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: March 29, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from ___________ to _____________
Commission File Number: 0-22256
MONACO COACH CORPORATION
Delaware 35-1880244
(State of Incorporation) (I.R.S. Employer
Identification No.)
91320 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 29, 1997: 4,438,217
MONACO COACH CORPORATION
FORM 10-Q
March 29, 1997
INDEX
PAGE
REFERENCE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
December 28, 1996 and March 29, 1997. 4
Condensed Consolidated Statements of Income
for the quarter ended March 30, 1996 and
March 29, 1997. 5
Condensed Consolidated Statements of Cash
Flows for the quarter ended March 30, 1996 and
March 29, 1997. 6
Notes to Condensed Consolidated Financial Statements. 7--10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11--17
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-k. 18
Signatures 19
-2-
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
-3-
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited: dollars in thousands)
DECEMBER 28, MARCH 29,
1996 1997
------------ -----------
ASSETS
Current assets:
Trade receivables............................................................ $ 14,891 $ 27,642
Inventories.................................................................. 46,930 45,249
Prepaid expenses............................................................. 1,343 532
Deferred tax assets.......................................................... 8,278 8,278
Notes receivable............................................................. 1,064 177
Assets held for sale......................................................... 1,383 908
------------ -----------
Total current assets....................................................... 73,889 82,786
Notes receivable............................................................... 636 2,093
Debt issuance costs, net of accumulated amortization of $343 and $446,
respectively................................................................. 1,760 1,666
Property, plant and equipment, net............................................. 38,309 41,589
Goodwill, net of accumulated amortization of $2,084 and $2,243,
respectively................................................................. 20,774 21,014
Other.......................................................................... 41
Total assets............................................................... $ 135,368 $ 149,189
------------ -----------
------------ -----------
LIABILITIES
Current liabilities:
Book overdraft............................................................... $ 2,455 $ 6,150
Short-term borrowings........................................................ 9,991 15,454
Current portion of long-term note payable.................................... 2,000 2,250
Accounts payable............................................................. 24,218 28,322
Accrued expenses and other liabilities....................................... 23,361 25,318
Income taxes payable......................................................... 7,362 3,486
------------ -----------
Total current liabilities.................................................. 69,387 80,980
Deferred income................................................................ 200 200
Notes payable, less current portion............................................ 16,500 15,875
Deferred tax liability......................................................... 2,787 2,871
------------ -----------
88,874 99,926
------------ -----------
Redeemable convertible preferred stock, redemption value of $3,005............. 2,687 2,735
------------ -----------
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares authorized, 4,438,217 shares
(4,430,467 shares at December 28, 1996) issued and outstanding............... 44 44
Additional paid-in capital..................................................... 25,430 25,504
Retained earnings.............................................................. 18,333 20,980
------------ -----------
Total stockholders' equity................................................. 43,807 46,528
------------ -----------
Total liabilities and stockholders' equity................................. $ 135,368 $ 149,189
------------ -----------
------------ -----------
See accompanying notes.
-4-
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited: dollars in thousands, except per share data)
QUARTER ENDED
-------------------------
MARCH 30, MARCH 29,
1996 1997
------------ ------------
Net sales.............................................................. $ 61,964 $ 109,023
Cost of sales.......................................................... 55,237 93,981
------------ ------------
Gross profit....................................................... 6,727 15,042
Selling, general and administrative expenses........................... 4,650 9,476
Management fees........................................................ 18 18
Amortization of goodwill............................................... 129 159
------------ ------------
Operating income................................................... 1,930 5,389
Other expense (income), net............................................ (7) (39)
Interest expense....................................................... 863 821
------------ ------------
Income before income taxes......................................... 1,074 4,607
Provision for income taxes............................................. 440 1,912
------------ ------------
Net income......................................................... 634 2,695
Preferred stock dividends.............................................. (23)
Accretion of redeemable preferred stock................................ (25)
------------ ------------
Net income attributable to common stock............................ $ 634 $ 2,647
------------ ------------
------------ ------------
Earnings per common share:
Primary............................................................ $ .14 $ .59
Fully Diluted...................................................... $ .14 $ .57
Weighted average shares outstanding:
Primary............................................................ 4,465,903 4,516,215
Fully Diluted...................................................... 4,540,236 4,747,083
See accompanying notes.
