SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: March 30, 1996
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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: 0-222-56
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MONACO COACH CORPORATION
Delaware 35-1880244
(State of Incorporation) (I.R.S. Employer
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
March 30, 1996: 4,418,407
MONACO COACH CORPORATION
FORM 10-Q
MARCH 30, 1996
INDEX
PAGE
PART I - FINANCIAL INFORMATION REFERENCE
- ------------------------------ ---------
Condensed Consolidated Balance Sheets as of 3
March 30, 1996 and December 30, 1995
Condensed Consolidated Statements of Income 4
for the quarter ended March 30, 1996 and
April 1, 1995
Condensed Consolidated Statements of Cash 5
Flows for the quarter ended March 30,
1996 and April 1, 1995
Notes to Condensed Consolidated Financial Statements 6 - 9
Management's Discussion and Analysis of Financial 10 - 16
Conditions and Results of Operations
PART II - OTHER INFORMATION
Other Information 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS)
MARCH 30 DECEMBER 30
1996 1995
-------- -----------
ASSETS
Current assets:
Cash $ 635
Trade receivables 21,307 $ 7,071
Inventories 71,861 19,591
Prepaid expenses 867 447
Deferred tax asset 4,624 575
Assets held for sale 6,122
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Total current assets 105,416 27,684
Property, plant and equipment, net 33,428 21,587
Debt issuance costs, net of accumulated
amortization of $40 1,984
Goodwill, net of accumulated amortization
of $1,595 and $1,466, respectively 23,197 19,231
-------- -------
Total assets $164,025 $68,502
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------- -------
LIABILITIES
Current liabilities:
Book overdraft $ 516
Notes payable $36,795 9,845
Current portion of long-term notes payable 1,151 2,000
Accounts payable 28,349 8,459
Accrued expenses and other liabilities 18,885 2,848
Income tax payable 393 221
Deferred tax liability 1,860
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Total current liabilities 87,433 23,889
Deferred income 200 200
Notes payable, less current portion 31,164 5,000
Deferred tax liability 3,756 1,483
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122,553 30,572
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REDEEMABLE PREFERRED STOCK 2,872
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STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000
shares authorized, 4,418,407 shares
(4,410,889 shares at December 30, 1995)
issued and outstanding 44 44
Additional paid-in capital 25,339 25,303
Retained earnings 13,217 12,583
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Total stockholders' equity 38,600 37,930
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Total liabilities and stockholders'
equity $164,025 $68,502
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See accompanying notes.
3
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
-----------------------
MARCH 30 APRIL 1
1996 1995
-------- ---------
Net sales $61,964 $38,015
Cost of sales 55,237 32,673
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Gross profit 6,727 5,342
Selling, general and administrative expenses 4,650 2,469
Management fees 18 18
Amortization of goodwill 129 129
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Operating income 1,930 2,726
Other expenses (income), net (7)
Interest expense 863 1
-------- ---------
Income before income taxes 1,074 2,725
Provision for income taxes 440 1,063
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Net income $ 634 $ 1,662
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-------- ---------
Earnings per common share $.14 $.37
---- ----
---- ----
Weighted average shares outstanding 4,540,236 4,479,444
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See accompanying notes.
4
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
QUARTER ENDED
-----------------------
MARCH 30 APRIL 1
1996 1995
-------- ---------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities: $ 634 $ 1,662
Net income
Adjustments to reconcile net income to
net cash generated (used) by operating
activities:
Depreciation and amortization 566 237
Deferred income taxes 84 84
Changes in working capital accounts, net
of effect of business acquisition:
Receivables (4,637) (3,894)
Inventories 8,592 (2,177)
Prepaid expenses (84) (292)
Accounts payable 3,880 2,185
Accrued expenses and other current
liabilities 1,129 (242)
Income tax payable 172 947
Deferred income 200
-------- ---------
Net cash generated (used) by
operating activities 10,336 (1,290)
-------- ---------
Cash flows used by investing activities:
Payment for business acquisition (40,222)
Additions to property, plant and equipment (329) (4,051)
-------- ---------
Net cash used by investing activities (40,551) (4,051)
-------- ---------
Cash flows from financing activities:
Book overdraft (516) 1,348
Borrowings on lines of credit, net 5,837
Issuance of common stock 37 24
Issuance of preferred stock, net of
issuance costs 2,872
Payments on floor financing, net (356)
Payments on long-term note (7,000)
Borrowings on subordinated note 12,000
Borrowings on long-term notes, net of
issuance costs 17,976 3,735
-------- ---------
Net cash generated by financing
activities 30,850 5,107
-------- ---------
Net increase (decrease) in cash 635 (234)
Cash at beginning of period 0 234
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Cash at end of period $ 635 $ 0
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SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest 34 111
See accompanying notes.
