SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: June 29, 1996
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from _________________ to ________________
Commission File Number: 0-22256
-------
MONACO COACH CORPORATION
35-1880244
Delaware (I.R.S. Employer
(State of Incorporation) Identification No.)
91320 Coburg Industrial Way
Coburg, Oregon 97408
(Address of principal executive offices)
Registrant's telephone number, including area code (541) 686-8011
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
--------------- -------------
The number of shares outstanding of common stock, $.01 par value, as
of June 29, 1996: 4,420,022
MONACO COACH CORPORATION
FORM 10-Q
JUNE 29, 1996
INDEX
PAGE
PART I - FINANCIAL INFORMATION REFERENCE
- ------------------------------- ---------
Condensed Consolidated Balance Sheets as of 3
June 29, 1996 and December 30, 1995.
Condensed Consolidated Statements of Income 4
for the quarter ended June 29, 1996 and
July 1, 1995 and for the six months ended
June 29, 1996 and July 1, 1995.
Condensed Consolidated Statements of Cash 5
Flows for the six months ended June 29, 1996
and July 1, 1995.
Notes to Condensed Consolidated Financial Statements 6 - 10
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 11 - 16
PART II - OTHER INFORMATION
- ---------------------------
Other Information 17
Signatures 18
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
JUNE 29, DECEMBER 30,
1996 1995
-------- ------------
ASSETS
Current assets:
Cash $ 1,748
Trade receivables 20,706 $ 7,071
Inventories 53,374 19,591
Prepaid expenses 1,125 447
Deferred tax asset 4,624 575
Notes receivable 2,124
Assets held for sale 2,561
---------- ---------
Total current assets 86,262 27,684
Property, plant and equipment, net 33,103 21,587
Notes receivable 1,436
Debt issuance costs, net of accumulated amortization of $120 1,922
Goodwill, net of accumulated amortization of $1,775
and $1,466, respectively 20,565 19,231
---------- ---------
Total assets $ 143,288 $ 68,502
---------- ---------
---------- ---------
LIABILITIES
Current liabilities:
Book overdraft $ 516
Notes payable $ 19,534 9,845
Current portion of long-term notes payable 1,125 2,000
Accounts payable 24,707 8,459
Accrued expenses and other liabilities 19,974 2,848
Income tax payable 93 221
Deferred tax liability 1,860 0
---------- ---------
Total current liabilities 67,293 23,889
Deferred income 200 200
Notes payable, less current portion 29,858 5,000
Deferred tax liability 3,840 1,483
---------- ---------
101,191 30,572
---------- ---------
Redeemable preferred stock, redemption value $3,050
at June 29,1996 2,682
----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 4,420,022 shares (4,410,889 shares
at December 30, 1995) issued and outstanding 44 44
Additional paid-in capital 25,345 25,303
Retained earnings 14,026 12,583
---------- ---------
Total stockholders' equity 39,415 37,930
---------- ---------
Total liabilities and stockholders' equity $ 143,288 $ 68,502
---------- ---------
---------- ---------
See accompanying notes. 3
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED SIX MONTHS ENDED
------------------------------- ------------------------------------
JUNE 29, 1996 JULY 1, 1995 JUNE 29, 1996 JULY 1, 1995
------------- ------------ --------------- ------------
Net sales $ 106,729 $ 35,081 $ 168,694 $ 73,096
Cost of sales 94,321 30,431 149,558 63,104
------------- ------------- --------------- -----------
Gross profit 12,408 4,650 19,136 9,992
Selling, general and administrative expenses 9,277 1,871 13,927 4,340
Management fees 18 18 36 36
Amortization of goodwill 179 129 309 259
------------- ------------- --------------- -----------
Operating income 2,934 2,632 4,864 5,357
Other expenses (income), net 11 (20) 3 (20)
Interest expense 1,362 32 2,226 32
------------- ------------- --------------- -----------
Income before income taxes 1,561 2,620 2,635 5,345
Provision for income taxes 670 1,014 1,110 2,077
------------- ------------- --------------- -----------
Net income $ 891 $ 1,606 $ 1,525 $ 3,268
Preferred stock dividends 38 50
Accretion of redeemable preferred stock 25 33
------------- ------------- --------------- -----------
Income attributable to primary
earnings per share $ 828 $ 1,606 $ 1,442 $ 3,268
------------- ------------- --------------- -----------
------------- ------------- --------------- -----------
Earnings per common share:
Primary $ .19 $ .32
Fully Diluted $ .19 $ .36 $ .33 $ .73
Weighted average shares outstanding:
Primary 4,472,357 4,469,130
Fully Diluted 4,703,043 4,480,136 4,621,549 4,479,790
See accompanying notes. 4
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited: dollars in thousands)
SIX MONTHS ENDED
-------------------------------------------
JUNE 29, 1996 JULY 1, 1995
-------------- -------------
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 1,525 $ 3,268
Adjustments to reconcile net income to net cash
generated (used) by operating activities:
Depreciation and amortization 1,489 500
Deferred income taxes 168 168
Changes in working capital accounts, net of effect
of business acquisition and sale of retail
stores:
Receivables (4,457) (3,414)
Inventories 13,659 (4,476)
Prepaid expenses (342) (405)
Accounts payable 873 2,511
Accrued expenses and other current liabilities 3,305 (104)
Income tax payable (128) 37
Deferred income 0 200
-------- --------
Net cash generated (used) by operating activities 16,092 (1,715)
-------- --------
Cash flows used by investing activities:
Payment for business acquisition, less gain from sale of
retail stores (37,758)