-5-
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited: dollars in thousands)
QUARTER ENDED
------------------------
MARCH 30, MARCH 29,
1996 1997
----------- -----------
Increase (Decrease) in Cash:
Cash flows from operating activities:
Net income........................................................... $ 634 $ 2,695
Adjustments to reconcile net income to net cash generated (used) by
operating activities:
Depreciation and amortization...................................... 566 786
Deferred income taxes.............................................. 84 84
Changes in working capital accounts, net of effect of business
acquisition and sale of retail stores:
Receivables...................................................... (4,637) (12,735)
Inventories...................................................... 8,592 (611)
Prepaid expenses................................................. (84) 811
Accounts payable................................................. 3,880 4,104
Accrued expenses and other current liabilities................... 1,129 1,957
Income tax payable............................................... 172 (3,876)
----------- -----------
Net cash provided by (used in) operating activities........... 10,336 (6,785)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment........................... (329) (3,780)
Payment for business acquisition (see note 2)........................ (25,350)
Proceeds from sale of retail stores, collections on
notes receivable, net of closing costs............................. 206
----------- -----------
Net cash used in investing activities.............................. (25,679) (3,574)
----------- -----------
Cash flows from financing activities:
Book overdraft....................................................... (516) 3,695
Borrowings on lines of credit, net................................... 5,837 7,483
Payments on floor financing, net..................................... (356) (468)
Borrowings on long-term notes payable................................ 20,000
Debt issuance costs.................................................. (2,024)
Payments on long-term notes.......................................... (7,000) (375)
Other................................................................ 37 24
----------- -----------
Net cash provided by financing activities.......................... 15,978 10,359
----------- -----------
Net increase in cash................................................... 635 0
Cash at beginning of period............................................ 0 0
----------- -----------
Cash at end of period.................................................. $ 635 $ 0
----------- -----------
----------- -----------
Supplemental disclosure
Amount of capitalized interest....................................... 34 146
See accompanying notes.
-6-
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
December 28, 1996 and March 29, 1997, and the results of operations and
cash flows of the Company for the quarters ended March 30, 1996 and
March 29, 1997. 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 28, 1996.
2. Holiday Acquisition
On March 4, 1996, the Company acquired certain assets of the Holiday
Rambler LLC Recreational Vehicle Manufacturing Division ("Holiday Rambler")
and ten retail dealerships ("Holiday World") from an affiliate of Harley-
Davidson, Inc. ("Harley-Davidson"). The acquisition (the "Holiday
Acquisition") was accounted for as a purchase.
The purchase price for Holiday Rambler and Holiday World was comprised of:
(In thousands)
----------------
Cash, including transaction costs of $2,131,
net of $836 received from Harley-Davidson................... $ 24,645
Preferred stock............................................... 2,599
Subordinated debt............................................. 12,000
----------------
$ 39,244
----------------
----------------
The purchase price was allocated to the assets acquired based on estimated
fair values at March 4, 1996, as follows:
(In thousands)
----------------
Receivables.................................................... $ 9,536
Inventories.................................................... 61,269
Property and equipment......................................... 11,592
Prepaids and other assets...................................... 86
Assets held for sale........................................... 7,100
Goodwill....................................................... 2,560
Notes payable.................................................. (21,784)
Accounts payable............................................... (16,851)
Accrued liabilities............................................ (14,264)
----------------
$ 39,244
----------------
----------------
The allocation of the purchase price and the related goodwill of $2,161,000
was subject to adjustment upon resolution of pre-Holiday Acquisition
contingencies. The effects of resolution of pre-Holiday Acquisition
contingencies occuring: (i) within one year of the acquisition date were
reflected as an adjustment of the allocation of the purchase price and of
goodwill, and (ii) after one year will be recognized in the determination of
net income.
