or a slowing of the overall economy has had a
material adverse effect on the recreational vehicle market. An extended
continuance of these conditions could have a material adverse effect on the
Company's business, results of operations and financial condition.
MANAGEMENT OF GROWTH Over the past several years the Company has experienced
significant growth in the number of its employees and the scope of its business.
This growth has resulted in the addition of new management personnel and
increased responsibilities for existing management personnel, and has placed
added pressure on the Company's operating, financial and management information
systems. While management believes it has been successful in managing this
expansion there can be no assurance that the Company will not encounter problems
in the future associated with the continued growth of the Company. Failure to
adequately support and manage the growth of its business could have a material
adverse effect on the Company's business, results of operations and financial
condition.
MANUFACTURING EXPANSION The Company has significantly increased its
manufacturing capacity over the last few years. The integration of the
Company's facilities and the expansion of the Company's manufacturing
17
operations involve a number of risks including unexpected building and
production difficulties. In the past the Company experienced startup
inefficiencies in manufacturing a new model and also has experienced
difficulty in increasing production rates at a plant. There can be no
assurance that the Company will successfully integrate its manufacturing
facilities or that it will achieve the anticipated benefits and efficiencies
from its expanded manufacturing operations. In addition, the Company's
operating results could be materially and adversely affected if sales of the
Company's products do not increase at a rate sufficient to offset the
Company's increased expense levels resulting from this expansion. The setup
of new models and scale-up of production facilities involve various risks and
uncertainties, including timely performance of a large number of contractors,
subcontractors, suppliers and various government agencies that regulate and
license construction, each of which is beyond the control of the Company. The
setup of production for new models involves risks and costs associated with
the development and acquisition of new production lines, molds and other
machinery, the training of employees, and compliance with environmental,
health and safety and other regulatory requirements. The inability of the
Company to complete the scale-up of its facilities and to commence full-scale
commercial production in a timely manner could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, the Company may from time to time experience lower than anticipated
yields or production constraints that may adversely affect its ability to
satisfy customer orders. Any prolonged inability to satisfy customer demand
could have a material adverse effect on the Company's business, results of
operations and financial condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS Although the Company's products were
offered by 338 dealerships located primarily in the United States and Canada at
the end of 2000, a significant percentage of the Company's sales have been and
will continue to be concentrated among a relatively small number of independent
dealers. Sales to Lazy Days RV Center, Inc. accounted for 10.0% of the Company's
sales in 1999 and 12.1% in 2000. The Company's 10 largest dealers, including
Lazy Days RV Center, Inc., accounted for a combined 33.0% of sales in 1999 and
36.0% in 2000. The loss of a significant dealer or a substantial decrease in
sales by such a dealer could have a material adverse effect on the Company's
business, results of operations and financial condition.
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS As is common in the recreational
vehicle industry, the Company enters into repurchase agreements with the
financing institutions used by its dealers to finance their purchases. These
agreements obligate the Company to repurchase a dealer's inventory under certain
circumstances in the event of a default by the dealer to its lender. If the
Company were obligated to repurchase a significant number of its products in the
future, it could have a material adverse effect on the Company's financial
condition, business and results of operations. The Company's contingent
obligations under repurchase agreements vary from period to period and totaled
approximately $321 million as of March 31, 2001, with approximately 8.3%
concentrated with one dealer. See "Liquidity and Capital Resources" and Note 6
of Notes to the Company's Condensed Consolidated Financial Statements.
AVAILABILITY AND COST OF FUEL An interruption in the supply, or a significant
increase in the price or tax on the sale, of diesel fuel or gasoline on a
regional or national basis could have a material adverse effect on the Company's
business, results of operations and financial condition. Diesel fuel and
gasoline have, at various times in the past, been difficult to obtain, and there
can be no assurance that the supply of diesel fuel or gasoline will continue
uninterrupted, that rationing will not be imposed, or that the price of or tax
on diesel fuel or gasoline, which have increased in price in the past year, will
not significantly increase in the future, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON CERTAIN SUPPLIERS A number of important components for certain of
the Company's products are purchased from single or limited sources, including
its turbo diesel engines (Cummins), substantially all of its transmissions
(Allison), axles (Dana) for all diesel motor coaches other than the Holiday
Rambler Endeavor Diesel model and chassis (Workhorse and Ford) for certain of
its motorhome products. The Company has no long term supply contracts with these
suppliers or their distributors, and there can be no assurance that these
suppliers will be able to meet the Company's future requirements for these
components. In 1997, Allison put all chassis manufacturers on allocation with
respect to one of the transmissions the Company uses, and in 1999 Ford put one
of its gasoline powered chassis on allocation. The Company presently believes
that its allocation by suppliers of all components is sufficient to meet planned
production volumes, and the Company does not foresee any operating difficulties
as a result of vendor supply issues.* Nevertheless, there can be no assurance
that Allison, Ford, or any of the Company's other suppliers will be able to meet
the Company's future requirements for transmissions, chassis or other key
components. An extended delay or interruption in the supply of any components
obtained from a single or
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limited source supplier could have a material adverse effect on the Company's
business, results of operations and financial condition.
NEW PRODUCT INTRODUCTIONS The Company believes that the introduction of new
features and new models will be critical to its future success. Delays in the
introduction of new models or product features or a lack of market acceptance of
new models or features and/or quality problems with new models or features could
have a material adverse effect on the Company's business, results of operations
and financial condition. For example, unexpected costs associated with model
changes have adversely affected the Company's gross margin in the past. Future
product introductions could divert revenues from existing models and adversely
affect the Company's business, results of operations and financial condition.
COMPETITION The market for the Company's products is highly competitive. The
Company currently competes with a number of other manufacturers of motor
coaches, fifth wheel trailers and travel trailers, many of which have
significant financial resources and extensive distribution capabilities. There
can be no assurance that either existing or new competitors will not develop
products that are superior to, or that achieve better consumer acceptance than,
the Company's products, or that the Company will continue to remain competitive.
RISKS OF LITIGATION The Company is subject to litigation arising in the ordinary
course of its business, including a variety of product liability and warranty
claims typical in the recreational vehicle industry. Although the Company does
not believe that the outcome of any pending litigation, net of insurance
coverage, will have a material adverse effect on the business, results of
operations or financial condition of the Company, due to the inherent
uncertainties associated with litigation there can be no assurance in this
regard.*
To date, the Company has been successful in obtaining product liability
insurance on terms the Company considers acceptable. The Company's current
policies jointly provide coverage against claims based on occurrences within the
policy periods up to a maximum of $65.0 million for each occurrence and $66.0
million in the aggregate. There can be no assurance that the Company will be
able to obtain insurance coverage in the future at acceptable levels or that the
costs of insurance will be reasonable. Furthermore, successful assertion against
the Company of one or a series of large uninsured claims, or of one or a series
of claims exceeding any insurance coverage, could have a material adverse effect
on the Company's business, results of operations and financial condition.
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