Notes receivable obtained from the sale of retail stores (2,500)
Proceeds from sale of retail stores, net of closing costs 5,713
Additions to property, plant and equipment (726) (8,047)
-------- --------
Net cash used by investing activities (35,271) (8,047)
-------- --------
Cash flows from financing activities:
Book overdraft (516) 305
Borrowings (payments) on lines of credit, net (3,968) 1,690
Issuance of common stock 42 33
Issuance of preferred stock, net of issuance costs 2,599
Advances on floor financing, net 1,089
Payments on long-term note (7,000)
Borrowings on subordinated note 12,000
Payments on subordinated note (1,277)
Borrowings on long-term notes, net of issuance costs 17,958 7,500
-------- --------
Net cash generated by financing activities 20,927 9,528
-------- --------
Net increase (decrease) in cash 1,748 (234)
Cash at beginning of period 0 234
-------- --------
Cash at end of period $ 1,748 $ 0
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest 136 290
See accompanying notes. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements have been prepared by Monaco Coach
Corporation (the "Company") without audit. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments necessary
to present fairly the financial position of the Company as of June 29, 1996
and the results of operations and cash flows of the Company for the quarter
and six months ended June 29, 1996. The interim condensed consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, and all significant intercompany accounts and transactions have
been eliminated in consolidation. The interim financial statements should be
read in conjunction with the audited financial statements and notes thereto
appearing in the Company's Annual Report to Stockholders for the year ended
December 30, 1995.
2. HOLIDAY ACQUISITION
In January 1996, the Company entered into an agreement (the "Agreement") to
acquire certain assets of the Holiday Rambler Recreational Vehicle
Manufacturing Division ("Holiday Rambler") and certain assets of the Holiday
World Retail Division ("Holiday World") of Harley-Davidson, Inc.
("Harley-Davidson"). The acquisition was consummated on March 4, 1996.
The purchase price is based upon the net book value of purchased assets less
liabilities assumed for Holiday Rambler and Holiday World. In accordance
with the provisions of the Agreement, the purchase price is subject to
post-closing adjustments pending completion of a Closing Statement setting
forth the book value of assets less the assumed liabilities. The Company and
Harley-Davidson are presently in the process of preparing the final Closing
Statement. Therefore, the final purchase price has not been agreed upon and
the following information is subject to change based on the final closing
statement.
The allocation of the final purchase price is subject to reallocation. The
retail facilities are expected to be sold within 12 months of the
acquisition. The estimated fair value of the retail property and equipment is
reflected as assets held for sale. The purchase price allocation will be
adjusted by any difference between the estimated fair values and gains or
losses on the sale of the retail store facilities, and such gains or losses
will not be reflected in the results of operations. The operations of the
Holiday World retail stores are included in the operating results as the
activities are not clearly distinguishable from other continuing operations.
Net sales from the Holiday World retail stores included in the Condensed
Consolidated Statements of Income for the quarter and six months ended June
29, 1996 is $10.3 million and $16.3 million respectively. The purchase price
previously reported was allocated using preliminary estimates. The purchase
price and allocations of the purchase price have been adjusted to reflect
clarifications of the purchase agreement and final appraisals of equipment
which were previously only estimates based on liquidation values. The
purchase price was also adjusted by the gain from the sale of 3 of the
Holiday World retail stores during the quarter ended June 29, 1996.
Management expects the sale of the remaining 7 retail stores will also adjust
the purchase price.
The following table sets forth the preliminary estimated sources and uses of
funds in connection with the acquisition of Holiday Rambler and Holiday World:
(IN THOUSANDS)
Sources:
Preferred stock, carrying value $ 2,599
Subordinated debt 12,000
Cash and proceeds from obtaining debt 26,332
-----------
40,931
Less gain on sale of retail stores 1,131
-----------
$ 39,800
-----------
-----------
Uses:
Purchase price $ 35,758
Transaction expense 2,000
Debt issuance Cost 2,042
-----------
$ 39,800
-----------
-----------
6
2. HOLIDAY ACQUISITION (continued)
The aggregate purchase price of $37,758,000, including transaction expenses,
has been allocated on the basis of the fair value of assets acquired (no cash
acquired) and liabilities assumed. The purchase price was allocated as
follows:
(in thousands)
Receivables $ 9,592
Inventories 60,862
Property and equipment 11,850
Prepaids and other assets 336
Assets held for sale 6,097
Goodwill 1,643
Notes payable (21,784)
Accounts payable (16,010)
Accrued liabilities (14,828)
-----------
$ 37,758
-----------
-----------
The Company authorized 100,000 shares of Series A Convertible Preferred Stock
at $.01 par value. The Company issued 65,217 shares in connection with the
acquisition. Shares of the Series A Convertible Preferred Stock may be
redeemed by its holders at established dates at the stated value of $46 per
share plus any accrued but unpaid dividends.