-7-
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
2. Holiday Acquisition (continued)
The ten acquired Holiday World retail store properties were classified as
"assets held for sale". Seven of the stores were sold during 1996 at a gain
of $1,402,000, which has been reflected as an adjustment of goodwill. One
store was sold during the first quarter of 1997 at a loss of $399,000,
which also has adjusted goodwill. The remaining two stores are still held
for sale. The Company's results of operations and cash flows include
Holiday World since March 4, 1996, as the operating activities of Holiday
World are not clearly distinguishable from other continuing operations. Net
sales of Holiday World stores subsequent to the purchase and included in
the quarters ended March 30, 1996 and March 29, 1997 were $9.6 million and
$2.9 million, respectively.
The following unaudited pro forma information presents the consolidated
results as if the Holiday Acquisition had occurred at the beginning of the
quarter and giving effect to the adjustments for the related interest on
financing the purchase price, goodwill and depreciation. The pro forma
information does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future operating results.
(In thousands, except per
share amounts)
Quarter Ended
March 30,
1996
----------------------------
Net sales.................................. $ 115,766
Net loss................................... 733
Loss per common share...................... 0.16
3. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
The composition of inventory is as follows:
(In thousands)
--------------------------
DECEMBER 28, MARCH 29,
1996 1997
------------- -----------
Raw materials................................ $ 16,844 $ 15,945
Work-in-process.............................. 17,592 17,139
Finished units............................... 3,998 6,449
Holiday World retail inventory............... 8,496 5,716
------------- -----------
$ 46,930 $ 45,249
------------- -----------
------------- -----------
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 29,
1997, the unamortized amount was $18.6 million. The goodwill arising from
the Holiday Acquisition is being amortized on a straight-line basis over 20
years; at March 29, 1997 the unamortized amount was $2.4 million.
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.
-8-
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. Short-term Borrowings
In connection with the Holiday Acquisition, 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 and
interest payable monthly on the unused available portion of the line at
0.5%. There were outstanding borrowings of approximately $11,272,000 at
March 29, 1997. 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 $4,182,000 at March 29,
1997, which bear interest at various rates based on the prime rate and are
collateralized by the assets of the subsidiary.
6. Long-term Borrowings
The Company has a term loan of $18,125,000 outstanding as of March 29, 1997
which was obtained in connection with the Holiday Acquisition. The term
loan bears interest at various rates based on the Company's interest
coverage ratio, and expires on March 1, 2001. 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. Earnings Per Common Share
Earnings 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 earnings per common share are as
follows:
Quarter Ended
--------------------------------------------------
March 30, March 29,
1996 1997
------------------------ ------------------------
Fully Fully
Primary Diluted Primary Diluted
---------- ------------ ---------- ------------
Issued and outstanding (weighted average).................. 4,414,254 4,414,254 4,435,703 4,435,703
Stock options.............................................. 51,649 60,020 80,512 80,512
Convertible preferred stock................................ 65,962 230,868
---------- ------------ ---------- ------------
4,465,903 4,540,236 4,516,215 4,747,083
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
8. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share", which is
required to be adopted for periods ending after December 15, 1997. The
following table presents unaudited pro forma earnings per share, calculated
in accordance with the provisions of this new standard:
MARCH 30, 1996 MARCH 29, 1997
----------------- -----------------
Basic........................... $ .14 $ .60
Diluted......................... $ .14 $ .57
-9-
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 legal proceedings arising in the ordinary course
of its business, including a variety of product liability and warranty
claims typical in the recreational vehicle industry. In addition, in
connection with the Holiday Acquisition, the Company assumed most of the
liabilities of that business, including product liability and warranty
claims. The Company does not believe that the outcome of its pending legal
proceedings, in excess of insurance coverage and accruals recorded for
estimated settlements, will have a material adverse effect on the business,
financial condition or results of operations of the Company.
OTHER COMMITMENTS
In 1996, the Company began construction of a new manufacturing facility in
Wakarusa, Indiana. The new facility is expected to be completed in 1997 at
a total estimated cost of $15 million. At March 29, 1997, the Company had
incurred approximately $8.2 million in expenditures related to construction
in progress on the facility.