5
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
March 30, 1996 and the results of operations and cash flows of the Company
for the quarter ended March 30, 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 ACQUISITIONS
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.
The acquisition was consummated 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 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.
Therefore, the final purchase price has not been agreed upon and the
following information is subject to change based on final negotiations.
The allocation of the final purchase price is subject to reallocation. The
retail facilities are expected to be sold within twelve 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. Included in the Condensed Consolidated Statements of Income
for March 30, 1996 is $9.6 million of net sales from the Holiday World
retail stores. In addition, appraisals for equipment have been made on
preliminary estimates based on liquidating values. Management expects fair
market appraisals based on intended use will increase the equipment amount
and reduce the goodwill amount listed below.
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 $ 3,000
Subordinated debt 12,000
Cash and proceeds from obtaining debt 27,374
-----------
$ 42,374
-----------
-----------
Uses
Purchase price $ 8,350
Transactions expense 2,000
Debt issuance Cost 2,024
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$ 42,374
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6
MONACO COACH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. HOLIDAY ACQUISITION (continued)
The aggregate purchase price of $40,222,000, including transaction expenses,
net of $128,000 charged to equity, has been allocated on the basis of fair
value of assets acquired (no cash acquired) and liabilities assumed. The
purchase price was allocated as follows:
(IN THOUSANDS)
Receivables $ 9,598
Inventories 60,862
Property and equipment 11,875
Prepaids and other assets 336
Assets held for sale 6,157
Goodwill 4,096
Notes payable (21,784)
Accounts payable (16,010)
Accrued liabilities (14,908)
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$ $40,222
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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 Holdiay Rambler and
Holiday World are included in the condensed consolidated statements of income
for the quarter ended March 30, 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 quarter. 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)
QUARTER ENDED
-------------
MARCH 30, APRIL 1,
1996 1995
----------------------
Net sales 115,766 101,463
Net loss (733) (265)
Earnings (loss) per common share (.16) (.06)
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
The composition of inventory is as follows;
(IN THOUSANDS)
MARCH 30 DECEMBER 30
1996 1995
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Raw materials $ 19,170 $ 8,069
Work-in-process 15,127 10,136
Finished coaches 37,564 1,386
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$ 71,861 $ 19,591
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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 March 30,
1996 the unamortized amount was $19.1 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.
7
MONACO COACH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $15,682,000 at March 30, 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 $21,113,000 at March 30, 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 March 30, 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 $12,000,000 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
$315,000.
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. 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:
QUARTER ENDED
-----------------------
MARCH 30, APRIL 1,
1996 1995
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Issued and outstanding (weighted average) 4,414,254 4,404,561
Stock options 60,020 74,883
Convertible preferred stock 65,962
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4,540,236 4,479,444
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8
MONACO COACH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
9. 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.
INTERNAL REVENUE SERVICE AUDIT
The Internal Revenue Service is currently conducting an examination of the
Company's 1993 federal income tax return. The outcome of the Internal
Revenue Service audit is incomplete at the present time. The Company has
accrued what it believes to be a reasonable amount for settlement and expects
that the ultimate resolution of this matter will not have a material adverse
effect on the Company's consolidated financial position, results of
operations and cash flows.
9
Item 2.
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 ("Monaco" or 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 ended
March 30, 1996 and April 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 ("Holiday Rambler") 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.
The Company is currently in the process of integrating Holiday Rambler into
its existing business.
Also on March 4, 1996, MCC Acquisition Corporation, a wholly-owned
subsidiary of the Company (the "Subsidiary"), acquired the assets of
Harley's Holiday World Division ("Holiday World") 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 note, and the assumption of a significant portion of the
libilities of Holiday World. The acquisition was accounted for using the
purchase method of accounting. The Subsidiary intends to sell all 10 of
the RV dealerships and is in the process of identifying potential buyers
for them.
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. 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 Holiday Rambler and Holiday
World were incorporated into the Company's condensed consolidated balance sheet,
statement of income and cash flows.
