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: September 28, 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
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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
September 28, 1996: 4,427,959
MONACO COACH CORPORATION
FORM 10-Q
SEPTEMBER 28, 1996
INDEX
Page
PART I - FINANCIAL INFORMATION Reference
- ------------------------------ ---------
Condensed Consolidated Balance Sheets as of 3
September 28, 1996 and December 30, 1995.
Condensed Consolidated Statements of Income 4
for the quarter ended September 28, 1996 and
September 30, 1995 and for the nine months ended
September 28, 1996 and September 30, 1995.
Condensed Consolidated Statements of Cash 5
Flows for the nine months ended September 28, 1996
and September 30, 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)
SEPTEMBER 28, DECEMBER 30,
1996 1995
------------ -----------
ASSETS
Current assets:
Trade receivables $ 22,335 $ 7,071
Inventories 40,770 19,591
Prepaid expenses 1,500 447
Deferred tax asset 4,475 575
Notes receivable 1,064
Assets held for sale 1,685
------------ -----------
Total current assets 71,829 27,684
Property, plant and equipment, net 33,492 21,587
Notes receivable 1,436
Debt issuance costs, net of accumulated amortization of $222 1,838
Goodwill, net of accumulated amortization of $1,955
and $1,466, respectively 21,708 19,231
------------ -----------
Total assets $130,303 $68,502
------------ -----------
------------ -----------
LIABILITIES
Current liabilities:
Book overdraft $ 5,846 $ 516
Notes payable 5,459 9,845
Current portion of long-term notes payable 1,750 2,000
Accounts payable 25,442 8,459
Accrued expenses and other liabilities 23,389 2,848
Income tax payable 646 221
Deferred tax liability 1,860 0
------------ -----------
Total current liabilities 64,392 23,889
Deferred income 200 200
Notes payable, less current portion 17,875 5,000
Deferred tax liability 3,748 1,483
------------ -----------
86,215 30,572
------------ -----------
Redeemable preferred stock,
redemption value of $3,089 2,745
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STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 4,427,959 shares (4,410,889 shares
at December 30, 1995) issued and outstanding 44 44
Additional paid-in capital 25,377 25,303
Retained earnings 15,922 12,583
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Total stockholders' equity 41,343 37,930
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Total liabilities and stockholders' equity $130,303 $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 NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Net sales $ 102,065 $ 36,726 $ 270,758 $ 109,823
Cost of sales 87,121 33,471 236,679 96,576
------------- ------------- ------------- -------------
Gross profit 14,944 3,255 34,079 13,247
Selling, general and administrative expenses 10,637 1,839 24,563 6,179
Management fees 18 18 54 54
Amortization of goodwill 180 129 489 388
------------- ------------- ------------- -------------
Operating income 4,109 1,269 8,973 6,626
Other expenses (income), net (96) 2 (145) (18)
Interest expense 881 111 3,160 143
------------- ------------- ------------- -------------
Income before income taxes 3,324 1,156 5,958 6,501
Provision for income taxes 1,367 451 2,473 2,528
------------- ------------- ------------- -------------
Net income $ 1,957 $ 705 $ 3,485 $ 3,973
Preferred stock dividends 39 89
Accretion of redeemable preferred stock 24 57
------------- ------------- ------------- -------------
Income attributable to primary
earnings per share $ 1,894 $ 705 $ 3,339 $ 3,973
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per common share:
Primary $.42 $.75
Fully Diluted $.42 $.16 $.75 $.89
Weighted average shares outstanding:
Primary 4,477,423 4,471,894
Fully Diluted 4,708,443 4,473,575 4,650,574 4,477,718
See accompanying notes.