11. Subsequent Event
On March 19, 1997, the Company filed a registration statement with the
United States Securites and Exchange Commission to register for sale to the
public 800,000 shares of its Common Stock, which is expected to occur after
March 29, 1997. The Company intends to use the net proceeds from the
offering to retire all or a portion of the outstanding balance under its
revolving line of credit. The balance of the proceeds are expected to be
used for working capital and general corporate purposes.
-10-
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, including statements that include the words "believes", "expects",
"anticipates" or similar expressions. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause
actual results, performance or acheivements of the Company to differ
materially from those expressed or implied by such forward-looking
statements. Such factors include, among others, the factors discussed below
under the caption "Factors That May Affect Future Operating Results" and
elsewhere in this Quarterly Report on Form 10-Q. The reader should carefully
consider, together with the other matters referred to herein, the factors set
forth under the caption "Factors That May Affect Future Operating Results".
The Company cautions the reader, however, that these factors may not be
exhaustive.
GENERAL
Monaco Coach Corporation is a leading manufacturer of premium Class A motor
coaches and towable recreational vehicles ("towables"). The Company's product
line currently consists of ten models of motor coaches and five models of
fifth wheel trailers and travel trailers under the well-known "Monaco" and
"Holiday Rambler" brand names. The Company's products, which are typically
priced at the high end of their respective product categories, range in
suggested retail price from $60,000 to $750,000 for motor coaches and from
$15,000 to $70,000 for towables.
Prior to March 1996, the Company's product line consisted exclusively of
High-Line Class A motor coaches (units with retail prices above $120,000). On
March 4, 1996 the Company acquired Holiday Rambler, a manufacturer of a full
line of towable products and mid to upper priced motor coaches. The Holiday
Acquisition more than doubled the Company's net sales, significantly
broadened the range of products the Company offered (including the Company's
first offerings of towables and entry-level to mid-range motor coaches) and
significantly lowered the price threshold for first-time buyers of the
Company's products, making them affordable for a significantly larger base of
potential customers.
The operations of Holiday Rambler were incorporated into the Company's
consolidated financial statements from March 4, 1996. Therefore, the
Company's consolidated financial statements for the first quarter of 1996
include only one month of Holiday Rambler operations while the first quarter
of 1997 includes three months of Holiday Rambler operations. Both 1996 and
1997 results contain other expenses related to the Holiday Acquisition,
primarily interest expense, the amortization of debt issuance costs, and
Holiday Acquisition goodwill.
RESULTS OF OPERATIONS
Quarter ended March 29, 1997 Compared to Quarter ended March 30, 1996
Net sales increased 75.9% to $109.0 million in the first quarter of 1997
compared to $62.0 million for the same period last year. The primary reason
for this increase was the inclusion in the 1997 period of three months of
Holiday Rambler operations compared to one month in the 1996 period. The
Company's overall unit sales more than doubled from 641 units in 1996 to
1,491 units in 1997 (excluding 98 units in 1997 and 193 units in 1996 that
were sold by the Company's Holiday World retail dealerships that were either
previously owned or not Holiday Rambler units). On a pro forma basis,
assuming the Company had acquired Holiday Rambler at the beginning of 1996,
wholesale sales dollars would have been up 7.4%, with motorized products up
4.1% and towables up 26.9%. The substantial increase in towable sales was
primarily due to sales of the Company's Alumascape model which was introduced
in the third quarter of 1996. The Company's average unit selling price
dropped to $71,684 in the first quarter of 1997 from $92,650 in the first
quarter of 1996. Due to the inclusion of Holiday Rambler's generally lower
priced products, the Company expects its overall average selling price to
remain less than $100,000.
-11-
Gross profit for the first quarter of 1997 increased to $15.0 million, up
$8.3 million from $6.7 million in 1996, and gross margin increased to 13.8%
in 1997 from 10.9% in 1996. Gross margin in the first quarter of 1996 was
limited by a $645,000 increase in cost of sales resulting from an inventory
write-up to fair value arising from the Holiday Acquisition. Without this
charge, gross margin in the first quarter of 1996 would have been 11.9%.
Gross margin in 1997 was slightly lower than expected due to a combination of
factors. The Company had abnormally high costs stemming from the ramp up of
production in the Coburg, Oregon plant from 8 to 10 units per week.