Commencing March 4, 1996, results of operations of Holiday Rambler and
Holiday World are included in the Condensed Consolidated Statement of Income
for the six months ended June 29, 1996. The following unaudited pro forma
summary presents information as if the acquisition of Holiday Rambler and
Holiday World had occurred at the beginning of each fiscal year. The pro
forma information is provided for information purposes only. It is based on
historical information and includes adjustments for interest expense that
would have been incurred to finance the purchase, depreciation charges
related to acquired asset values and amortization of intangibles. The pro
forma information does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future results of operations of
the combined companies.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
-------------------------------
JUNE 29, 1996 JULY 1, 1995
-------------- -------------
Net sales $ 222,495 $ 222,678
Net income (loss) 158 (1,535)
Earnings (loss) per common share 0.03 0.33
7
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market. The
composition of inventory is as follows:
(IN THOUSANDS)
JUNE 29, DECEMBER 30,
1996 1995
----------- -----------
Raw materials $ 15,405 $ 8,069
Work-in-process 14,640 10,136
Finished coaches 23,329 1,386
----------- -----------
$ 53,374 $ 19,591
----------- -----------
----------- -----------
4. GOODWILL
Goodwill represents the excess of the cost of acquisition over the fair value
of net assets acquired. The goodwill arising from the acquisition of the
assets and operations of the Company's Predecessor in March 1993 is being
amortized on a straight-line basis over 40 years and, at June 29, 1996, the
unamortized amount was $19.0 million. The goodwill arising from the
acquisition of Holiday Rambler and Holiday World is being amortized on a
straight-line basis over 20 years. Management assesses whether there has
been permanent impairment in the value of goodwill and the amount of such
impairment by comparing anticipated undiscounted future cash flows from
operating activities with the carrying value of the goodwill. The factors
considered by management in performing this assessment include current
operating results, trends and prospects, as well as the effects of
obsolescence, demand, competition and other economic factors.
5. NOTES PAYABLE
In connection with the acquisition of Holiday Rambler and Holiday World on
March 5, 1996, the Company replaced its bank line of credit with new credit
facilities consisting, in part, of a revolving line of credit of up to
$45,000,000, with interest payable monthly at varying rates based on the
Company's interest coverage ratio. There were outstanding borrowings of
approximately $5,877,000 at June 29, 1996. The revolving line of credit
expires March 1, 2001 and is collateralized by all the assets of the Company.
The newly acquired Holiday World subsidiary has various loans outstanding to
finance retail inventory at the dealerships which amounted to approximately
$13,657,000 at June 29, 1996 and which bear interest at various rates based
on the Prime Rate and are secured by the assets of the subsidiary.
6. LONG-TERM BORROWINGS
The Company has a term loan of $20,000,000 outstanding as of June 29, 1996
which was obtained in connection with the acquisition of Holiday Rambler and
Holiday World. The term loan bears interest at various rates based on the
Company's interest coverage ratio. The term loan requires monthly interest
payments, quarterly principal payments and certain mandatory prepayments, and
is collateralized by all the assets of the Company. The Holiday World retail
dealership subsidiary has a subordinated note outstanding of approximately
$10,723,000 that is to be paid from the net proceeds of the sale of the
retail dealerships. The note bears interest at the Prime Rate less 0.5% and
is due and payable in full on March 4, 1999. The subsidiary also has a
mortgage on one of the stores with a balance of approximately $260,000.
8
7. INCOME TAXES
The Company adopted the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", (SFAS No. 109). Under the liability method, deferred
taxes are determined based on differences between the financial statement and
tax bases of assets and liabilities at enacted tax rates in effect in years
in which differences are expected to reverse. Deferred tax expense
represents the change in deferred tax asset/liability balance. A valuation
allowance is established for deferred tax assets if their realization is not
likely.
8. REDEEMABLE PREFERRED STOCK
The redeemable preferred stock was recorded at fair value on the date of
issuance less issuance costs. The excess of redemption value over the
carrying value is being accreted by period charges over the maturity of the
issue. The accretion amount is charged to retained earnings. For the the
six months ended June 29, 1996, the accretion charges were $33,000.
The accrual of preferred stock dividends was $50,000 for the six months ended
June 29, 1996, which was included in the carrying amount of preferred stock
and charged to retained earnings.
The holder of the preferred stock may require the Company to redeem the
holder's outstanding shares as follows:
(IN THOUSANDS)
March 4, 1998 $ 1,000
March 4, 1999 1,500
March 4, 2000 500
----------
$ 3,000
----------
----------
In addition, the preferred stockholders may accelerate their redemption
rights upon the occurrence of certain events, such as a secondary offering of
the company's common stock or dispositions of substantially all of the
Company's assets. The redemption value is 100% of issue price plus any
accumulated dividends.
9. NET INCOME PER COMMON SHARE
Income per share is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
stock options and convertible preferred stock. Common shares issued and
options granted by the Company are considered outstanding for the period
presented, using the treasury stock method. The weighted average number of
common shares used in the computation of net income per common share are as
follows:
SIX MONTHS ENDED SIX MONTHS ENDED
------------------------------- -----------------
JUNE 29, 1996 JUNE 29, 1996 JULY 1, 1995
Primary Fully Diluted Fully Diluted
-------------- ------------- -------------
Issued and outstanding (weighted average) 4,416,751 4,416,751 4,405,638
Stock options 52,379 56,473 74,498
Convertible preferred stock 148,325
-------------- ------------- -------------
4,469,130 4,621,549 4,480,136
-------------- ------------- -------------
-------------- ------------- -------------
9
10. COMMITMENTS AND CONTINGENCIES
REPURCHASE AGREEMENTS
Substantially all of the Company's sales to independent dealers are made on
terms requiring cash on delivery. The Company does not finance dealer
purchases. However, most dealers are financed on a "floor plan" basis by a
bank or finance company which lends the dealer all or substantially all of
the wholesale purchase price and retains a security interest in the vehicles.