4
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 3,485 $ 3,973
Adjustments to reconcile net income to net cash
generated (used) by operating activities:
Depreciation and amortization 2,249 781
Deferred income taxes 225 252
Changes in working capital accounts, net of effect
of business acquisition and sale of retail stores:
Receivables (6,178) (6,365)
Inventories 15,862 (3,453)
Prepaid expenses (967) (116)
Accounts payable 865 3,403
Accrued expenses and other current liabilities 7,314 48
Income tax payable 425 (362)
Deferred income 0 200
------------- -------------
Net cash generated (used) by operating activities 23,280 (1,639)
------------- -------------
Cash flows used by investing activities:
Additions to property, plant and equipment (1,920)
Payment for business acquisition(see footnote 2) (24,728)
Sale of retail stores:
Proceeds from sale of retail stores, net of closing costs 12,366
Notes receivable obtained from the sale of retail stores (3,048)
Collections on notes receivable 548 (11,900)
------------- -------------
Net cash used by investing activities (16,782) (11,900)
------------- -------------
Cash flows from financing activities:
Book overdraft 5,330 1,100
Borrowings (payments) on lines of credit, net (8,633) 4,647
Issuance of common stock 74 58
Payments on floor financing, net (1,834)
Payments on subordinated note (12,000)
Borrowings on long-term notes, net of issuance costs 17,940
Payments on long-term notes (7,375) 7,500
------------- -------------
Net cash generated (used) by financing activities (6,498) 13,305
------------- -------------
Net increase (decrease) in cash 0 (234)
Cash at beginning of period 0 234
------------- -------------
Cash at end of period $ 0 $ 0
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------------- -------------
SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest 196 492
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
September 28, 1996 and December 30, 1995, the results of operations of the
Company for the quarter and nine months ended September 28, 1996 and
September 30, 1995, and cash flows for the nine months ended September 28,
1996 and September 30, 1995. The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiary, and all significant intercompany accounts and transactions
have been eliminated in consolidation. These 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 was based upon the net book value of purchased assets
less liabilities assumed for Holiday Rambler and Holiday World. 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 nine months ended September 28, 1996 is $7.1 million and $23.5
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 7 of the Holiday World retail stores
during the nine months ended September 28, 1996. Management expects the
sale of the remaining 3 retail stores will also adjust the allocation of
the purchase price.
The Company has developed a relocation plan for Holiday Rambler operations
that will be relocated to Monaco facilities. The Company anticipates this
relocation to occur in early 1997. Management has estimated $575,000 of
relocation expenses related directly to the aquisition. The relocation
cost has been included in the purchase price allocation. If estimated
amounts differ from actual cost for relocation, an adjustment to the
original purchase price allocation will be made.
6
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. HOLIDAY ACQUISITION (CONTINUED)
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, net of
debt issuance cost of $2,060 24,728
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$39,327
-------
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Uses:
Purchase price $37,113
Transaction expense 2,214
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$39,327
-------
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The adjusted aggregate purchase price of $38,462,000, 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 $ 9,536
Inventories 61,269
Property and equipment 11,870
Prepaids and other assets 86
Assets held for sale 6,097
Goodwill 3,831
Notes payable (21,784)
Accounts payable (16,753)
Accrued liabilities (14,825)
----------
39,327
Adjustment to goodwill for net gain from sale of retail stores (865)
----------
$ 38,462
----------
----------
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 nine months ended September 28, 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.
7
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. HOLIDAY ACQUISITION (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
Net sales $ 329,560 $ 320,406
Net income (loss) 2,115 (3,501)
Earnings (loss) per common share 0.47 (0.74)
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
The composition of inventory is as follows:
(IN THOUSANDS)
SEPTEMBER 28, DECEMBER 30,
1996 1995
------------- -------------
Raw materials $ 16,991 $ 8,069
Work-in-process 13,663 10,136
Finished coaches 10,116 1,386
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$ 40,770 $ 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 September
28, 1996, the unamortized amount was $18.8 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 $1,212,000 at September 28, 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 $4,247,000 at September 28, 1996 and which bear
interest at various rates based on the Prime Rate and are secured by the
assets of the subsidiary.
8
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. LONG-TERM BORROWINGS
The Company has a term loan of $19,625,000 outstanding as of September 28,
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.
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 nine months ended September 28, 1996, the accretion charges were
$57,000.
The accrual of preferred stock dividends was $89,000 for the nine months
ended September 28, 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
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
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:
NINE MONTHS ENDED
-------------------------------------------
SEPTEMBER 28, SEPTEMBER 28, SEPTEMBER 30,
1996 1996 1995
Primary Fully Diluted Fully Diluted
------------- ------------- -------------
Issued and outstanding
(weighted average) 4,419,775 4,419,775 4,406,140
Stock options 52,119 55,020 71,578
Convertible preferred stock 175,779
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4,471,894 4,650,574 4,477,718
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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. These statements include statements about
gross margins, Holiday Rambler expense levels and the Company's ability to meet
working capital requirements. 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 nine-months ended September
28, 1996 and September 30, 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 $21,514,000 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 Corp, a wholly owned subsidiary of the
Company (the "Subsidiary"), acquired certain of the assets of Harley's Holiday
World Division, 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 and all but three of the
dealerships had been sold by September 28, 1996.