Additionally, the Company took some modest inventory write-downs in
anticipation of model changes coming up in the second quarter. One of the
Company's objectives continues to be to improve individual model gross
margins, primarily through additional purchasing and manufacturing synergies
anticipated to be derived from the Holiday Acquisition. The Company's overall
gross margin may fluctuate in future periods if the mix of products shifts
from higher to lower gross margin units or if the Company encounters
unexpected manufacturing difficulties or competitive pressures.
Selling, general, and administrative expenses increased from $4.7 million in
1996 to $9.5 million in the first quarter of 1997 and increased as a
percentage of net sales from 7.5% in 1996 to 8.7% in 1997. The increase in
selling, general, and administrative expenses in dollars and as a percentage
of net sales was primarily due to the inclusion of a full quarter of Holiday
Rambler operations in 1997 versus only one month in 1996. Holiday Rambler has
historically spent more for selling, general, and administrative expense as a
percentage of net sales than Monaco. The Company has reduced and plans to
continue lowering the level of spending by Holiday Rambler for selling,
general, and administrative expenses as a percentage of net sales. However,
the Company's overall selling, general, and administrative expenses as a
percentage of net sales is expected to remain higher than the level prior to
the Holiday Acquisition.
Amortization of goodwill was $159,000 in the first quarter of 1997 compared
to $129,000 in the same period of 1996. At March 29, 1997, goodwill, net of
accumulated amortization, was $21.0 million.
Operating income was $5.4 million in the first quarter of 1997, a $3.5
million increase over $1.9 million in the first quarter of 1996. The
improvement in the Company's gross margin was greater than the increase in
selling, general, and administrative expense as a percentage of net sales,
resulting in an increase in operating margin from 3.1% in the first quarter
of 1996 to 4.9% in the first quarter of 1997. The Company's operating margin
in the first quarter of 1996 was adversely affected by a $645,000 expense
related to an inventory write-up to fair value as a result of the Holiday
Acquisition. Without that charge, the Company's operating margin in the first
quarter of 1996 would have been 4.1%.
Net interest expense was $821,000 in the first quarter of 1997 compared to
$863,000 in the comparable 1996 period. The Company capitalized $146,000 of
interest expense in 1997 relating to the construction in progress for a new
motorized manufacturing facility in Wakarusa, Indiana, and capitalized
$34,000 of interest expense in 1996 stemming from the construction of the
Coburg, Oregon facility. The Company's interest expense included $153,000 in
1997 and $209,000 in 1996 relating to floor plan financing at the retail
stores. Additionally, 1997 first quarter interest expense included $103,000
related to the amortization of $2.1 million in debt issuance costs recorded
in conjunction with the Holiday Acquisition. These costs are being written
off over a five-year period.
The Company reported a provision for income taxes of $1.9 million, or an
effective tax rate of 41.5%, in the first quarter of 1997, compared to
$440,000, or an effective tax rate of 41%, for the comparable 1996 period.
Net income increased by $2.1 million from $634,000 in the first quarter of
1996 to $2.7 million in the first quarter of 1997, primarily due to the
increases in net sales and operating income resulting from the Holiday
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are internally generated cash from
operations and available borrowings under its credit facilities. During the
first quarter of 1997, the Company had a cash outflow of $6.8 million from
operations. An abnormally large increase in trade receivables, arising
primarily from a trade show in March, combined with payments that reduced
income taxes payable more than offset the $3.5 million generated from net
income and non-cash expenses such as depreciation and amortization, as well
as increases in accounts payable and accrued expenses. The increase in trade
receivables was temporary and the Company's trade receivable balance has
since returned to a more normal level.