Upon request of a lending institution financing a dealer's purchases of the
Company's product, the Company will execute a repurchase agreement. These
agreements provide that, for up to 18 months after a unit is shipped, the
Company will repurchase a dealer's inventory in the event of default by a
dealer to its lender.
The Company's liability under repurchase agreements is limited to the unpaid
balance owed to the lending institution by reason of its extending credit to
the dealer to purchase its vehicles. The Company does not anticipate any
significant losses will be incurred under these agreements in the foreseeable
future.
LITIGATION
The Company is involved in various legal proceedings which are ordinary
litigations incidental to the industry and which are covered in whole or in
part by insurance or, otherwise the Company has recorded accruals for
estimated settlements. Management believes that any liability which may
result from these proceedings will not be significant.
10
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including those set forth under the caption
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS".
GENERAL
Monaco Coach Corporation (the "Company") is the successor to a company formed
in 1968, the assets and operations of which were acquired by the Company on
March 5, 1993 (the "Acquisition"). The predecessor's management and the
manufacturing of its "high-line" motor coaches were largely unaffected by the
Acquisition. However, the Company's quarters and six-months ended June 29,
1996 and July 1, 1995 both contain Acquisition related expenses, consisting
primarily of the amortization of acquired goodwill.
On March 4, 1996, the Company acquired from Harley-Davidson, Inc. ("Harley")
substantially all of the assets of Harley's Holiday Rambler RV Division, a
manufacturer of mid-range and high-line motor coaches and towable RVs, in
exchange for $22,350,000 in cash, 65,217 shares of the Company's Series A
Preferred Stock, and the assumption of a significant portion of the
liabilities of the Holiday Rambler RV Division. The acquisition was
accounted for using the purchase method of accounting.
Also on March 4, 1996, MCC Acquisition Corporation, a wholly owned subsidiary
of the Company (the "Subsidiary"), acquired certain of the assets of Harley's
Holiday World Division, consisting of a group of 10 retail RV dealerships
located in California, Texas, Florida, Oregon, Indiana, Washington, and New
Mexico, in exchange for $1 million in cash, a $12 million subordinated
promissory note, and the assumption of a significant portion of the
liabilities of the Holiday World Division. The acquisition was accounted for
using the purchase method of accounting. The Subsidiary intends to sell all
of the RV dealerships within 12 months of the acquisition and had sold three
of the dealerships by the end of the second quarter.
The respective purchase price for Holiday Rambler and Holiday World is based
upon the net book value of purchased assets less liabilities for each of
Holiday Rambler and Holiday World, and each of the respective purchase prices
is subject to adjustment pending completion of Closing Statements setting
forth the book value of the acquired assets less assumed liabilities. The
Company and Harley are currently in the process of preparing the final
Closing Statements. Accordingly, the final purchase price for each of
Holiday Rambler and Holiday World has not yet been agreed upon and therefore
the following information is subject to change pending final determination of
the respective purchase prices.
Beginning on March 4, 1996, the operations of the Holiday Rambler RV Division
and the Holiday World retail stores (collectively "Holiday Rambler") were
incorporated into the Company's consolidated balance sheet, statement of
income and cash flows. The Company's quarter and six-months ended June 29,
1996 contain expenses related to the purchase of Holiday Rambler, primarily
the expensing of an inventory write-up to fair value, and the amortization of
debt issuance costs and Holiday Rambler goodwill.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 29, 1996 COMPARED TO QUARTER ENDED JULY 1, 1995
Net sales increased to $106.7 million in the second quarter of 1996 compared
to $35.1 million for the same period last year. Sales of newly acquired
Holiday Rambler were responsible for the increase, with the stores
contributing incremental revenue of $10.3 million. On a pro-forma basis,
motorized products wholesale sales were down slightly, 1.1%, from the second
quarter of 1995, while towable sales were down 23.7%. Reflecting the
acquisition of Holiday Rambler, Monaco's unit sales expanded seven fold from
252 units in the comparable 1995 period to 1772 units this year, including
391 non-Holiday Rambler units sold by Holiday World. On a pro forma basis, as
if the acquisition of Holiday Rambler and Holiday World had occurred at the
beginning of each period, sales of Company produced motorized units decreased
3.9% in the second quarter of 1996 compared to the same quarter of
11
1995, while towable unit sales declined 26.9%. The greater reduction in
towables reflected Monaco's decision to focus initially on strengthening
Holiday Rambler's higher margin motorized product offerings. The Company's
overall average unit selling price was approximately $68,300 versus $140,500
in the comparable year earlier quarter. Due to inclusion of the generally
less expensive Holiday Rambler line and its weight of substantial units in
the calculation, the Company expects that an overall average selling price of
less than $100,000 will be the norm in future periods.