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 nine months ended September 28, 1996
contain expenses related to the purchase of Holiday Rambler, primarily the
expensing of an inventory write-up to fair value in the first and second
quarters, and the amortization of debt issuance costs and Holiday Rambler
goodwill.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 28, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
Net sales increased 177.9%, to $102.1 million in the third quarter of 1996
compared to $36.7 million for the same period last year. Sales of the newly
acquired Holiday Rambler products were responsible for the increase, with the
retail stores contributing incremental revenue of $7.1 million. On a pro-forma
basis, the Company enjoyed a strong performance in motorized products with
wholesale shipments of such models up 26.0% from the third quarter of 1995.
Towable products continued to be soft with towable wholesale shipments,
excluding the new Alumascape product, down 10.9%. Overall, Monaco's unit
sales expanded almost six fold from 252 units in the comparable 1995 period to
1496 units this year, including 179 non-Holiday Rambler units sold by Holiday
World. The Company's overall average unit selling price was essentially even
with the second quarter of 1996 at $68,200 compared to $147,405 in the 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 third quarter of 1996 increased by $11.7 million to $14.9
million and increased as a percentage of net sales to 14.6% from 8.9% in the
year earlier period. Part of the relatively large percentage increase in gross
margin was due to the third quarter of 1995 being unusually low due to
abnormally high costs associated with model changeovers and a shift in mix to
lower margin products. The gross margin in 1996 benefited from a strong
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
performance in motorized products, which on average generate higher margins
than towable products. One of the Company's objectives continues to be
modest improvement in individual model gross margins, primarily from
purchasing and manufacturing synergies evolving from the acquisition of
Holiday Rambler. However, the Company's overall gross margin will likely
decline in future periods if the Company's efforts to improve sales of its
lower margin towable products are successful or if the mix of motorized
products shifts from higher margin to lower margin units. Additionally, the
Company's gross margin could decline if the Company encounters unexpected
manufacturing difficulties or competitive pressures.
Operating expenses increased by $8.8 million, to $10.7 million and increased as
a percentage of net sales to 10.4% from an abnormally low 5.1% 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
continue working 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 was $180,000 in the third quarter of 1996 compared to
$129,000 for the year earlier period. At September 28, 1996, goodwill arising
from the Acquisition, net of accumulated amortization, was $18.8 million, which
is currently being amortized on a straight-line basis over 40 years. Goodwill
of approximately $3.0 million was created as a result of the purchase of
Holiday Rambler and is being amortized over a period of twenty years. The
goodwill from the Holiday Rambler transaction is subject to adjustment
depending on the final 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 third quarter of 1996 was $4.1 million, a $2.8
million increase over the comparable 1995 period. The increase in the
Company's gross margin was slightly greater than the Company's increase in
operating expenses as a percentage of sales resulting in an improvement in
operating income as a percentage of net sales from 3.5% in the third quarter of
1995 to 4.0% in 1996.
Net interest expense increased in the third quarter to $881,000 versus $111,000
in the comparable 1995 period. The Company capitalized approximately $60,000
of interest in the third quarter of 1996 due to the acquisition of Holiday
Rambler compared to $202,000 of capitalized third quarter 1995 interest during
the construction of the new Oregon facility. The Company's 1996 interest
expense for the quarter includes approximately $214,000 of floor plan interest
expense relating to the retail stores. Additionally, 1996 third quarter
interest expense includes $102,000 related to amortization of 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 again be higher in the fourth
quarter of 1996 than in the comparable 1995 period.
The Company's net income of $2.0 million in the third quarter of 1996 was an
increase of $1.3 million over that reported for the comparable year earlier
period with the increase attributable to the substantial increase in sales and
slightly better operating margin more than offsetting the increases in
interest and amortization expense.
NINE MONTHS ENDED SEPTEMBER 28, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net sales increased $160.9 million, or 146.5% for the first nine months of
1996, compared to the year earlier period. The increase was primarily due to
the inclusion of Holiday Rambler sales from March 5, 1996 forward. On a
pro-forma basis, as if the acquisition of Holiday Rambler had occurred at the
beginning of each fiscal year, Monaco's motorized models gross wholesale
shipments were up 9.3% for the nine-month period, while gross wholesale
shipments for towable products, excluding Holiday's new Alumascape model were
down 23.6%. Reflecting the acquisition of Holiday Rambler in March, Monaco
unit sales for the nine month period expanded five fold from 769 units in the
comparable 1995 period to 4,102 units this year, including 763 non-Holiday
Rambler units sold by Holiday World. The Company's overall average unit
selling price was approximately $66,000 versus
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
$144,400 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 nine-month period was up $20.8 million at $34.1 million
and on a percentage basis was 12.6% of net sales compared to 12.1% in the year
earlier period. The increase both in dollars and as a percentage of sales was
dampened by 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 13.2% for the nine-month
period.