-12-
The Company has credit facilities consisting of a term loan of $20.0 million
(the "Term Loan") and a revolving line of credit of up to $45.0 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 (no defined excess cash flow existed
for the year ended December 28, 1996); and (ii) a payment within two days of
the sale of any Holiday World dealership, of the net cash proceeds received
by the Company 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. At March 29, 1997, the effective interest rates on the Revolving Loans
and the Term Loan were 9.75% and 8.53%, respectively. The Revolving Loans are
due and payable in full on March 1, 2001, and require monthly interest
payments. As of March 29, 1997, $18.1 million was outstanding under the Term
Loan and $11.3 million was outstanding under the Revolving Loans. The Term
Loan and the Revolving Loans are collateralized by a security interest in all
of the assets of the Company and include various restrictions and financial
covenants. The Company also has various loans outstanding to finance retail
inventory at the two remaining Holiday World dealerships which amounted to
$4.2 million at March 29, 1997 and which bear interest at various rates based
on the prime rate and are collateralized by the assets of the Company.
The Company's principal working capital requirements are for purchases of
inventory and, to a lesser extent, financing of trade receivables. The
Company's dealers typically finance product purchases under wholesale floor
plan arrangements with third parties. At March 29, 1997, the Company had
working capital of approximately $1.8 million, a decrease of $2.7 million
from working capital of $4.5 million at December 28, 1996. The Company has
been using short-term credit facilities and cash flow to finance construction
of a new motorized manufacturing facility in Wakarusa, Indiana. The Company
primarily used long-term debt and redeemable preferred stock to finance the
Holiday Acquisition.
The Company's capital expenditures were $3.8 million in the first quarter of
1997, primarily for construction of the Wakarusa facility. This facility is
expected to double the Company's production capacity of motor coaches from 14
units to 28 units per day. The total cost of the Wakarusa facility is
estimated to be approximately $15.0 million, and the plant is expected to be
operational by the end of the second quarter of 1997.
The Company believes that cash flow from operations and funds available under
its credit facilities will be sufficient to meet the Company's liquidity
requirements for the next 12 months. The Company anticipates that capital
expenditures for all of 1997 will total from $17.0 to $20.0 million, of which
an estimated $10.0 million will be spent to finish construction of the
Wakarusa facility, $1.0 million will be used to set up a new towable
manufacturing facility in Springfield, Oregon, and up to $2.0 million will be
used to upgrade the Company's management information systems, including
software to handle the "Year 2000" issue. The Company may 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. The Company
may also from time to time seek to acquire businesses that would complement
the Company's current business, and any such acquisition could require
additional financing. 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 Holiday World dealerships, utilize wholesale
floor plan financing arrangements with third party lending institutions to
finance their purchases of the Company's products. Under the terms of these
floor plan arrangements, institutional lenders customarily require the
recreational vehicle 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
contingent obligations under these repurchase agreements are reduced by the
proceeds received upon the sale of any repurchased units. The Company's
obligations under these repurchase agreements vary from period to period. At
March 29, 1997, approximately $137.0 million of products sold by the Company
to independent dealers were subject to potential repurchase under existing
floor plan financing agreements with approximately 7.0% concentrated with one
dealer. If the Company were obligated to repurchase a significant number of
units under any repurchase agreement, its business, operating results and
financial condition could be adversely affected.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's net sales, gross
margin and operating results may fluctuate significantly from period to
period due to factors such as the mix of products sold, the ability to
utilize and expand manufacturing resources efficiently, the introduction and
consumer acceptance of new models offered by the Company, competition, the
addition or loss of dealers, the timing of trade shows and rallies, and
factors affecting the recreational vehicle industry as a whole. In addition,
the Company's overall gross margin on its products may decline in future
periods to the extent the Company increases its sales of lower gross margin
towable products or if the mix of motor coaches shifts to lower gross margin
units. Due to the relatively high selling prices of the Company's products
(in particular, its High-Line Class A motor coaches), a relatively small
variation in the number of recreational vehicles sold in any quarter can have
a significant effect on sales and operating results for that quarter. Demand
in the overall recreational vehicle industry generally declines during the
winter months, while sales and revenues are generally higher during the
spring and summer months. With the broader range of recreational vehicles now
offered by the Company as a result of the Holiday Acquisition, seasonal
factors could have a significant impact on the Company's operating results in
the future. In addition, unusually severe weather conditions in certain
markets could delay the timing of shipments from one quarter to another.