Gross profit for the second quarter of 1996 increased by $7.8 million to
$12.4 million and decreased as a percentage of net sales to 11.6% from 13.3%
in the year earlier period. Part of the year-to-year reduction in gross
margin was due to the Company's expensing of the remaining $1.1 million of a
$1.75 million write-up to fair value of Holiday Rambler inventory recorded in
connection with the acquisition of Holiday Rambler. Without that expense,
the gross margin would have been 12.7% of net sales. Another factor was a
reduction in the gross margin of Monaco's Elkhart, Indiana facility due to
lower production volumes and a heavier mix of lower margin Windsor models.
The Company's objective for the remainder of 1996 is to work towards modest
improvement in individual model gross margins, primarily from purchasing and
manufacturing synergies evolving from the acquisition of Holiday Rambler.
The Company's overall gross margin may decline in future periods if the mix
of products continues to shift from higher margin units to lower margin
models or if the Company encounters unexpected manufacturing difficulties.
Operating expenses increased by $7.4 million, to $9.3 million and increased
as a percentage of net sales to 8.7% from an abnormally low 5.3% in the year
earlier period. The increase was primarily attributable to the addition of
Holiday Rambler which has traditionally spent more as a percentage of sales
on operating expenses than Monaco. One of the Company's objectives is to
reduce Holiday Rambler's level of spending on a percentage basis, however
there can be no assurance that the Company will succeed in achieving such
reductions. Despite these efforts, the combined Company's operating expense
level as a percentage of sales is expected to remain higher than last year.
Amortization of goodwill was $179,000 in the second quarter of 1996 compared
to $129,000 for the year earlier period. At June 29, 1996, goodwill arising
from the Acquisition, net of accumulated amortization, was $19.0 million,
which is currently being amortized on a straight-line basis over 40 years.
Goodwill of approximately $1.6 million was created as a result of the
purchase of Holiday Rambler and is being amortized over a period of 20 years.
The goodwill from the Holiday Rambler transaction is subject to adjustment
depending on the final settlement of the purchase price with Harley, as well
as the disposition of the retail stores. Goodwill amortization, a non-cash
expense, will continue to adversely affect the Company's results of
operations.
Operating income for the second quarter of 1996 was $2.9 million, a $302,000
increase over the comparable 1995 period. The Company's lower gross margin
and higher operating expenses as a percentage of sales were responsible for
the decline in operating income as a percentage of net sales from 7.5% in the
second quarter of 1995 to 2.7% in 1996. Excluding the expensing of the $1.1
million in inventory write-up, operating income would have been $4.0 million,
a $1.4 million increase from 1995, and 3.8% of sales.
Net interest expense increased significantly from $32,000 in the second
quarter of 1995 to $1.4 million in the comparable 1996 period. The Company
capitalized approximately $102,000 of interest in the second quarter of 1996
due to the acquisition of the Holiday World retail stores held for resale
compared to $179,000 of second quarter 1995 interest which was capitalized
during the construction of the new Oregon facility. The Company's 1996
interest expense for the quarter includes approximately $414,000 of floor
plan interest expense relating to the retail stores. Additionally, 1996
second quarter interest expense includes $80,000 related to the $2 million in
debt issuance costs recorded in conjunction with the Holiday Rambler
acquisition. These costs are being written off over a five year period. The
Company expects that, due to financing of the acquisition of Holiday Rambler
and expensing of interest on debt related to the now completed Oregon
facility, interest payments and interest expense will continue to be higher
in 1996 than in 1995.
The Company's net income of $891,000 in the second quarter of 1996 was
approximately $715,000 lower than that reported for the comparable year
earlier period, with the decline attributable to the substantial increase in
sales being more than offset by the reduction in gross margin, higher
operating expenses, and much greater interest expense. Without the expensing
of the $1.1 million in inventory write-up to fair value, net income would
have been $1.5 million, a slight decrease relative to the year earlier period.
12
SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995
Net sales increased $95.6 million, or 130.8% for the first six months of
1995, compared to the year earlier period. The increase was primarily due to
the addition of the sales of Holiday Rambler products from March 5, 1996
forward. On a pro-forma basis, Monaco's motorized models gross wholesale
sales were up slightly, 3.0%, for the six-month period while gross wholesale
sales for towable products were down 22.6%. Reflecting the acquisition of
Holiday Rambler in March, Monaco's unit sales during the first six months of
1996 expanded five fold from 517 units in the comparable 1995 period to 2,606
units this year, including 584 non-Holiday Rambler units sold by Holiday
World. On a pro-forma basis, sales of Company produced motorized units were
up 2.9% year-to-year while towable units sold declined 28.2%. The Company's
overall average unit selling price was approximately $76,300 versus $143,000
in the comparable year earlier period. Due to inclusion of the generally
less expensive Holiday Rambler line and its weight of substantial units in
the calculation, the Company expects its overall average selling price to
remain below $100,000 and that it may at times drop below the current period
average depending on the mix of units.
Gross profit for the six-month period was up $9.1 million at $19.1 million
and on a percentage basis was 11.3% of net sales compared to 13.7% in the
year earlier period. The decline as a percentage of sales was partially due
to the expensing of a $1.75 million inventory write-up to fair value arising
from the purchase of Holiday Rambler. Without that expense, gross profit as
a percentage of sales would have been 12.4% for the six-month period. Also
contributing to the decline were lower than expected gross margins at
Monaco's Elkhart, Indiana facility due to reduced production volumes and a
higher than expected mix of lower margin Windsor models.