Operating expenses increased $18.4 million to $24.6 million in the first nine
months of 1996 and increased as a percentage of sales to 9.1% in 1996 from a
historically low 5.7% 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 work towards reducing
Holiday Rambler's level of spending on a percentage basis. 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.
Amortization of goodwill in the first nine months of 1996 was $489,000 compared
to $388,000 for 1995. At September 28, 1996, goodwill arising from the
Acquisition, net of accumulated amortization, was $18.8 million, which is
currently being amortized on a straight-line basis over 40 years. Goodwill of
approximately $3.0 million was recorded in conjunction with 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 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 nine-month period of 1996 was $9.0 million, a $2.3
million increase versus the comparable 1995 period. The Company's slightly
higher gross margin was more than offset by higher operating expenses as a
percentage of sales resulting in a decline in operating income as a percentage
of sales from 6.0% for the first nine months of 1995 to 3.3% 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 $10.7 million, or
4.0% of sales.
Interest expense increased from $143,000 in the first nine months of 1995 to
$3.2 million in 1996. The Company capitalized approximately $196,000 of
interest in the first nine months of 1996 related to the acquisition of Holiday
Rambler, compared to $492,000 of interest capitalized in the comparable 1995
period due to the construction of the Company's new Oregon facility. The
Company's nine month interest expense includes approximately $837,000 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 nine-month period of 1996 of $3.5 million was
approximately $488,000 less than that reported for the year earlier period with
the decline attributable to the substantial increase in sales being more than
offset by higher operating expenses and greater interest expense. Excluding
the expensing of the $1.75 million inventory write-up to fair value and the
related tax benefit, the Company's net income would have been $4.5 million, an
increase of $413,000 over the comparable 1995 period.
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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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 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 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 $13 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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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 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. The Company has begun required remediation as
required by covenants with its lenders in connection with the acquisition
financing. 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 nine months of 1996, the operations of the Company generated
net cash of $23.3 million. Net income and the adjustment of non-cash expenses
such as depreciation and amortization generated $6.0 milllion 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 $1,920,000 during the first nine
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 also started
construction of a new facility to produce motorized vehicles at its Holiday
Rambler Wakarusa, Indiana location in the third quarter 1996 and expects to
spend approximately $13 million over the next nine months to complete this
facility. Motorized production is currently at full capacity in the existing
Holiday Rambler facility and the new plant will allow an approximate doubling
of motorized vehicle production at the site. This will also allow the Company
to move its Monaco Indiana production currently in Elkhart, Indiana to
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
the new Wakarusa facility. In turn, this will free up space at the Elkhart
plant for Holiday Rambler towable production, which is currently in leased
facilities in Wakarusa.
The Company's principal working capital requirements are purchases of inventory
and financing of accounts receivable. The Company's dealers typically finance
coach purchases under floor plan arrangements with third parties as described
below. At September 28, 1996, the Company had working capital of approximately
$7.4 million, an increase of $3.6 million from working capital of $3.8 million
at December 30, 1995. The slight increase reflects the recent payment of long
term debt related to the Holiday World acquisition with proceeds from the sales
of the net current assets of those stores. The Company primarily used
long-term debt and preferred stock, rather than its short-term credit
facilities, to finance the purchase of Holiday Rambler.
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 to Harley in conjunction with the
purchase of the Holiday World retail stores (which note was repaid in full by
the end of the third quarter), 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 secured by a security interest in all
of the assets of the Company and include various restrictions and financial
covenants. As of September 28, 1996, $19.6 million was outstanding under the
Term Loan and $1.2 million was outstanding under the Revolving Loans. The
Subsidiary also has various loans outstanding to finance retail inventory at
the three remaining dealerships which in the aggregate amounted to $4.2 million
at September 28, 1996 and which bear interest at various rates based on the
Prime Rate and are secured 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 $6 to 7 million, of which
an estimated $4 to 5 million will be used to begin construction of the new
Holiday Rambler manufacturing facility described above. 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 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 purchases
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 September 28, 1996, approximately $113 million of
products sold by the Company to independent dealers were subject to potential
repurchase under existing floor plan financing agreements, with approximately
6.2% 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the quarter
ended September 28, 1996, for which this report is filed.
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: November 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