CYCLICALITY. The recreational vehicle industry has been characterized by
cycles of growth and contraction in consumer demand, reflecting prevailing
economic, demographic and political conditions that affect disposable income
for leisure-time activities. Unit sales of recreational vehicles (excluding
conversion vehicles) reached a peak of approximately 259,000 units in 1994
and declined to approximately 247,000 units in 1996. Although unit sales of
High-Line Class A motor coaches have increased in each year since 1989, there
can be no assurance that this trend will continue. Furthermore, as a result
of the Holiday Acquisition, the Company offers a much broader range of
recreational vehicle products and will likely be more susceptible to
recreational vehicle industry cyclicality than in the past. Factors affecting
cyclicality in the recreational vehicle industry include fuel availability
and fuel prices, prevailing interest rates, the level of discretionary
spending, the availability of credit and overall consumer confidence. In
particular, interest rates rose significantly in 1994 and while recent
interest rates have not had a material adverse effect on the Company's
business, no assurances can be given that an increase in interest rates would
not have a material adverse effect on the Company's business, results of
operations and financial condition.
MANAGEMENT OF GROWTH. As a result of the Holiday Acquisition, the Company
has experienced significant growth in the number of its employees, in the
size of its manufacturing operations and in the scope of its business. This
growth has resulted in the addition of new management personnel, increased
responsibilities for existing management personnel, and has placed added
pressure on the Company's operating, financial and management information
systems. While management believes it has substantially completed the
integration of Holiday Rambler's operations and personnel into the Company,
due to the large size of the Holiday Acquisition relative to the Company,
there can be no assurance that the Company will not encounter problems in the
future associated with the integration of Holiday Rambler's operations and
personnel or that the anticipated benefits of the Holiday Acquisition will be
fully realized. In addition, there can be no assurance that the Company will
adequately support and manage the growth of its business and the failure to
do so could have a material adverse effect on the Company's business, results
of operations and financial condition.
MANUFACTURING EXPANSION. The Company significantly increased its
manufacturing capacity in 1995 by expanding its Elkhart, Indiana facility and
opening its Coburg, Oregon facility. In order to meet market demand and
realize manufacturing efficiencies, the Company is constructing a new motor
coach manufacturing facility in Wakarusa, Indiana, is relocating its Elkhart,
Indiana motor coach production to the new Wakarusa facility, and recently
completed construction of the new Springfield, Oregon facility to manufacture
towables. The integration of the Company's facilities and the expansion of
the Company's manufacturing operations involve a number of risks including
unexpected production difficulties. In 1995, the Company experienced start-up
inefficiencies in manufacturing the Windsor model and, beginning in 1996, the
Company experienced difficulty in increasing production rates of motor
coaches at its Coburg facility. There can be no assurance that the Company
will successfully integrate its manufacturing facilities or that it will
achieve the anticipated benefits and efficiencies from its expanded
manufacturing operations. In addition, the Company's operating results could
be materially and adversely affected if sales of the Company's products do
not increase at a rate sufficient to offset the Company's increased expense
levels resulting from this expansion.
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The set-up and scale-up of production facilities in Wakarusa and Springfield
involve various risks and uncertainties, including timely performance of a
large number of contractors, subcontractors, suppliers and various government
agencies that regulate and license construction, each of which is beyond the
control of the Company. The set-up of the new facilities involves risks and
costs associated with the development and acquisition of new production
lines, molds and other machinery, the training of employees, and compliance
with environmental, health and safety and other regulatory requirements. The
inability of the Company to complete the set-up of its Wakarusa and
Springfield facilities and to commence full-scale commercial production in a
timely manner could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, at such time as
the Company commences production at these new facilities, it may from time to
time experience lower than anticipated yields or production constraints that
may adversely affect its ability to satisfy customer orders. Any prolonged
inability to satisfy customer demand could have a material adverse effect on
the Company's business, results of operations and financial condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS. Although the Company's products
were offered by more than 150 dealerships located primarily in the United
States and Canada as of March 29, 1997, a significant percentage of the
Company's sales have been and will continue to be concentrated among a
relatively small number of independent dealers. Although no single dealer
accounted for as much as 10% of the Company's net sales in 1996, the top
three dealers accounted for approximately 22.5% of the Company's net sales in
that period. The loss of a significant dealer or a substantial decrease in
sales by such a dealer could have a material adverse effect on the Company's
business, results of operations and financial condition.