Operating expenses increased $9.6 million to $14.0 million in the first six
months of 1996 and increased as a percentage of sales to 8.3% in 1996 from a
historically low 6.0% for the year earlier period. Holiday Rambler has
historically spent a greater portion of its revenues on operating expenses
than has Monaco. One of the Company's objectives will be to reduce Holiday
Rambler's level of spending on a percentage basis, however, in spite of these
efforts, the Company believes that its overall operating expense level as a
percentage of sales will remain higher than last year.
Operating income for the six-month period of 1996 was $4.9 million, a
$494,000 decrease versus the comparable 1995 period. The Company's lower
gross margin and higher operating expenses as a percentage of sales were
responsible for the decline in operating income as a percentage of sales from
7.3% for the first six months of 1995 to 2.9% in the comparable 1996 period.
Excluding the expensing of the $1.75 million inventory write-up to fair
value, the Company's operating income would have been $6.6 million, or 3.9%
of sales.
Interest expense increased from $32,000 in the first six months of 1995 to
$2.2 million in 1996. The Company capitalized approximately $136,000 of
interest in the first six months of 1996 related to the acquisition of
Holiday Rambler, compared to $290,000 of interest in the comparable 1995
period during the construction of the Company's new Oregon facility. The
Company's six month interest expense includes approximately $623,000 of floor
plan interest expense relating to the Holiday World retail stores. The
Company expects that, due to the debt related to the now completed Oregon
facility, and the acquisition of Holiday Rambler, interest payments and
interest expense will continue to be higher in 1996 than in 1995.
The Company's net income for the six-month period of 1996 of $1.5 million,
was approximately $1.7 million less than that reported for the year earlier
period with the decline attributable to the substantial increase in sales
being more than offset by the reduction in gross margin, higher operating
expenses, and greater interest expense.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
GENERAL
The Company may from time to time make oral forward-looking statements which
involve risks and uncertainties. The following are important factors that
could cause actual results to differ materially from those projected in any
such forward-looking statements.
13
ACQUISITION OF HOLIDAY RAMBLER
The Company acquired Holiday Rambler in March 1996. The anticipated benefits
of this acquisition may not be achieved unless Monaco successfully integrates
Holiday Rambler into Monaco's operations. Holiday Rambler incurred a net
loss from operations of approximately $13.4 million for 1995, and unless
Monaco is able to reduce the operating expenses of Holiday Rambler
substantially from historical expense levels, the acquisition could have a
material adverse affect on the financial condition and results of operations
of Monaco. The process of integration may result in unforeseen operating
difficulties and expenditures and may absorb significant management attention
that would otherwise be available for the ongoing development of Monaco's
business. This may cause an interruption, a loss of momentum in the ongoing
activities of Monaco, which in turn would have a material adverse affect on
Monaco's operating results and financial condition. Moreover, the acquisition
involves a number of additional risks, such as the assimilation of the
operations and personnel of the acquired business, the incorporation of
acquired products into Monaco's existing product line, adverse short-term
effects on reported operating results, the amortization of acquired assets,
the loss of key employees of Holiday Rambler as a result of the acquisition,
and the difficulty of integrating disparate corporate cultures and presenting
a unified corporate image. Accordingly, there can be no assurance that the
anticipated benefits of this acquisition will be realized or that the
acquisition of Holiday Rambler will not materially adversely affect Monaco's
operating results and financial condition.
CYCLICALITY
The recreational vehicle industry has been characterized by cycles of growth
and contraction in consumer demand, reflecting prevailing economic conditions
that affect disposable income for leisure-time activities. Unit sales of
recreational vehicles in general and motor coaches in particular declined in
each of 1990 and 1991 as compared with the prior year. While unit sales of
high-line motor coaches have increased each year since 1989, no assurance can
be given that the high-line motor coach segment of the RV industry will not
experience cyclical contractions in the future. In addition, as a result of
the acquisition of Holiday Rambler, the Company now has a much broader range
of RV products and will likely be more susceptible to RV industry cyclicality
than in the past. Factors affecting cyclicality in the RV industry include
prevailing interest rates, the level of discretionary spending, the
availability of credit and overall consumer confidence. In particular,
interest rates rose significantly in 1994 and while recent interest rates
have not materially adversely affected the Company's business, no assurance
can be given that future increases will not have an adverse effect on Company
sales and profits.
POSSIBLE EXCESS MANUFACTURING CAPACITY
The Company significantly expanded its manufacturing capacity in 1995, both
at its Indiana facility, which produces Dynasty and Windsor models, and at
its new Oregon facility. The Company incurred significant fixed expenses in
1994 and 1995 as a result of this expansion. The Company is also proceeding
with plans to construct a new manufacturing facility for the Holiday Rambler
RV Division which is expected to be completed in 1997 and cost an estimated
$12 million. The Company's operating results could be materially and
adversely affected in the future if sales of the Company's products do not
increase at a rate sufficient to offset the Company's increased expense
levels.