RESULTS OF OPERATIONS
MARCH 30, 1996 COMPARED TO APRIL 1, 1995
Net sales increased to $62.0 million in the first quarter of 1996 compared
to $38.0 million for the same period last year. The addition of the sales
of Holiday Rambler and Holiday World commencing on March 4, 1996
contributed $17.9 million and $9.6 million, respectively, to the total net
sales for the quarter. On a comparative basis. Monaco's net sales,
excluding Holiday Rambler, were $34.4 million, down 9% from last year. The
Dynasty, Signature, and Executive models posted unit sale decreases of
20.3%, 30.8%, and 50% respectively, in the first quarter over the same
period last year, while Windsor unit sales rose 24.6%. Holiday Rambler's
unit sales for the entire quarter were down 8.5% this year versus the same
period last year with motor coaches being up 22.9% and towables declining
29.7%. Overall the Company's average selling price per unit for its
traditional high-line models was up 3.5%. Holiday Rambler's average selling
price per unit in the first quarter of 1996 was up approximately 20%
reflecting a shift in the mix from towables to motor coaches. The Company
expects its overall selling price per unit in future periods will drop
significantly due to the inclusion of a substantial number of less
expensive Holiday Rambler units in the equation.
Gross profit for the first quarter of 1996 increased by $1.4 million to
$6.7 million and decreased as a percentage of net sales to 10.9% from 14.1%
in the year earlier period.
10
Part of the reduction in gross margin in 1996 was due to the
Company's expensing of $645,000, representing a portion of a $1.7 million
write-up to fair value of Holiday Rambler and Holiday World inventory
recorded in connection with the acquisition. Without that expense, the
Company's gross margin would have been 11.9% of net sales. The remainder of
the decline was due to a shift in the Company's sales mix towards lower
margin Dynasty and Windsor models and to the addition of Holiday Rambler's
mix of units which includes lower margin towable products. Monaco's
traditional high-line models had a combined gross margin of 12.4%, an
increase of 0.5% over the fourth quarter of 1995. Excluding the $645,000
inventory write-up to fair value expense, Holiday Rambler had an overall
gross margin of 11.3% on its March sales. The Company will expense the
remainder of the write-up to fair value of Holiday Rambler inventory created
by the acquisition, approximately $1.1 million, in the second quarter of
1996. Not including the expensing of the inventory write-up, the Company's
objective for the remainder of 1996 is a modest improvement in gross margins,
primarily from purchasing and manufacturing synergy evolving from the
acquisition of Holiday Rambler.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
A greater than anticipated shift from the Company's higher margin units to
its lower margin models would hinder these efforts, as would unexpected
manufacturing difficulties..
Operating expenses increased by $2.2 million, to $4.7 million and increased
as a percentage of net sales to 7.6% from 6.5% in the year earlier period.
The increase was primarily attributable to the addition of Holiday Rambler
which had operating expenses of 8.8% of net sales while Monaco's traditional
high-line business was basically flat, on a percentage basis, at 6.6% of net
sales. Holiday Rambler has traditionally spent more as a percentage of sales
on operating expenses than Monaco and one of the Company's objectives is to
reduce Holiday Rambler's level of spending on a percentage basis. 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 arising from the Acquisition was $129,000 in the
first quarter of 1996, the same as for the year earlier period. At March 30,
1996, goodwill arising from the Acquisition, net of accumulated amortization,
was $19.1 million, which is currently being amortized on a straight-line
basis over 40 years. Goodwill of $4.09 million was created as a result of
the purchase of Holiday Rambler and Holiday World and will be amortized over
a period of 20 years. Goodwill amortization, a non-cash expense, will
continue to adversely affect the Company's results of operations.
Operating income for the first quarter of 1996 was $1.9 million, a $796,000
decrease versus the comparable 1995 period. The Company's lower gross margin
and higher operating expenses as a percentage of sales were responsible for a
decline in operating income as a percentage of net sales from 7.2% in the
first quarter of 1995 to 3.1% in 1996.