FLUCTUATIONS OF GROSS MARGINS
The Company's gross margin fluctuates from period to period, depending upon
the mix of coaches sold and the Company's ability to utilize its
manufacturing resources efficiently. The gross margin on Windsor sales is
generally lower than on Dynasty sales, which in turn is generally lower than
on Executive and Signature sales. In addition, Holiday Rambler's products
generally have lower gross margins than those of Monaco, and have similar
differences in gross margin between models. Accordingly, the Company
anticipates that as sales of its lower gross margin units increase as a
percentage of the Company's overall sales, its overall gross margin will
decline.
FLUCTUATIONS OF OPERATING RESULTS
The Company's sales and operating results may fluctuate significantly from
period to period due to factors such as the addition or loss of dealers, the
mix of coaches sold, the ability to utilize manufacturing resources
efficiently, the timing of trade shows and rallies, the introduction and
consumer acceptance of new models by the Company and its competitors, and
factors affecting the RV industry as a whole described above. The Company
does not believe that
14
purely seasonal factors have had a significant impact on the Company's net
sales or operating results to date. However, with the broader range of RV
products now offered, as a result of the acquisition of Holiday Rambler,
seasonal factors could have a significant impact in the future.
Additionally, because of the relatively high selling prices of the Company's
motor coaches, a small variation in the number of coaches sold in any quarter
can have a significant effect on sales and operating results for that quarter.
ENVIRONMENTAL REGULATION
In connection with due diligence activities associated with the financing for
the acquisition of Holiday Rambler and Holiday World, the Company discovered
a ground water contaminant at Monaco's Elkhart, Indiana facility. Moreover,
in connection with the acquisitions, the Company assumed the environmental
liabilities of the businesses acquired, subject to certain indemnification
from Harley for such liabilities. The Company has performed additional
environmental testing at its Elkhart facility, at Holiday Rambler's facility
in Wakarusa and at three Holiday World stores in Florida, Texas and
California and has identified the extent of contamination at these sites and
is proceeding with clean-up efforts. The company has filed appropriate
closure documents with the state of Texas and is in the process of filing
similar required documents with the other states. In connection with the
acquisition financing, the Company covenanted with its lenders that, if any
remediation is required, the Company will commence such remediation no later
than September 1996. Based on its investigations to date, management of the
Company believes that the costs of any remediation activities which may be
required at these sites, net of Harley's indemnification obligations, will
not have a material adverse effect on the Company's business, financial
condition or results of operations. Nevertheless, there can be no assurances
that the Company will not discover additional environmental problems or that
the cost of the expected remediation activities will not exceed the Company's
estimates.
RISKS OF LITIGATION
The Company is regularly subject to litigation arising in the ordinary course
of its business, including a variety of product liability and warranty claims
typical in the RV industry. In addition, as a result of the acquisition of
Holiday Rambler, the Company assumed the liabilities of Holiday Rambler,
including product liability and warranty claims. The Company does not
believe that the outcome of the pending litigation, net of insurance
coverage, will have a material adverse affect on the business, financial
condition or results of operations of the Company. However, due to the
inherent uncertainties associated with such litigation, there can be no
assurance that such litigation will not have a material adverse affect on the
business, financial condition or results of operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1996, the operations of the Company generated
net cash of $16.1 million. Net income and the adjustment of non-cash
expenses such as depreciation and amortization generated $3.2 million and
the balance was generated by a reduction in inventories and an increase in
accrued expenses more than offsetting an increase in accounts receivable.
The Company made capital expenditures of $726,000 during the first six
months of 1996 primarily for completion of expansion-related activities
started in 1995. The Company expanded both its Indiana and Oregon facilities
during 1995 and while substantially completed in 1995, some expenditures
carried over to the first quarter of 1996.
The Company's principal working capital requirements are purchases of
inventory and, to a lesser extent, financing of accounts receivable. The
Company's dealers typically finance coach purchases under floor plan
arrangements with third parties as described below. At June 29, 1996, the
Company had working capital of approximately $19.0 million, an increase of
$15.2 million from working capital of $3.8 million at December 30, 1995. The
increase was largely due to the addition of Holiday Rambler's working
capital. The Company primarily used long-term debt and preferred stock,
rather than its short-term credit facilities, to finance the purchase of
Holiday Rambler.
15
The Company's primary sources of liquidity are internally generated cash from
operations and available borrowings under its credit facilities. In
connection with the acquisition of Holiday Rambler, on March 5, 1996, the
Company replaced its bank line of credit with new credit facilities
consisting of a term loan of $20 million (the "Term Loan") and a revolving
line of credit of up to $45 million (the "Revolving Loans"). The Term Loan
bears interest at various rates based upon the prime lending rate announced
from time to time by Banker's Trust Company (the "Prime Rate") or LIBOR and
is due and payable in full on March 1, 2001. The Term Loan requires monthly
interest payments, quarterly principal payments and certain mandatory
prepayments. The mandatory prepayments consist of (i) an annual payment on
April 30 of each year, beginning April 30, 1997, of seventy-five percent
(75%) of the Company's defined excess cash flow for the then most recently
ended fiscal year, and (ii) subsequent to repayment by the Subsidiary of the
$12 million note issued in conjunction with the purchase of the Holiday World
retail stores, a payment, within two days of the sale of any store, of the
net cash proceeds received by the Subsidiary from such sale. At the election
of the Company, the Revolving Loans bear interest at variable interest rates
based on the Prime Rate or LIBOR. The Revolving Loans are due and payable in
full on March 1, 2001, and require monthly interest payments. The Term Loan
and the Revolving Loans are collateralized by a security interest in all of
the assets of the Company and include various restrictions and financial
covenants. As of June 29, 1996, $20 million was outstanding under the Term
Loan and $5.9 million was outstanding under the Revolving Loans. The
Subsidiary has a subordinated note outstanding to Harley for $12 million that
is to be paid from the net proceeds of the sale of the retail locations. The
subordinated note bears interest at the Prime Rate less 0.5% and is due and
payable in full on March 4, 1999. The note requires quarterly interest
payments of $30,000 as well as certain mandatory prepayments. The mandatory
prepayments consist of (i) an annual payment on April 30 of each year,
beginning on April 30, 1997, of a portion of the Subsidiary's defined excess
cash flow for the most recently ended fiscal year, and (ii) a payment, within
two days of the sale of any store, of the net cash proceeds received by the
Subsidiary from such sale. As of June 29, 1996, the amount outstanding on
the Harley note was $10.7 million. Subsequent to the end of the second
quarter, the Subsidiary made an additional payment from store sale proceeds
which reduced the balance on the note to $6.5 million. The Subsidiary also
has various loans outstanding to finance retail inventory at the dealerships
which amounted to $13.7 million at June 29, 1996 and which bear interest at
various rates based on the Prime Rate and are collateralized by the assets of
the Subsidiary.
The Company believes that cash flow anticipated from its operations and funds
available under its revolving credit facilities will be sufficient to meet
the Company's working capital requirements for the next 12 months. Capital
expenditures for 1996 are anticipated to approximate $5 to $6 million, of
which an estimated $3 to $4 million will be used to begin construction of a
new manufacturing facility for the Holiday Rambler RV Division. This new
facility is expected to be completed in 1997 at a total cost of approximately
$12 million. The Company may, however, require additional equity or debt
financing to address working capital and facilities expansion needs,
particularly if the Company further expands its operations or the operations
of the Holiday Rambler RV Division to address greater than anticipated growth
in the market for its products. There can be no assurance that additional
financing will be available if required or on terms deemed favorable by the
Company.
As is typical in the motor coach industry, many of the Company's retail
dealers, including the Subsidiary, utilize wholesale floor plan financing
arrangements with third party lending institutions to finance their purchase
of the Company's coaches. Under the terms of these floor plan arrangements,
institutional lenders customarily require the coach manufacturer to agree to
repurchase any unsold coaches if the dealer fails to meet its commitments to
the lender, subject to certain conditions. The Company has agreements with
several institutional lenders under which the Company currently has
repurchase obligations. The Company's obligations under these repurchase
agreements vary from period to period. At June 29, 1996, approximately $100
million of products sold by the Company to independent dealers were subject
to potential repurchase under existing floor plan financing agreements, with
approximately 6.5% concentrated with one dealer. If the Company were
obligated to repurchase a significant number of coaches under any repurchase
agreement, its operating results and financial condition could be adversely
affected.
16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on May 15, 1996 in
Coburg, Oregon, the Stockholders (i) elected two Class I directors to serve
on the Company's Board of Directors, (ii) approved a 300,000 increase in
shares issuable under the 1993 Incentive Stock Option Plan and the imposition
of a grant limit under the 1993 Stock Option Plan, and (iii) ratified the
Company's appointment of Coopers & Lybrand L.L.P. as independent auditors.
Nominee For Withheld
---------------- --------- --------
Kay L. Toolson 4,009,295 11,113
Michael J. Kluger 4,009,308 11,100
The vote for increasing the shares issuable and including a grant limit to
the 1993 Stock Option Plan was as follows:
For Against Abstained
--------- ------- ---------
3,114,305 259,235 13,050
The vote for ratifying the appointment of Coopers & Lybrand L.L.P. was as
follows:
For Against Abstained
--------- ------- ---------
4,016,408 1,400 2,600
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27.2 Financial data schedule.
(b) REPORTS ON FORM 8-K.
Amendment No. 1 (the "Amendment") to a Current Report on Form 8-K dated
March 4, 1996 was filed with the Securities and Exchange Commission (the "SEC")
on May 20, 1996, pursuant to Item 2 of Form 8-K, in connection with the
Company's acquisition of Harley's Holiday Rambler RV Division and Holiday
World Division. Pursuant to Item 7(b), the Amendment included the following
financial statements:
1. Condensed Consolidated Balance Sheet of Monaco Coach Corporation
("Monaco") as of March 30, 1996, including the Holiday Rambler RV
Division and the Holiday World Division (incorporated by reference to
the Condensed Consolidated Balance Sheet of Monaco as of March 30, 1996,
contained in Monaco's Quarterly Report on Form 10-Q for the period ended
March 30, 1996 as filed with the SEC); and
2. Unaudited Pro Forma Combined Condensed Statements of Operations of
Monaco for the fiscal year ended December 30, 1995 and for the quarter
ended March 30, 1996.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONACO COACH CORPORATION
Dated: August 12, 1996 s/s: John W. Nepute
------------------------------ ---------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
18