Net interest expense increased significantly from $790 in the first quarter
of 1995 to $863,000 in the comparable 1996 period. The Company capitalized
approximately $34,000 of interest in the first quarter of 1996 due to the
acquisition of Holiday Rambler and Holiday World, compared to $111,000 of
first quarter 1995 interest which was capitalized due to the construction of
the Company's new Oregon facility. The Company's 1996 interest expense
includes approximately $209,000 of floor plan interest expense relating to
the Holiday World retail stores. The Company expects that, due to the
acquisition of Holiday Rambler and Holiday World and the 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 $634,000 in the first quarter of 1996 was
approximately $1.0 million 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 higher interest expense.
12
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.
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 unforseen 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, or 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 assurances 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's operating
results could be materially and adversely affected in 1996 if sales of the
Company's products do not increase at a rate sufficient to offset the
Company's increased expense levels.
13
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 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 is in the
process of performing 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. 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.
14
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 quarter of 1996, the operations of the Company generated net
cash of $10.3 million. Net income and the adjustment of non-cash expenses
such as depreciation and amortization generated $1.2 million and the balance
was generated by a reduction in inventories and increases in accounts payable
and other liabilities more than offsetting an increase in accounts receivable.
The Company made capital expenditures of $329,000 during the first quarter 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 RV purchases under floor plan arrangement
with third parties as described below. At March 30, 1996, the Company had
working capital of approximately $18 million, an increase of $14.2 million
from working capital of $3.8 million at December 30, 1995. The increase was
largely due to the addition of Holiday Rambler's current assets and the
Company's use primarily of long-term debt financing and preferred stock
rather than short-term credit facilities to finance the purchase of Holiday
Rambler and Holiday World.
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 and Holiday
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
World, 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 excess cash flow for the then
most recently ended fiscal year, [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 Revolving Loans are secured by a
security interest in all of the assets of the Company and include various
restrictions and financial covenants. As of March 30, 1996, $20 million was
outstanding under the Term Loan and $15.7 million was outstanding under the
Revolving Loans. The Subsidiary has a subordinated note outstanding to
Harley for $12 million that is to be repaid from the net proceeds of he 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 excess cash flow for the most recently ended fiscal year, and
(i) a payment, within two days of the sale of any store, of the net cash
proceeds received by the Subsidiary from such sale. The Subsidiary also has
various loans outstanding to finance retail inventory at the dealerships
which amounted to $21.1 million at March 30, 1996 and which bear interest at
various rates based on the prime rate and are secured by the assets of the
Subsidiary. The Subsidiary also has a mortgage on one of the stores with a
balance of approximately $315,000.
The Company believes that cash flow anticipated from its operations and funds
available under its 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 million of which an
estimated $3 million will be used to fund construction of a new manufacturing
facility for Holiday Rambler. This new facility is expected to be completed
in 1997 at a total cost of approximately $7 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 Holiday Rambler 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 recreational vehicle 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 units. Under the terms of these floor plan arrangements,
institutional lenders customarily require the manufacturer to agree to
repurchase any unsold units 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 March 30, 1996, approximately $128
million of products sold by the Company to independent dealers were subject
to potential repurchase under existing floor plan financing agreements, with
approximately 6% concentrated with one dealer. If the Company were obligated
to repurchase a significant number of units under any repurchase agreement
its operating results and financial condition could be adversely affected.
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PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated March 4, 1996 (the "Report") was filed
during the quarter ending March 30, 1996, pursuant to Item 2 of the Report, in
connection with the Company's acquisition of Holiday Rambler and Holiday
World. Pursuant to Item 7(a), the Report included the following financial
statements:
1. Report of Independent Accountants
2. Audited Combined Balance Sheets of the acquired business as of
December 31, 1995 and December, 1994.
3. Audited Combined Statements of Operations and Deficiency in Net
Assets of the acquired business for the year ended December 31,
1995, 1994 and 1993.
4. Audited Combined Statements of Cash Flows of the acquired business
for the year ended December 31, 1995, 1994 and 1993.
5. Notes to Combined Financial Statements.
6. Schedule of Combining Balance Sheets of the acquired business as of
December 31, 1995.
7. Schedule of Combining Balance Sheets of the Holiday World Division
as of December 31, 1995.
8. Schedule of Combining Statements of Operations for the year ended
December 31, 1995.
9. Schedule of Combining Statement of Operations of the Holiday World
Division for the year ended December 31, 1995.
10. Schedule of Combining Statements of Cash Flows for the year ended
December 31, 1995.
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
October 7, 1996 /s/ John W. Nepute
Dated: ----------------------- -------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Officer)
18