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS. As is common in the
recreational vehicle industry, the Company enters into repurchase agreements
with the financing institutions used by its dealers to finance their
purchases. These agreements obligate the Company to repurchase a dealers'
inventory under certain circumstances in the event of a default by the dealer
to its lender. In 1993, the Company's then third largest dealer went into
default with its lenders, and the Company was required to repurchase 16 motor
coaches. Although the Company was able to resell these motor coaches within
three months, the Company incurred expenses of approximately $291,000 in
connection with this dealer's default. Additionally, the need to resell these
motor coaches and the loss of that dealer temporarily limited the Company's
sales of new motor coaches. If the Company were obligated to repurchase a
significant number of its products in the future, it could have a material
adverse effect on the Company's financial condition, business and results of
operations. The Company's contingent obligations under repurchase agreements
vary from period to period and totaled approximately $137.0 million as of
March 29, 1997, with approximately 7.0% concentrated with one dealer. See
"Liquidity and Capital Resources" and Note 10 of Notes to the Company's
Condensed Consolidated Financial Statements.
AVAILABILITY AND COST OF FUEL. An interruption in the supply or a
significant increase in the price or tax on the sale of diesel fuel or
gasoline on a regional or national basis could have a material adverse effect
on the Company's business, results of operations and financial condition.
Diesel fuel and gasoline have, at various times in the past, been difficult
to obtain, and there can be no assurance that the supply of diesel fuel or
gasoline will continue uninterrupted, that rationing will not be imposed, or
that the price of or tax on diesel fuel or gasoline will not significantly
increase in the future, any of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
DEPENDENCE ON CERTAIN SUPPLIERS. A number of important components for certain
of the Company's products are purchased from single or limited sources,
including its turbo diesel engines (Cummins Engine Company, Inc.),
substantially all of its transmissions (Allison Transmission Division of
General Motors Corporation), axles for all diesel motor coaches other than
the Holiday Rambler Endeavor Diesel model and chassis for certain of its
Holiday Rambler products (Chevrolet Motor Division of General Motors
Corporation, Ford Motor Company and Freightliner Custom Chassis Corporation).
The Company has no long term supply contracts with these suppliers or their
distributors, and there can be no assurance that these suppliers will be able
to meet the Company's future requirements for these components. Although the
Company believes that adequate alternative suppliers exist for each of these
components, an extended delay or interruption in the supply of any of the
components currently obtained from a single source supplier or limited
supplier could have a material adverse effect on the Company's business,
results of operations and financial condition.
-15-
NEW PRODUCT INTRODUCTIONS. The Company believes that the introduction of new
features and new models will be critical to its future success. Delays in the
introduction of new models or product features or a lack of market acceptance
of new models or features and/or quality problems with new models or features
could have a material adverse effect on the Company's business, results of
operations and financial condition. For example, in the third quarter of 1995
the Company incurred unexpected costs associated with three model changes
introduced in that quarter which adversely affected the Company's gross
margin. There also can be no assurance that product introductions in the
future will not divert revenues from existing models and adversely affect the
Company's business, results of operations and financial condition.
COMPETITION. The market for the Company's products is highly competitive.
The Company currently competes with a number of other manufacturers of motor
coaches, fifth wheel trailers and travel trailers, some of which have
significantly greater financial resources and more extensive marketing
capabilities than the Company. There can be no assurance that either existing
or new competitors will not develop products that are superior to, or that
achieve better consumer acceptance than, the Company's products, or that the
Company will continue to remain competitive.
RISK OF LITIGATION. The Company is subject to litigation arising in the
ordinary course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. In addition, as
a result of the Holiday Acquisition, the Company assumed most of the
liabilities of Holiday Rambler, including product liability and warranty
claims. Although the Company does not believe that the outcome of any pending
litigation, net of insurance coverage, will have a material adverse effect on
the business, results of operations or financial condition of the Company,
due to the inherent uncertainties associated with litigation, there can be no
assurance in this regard.
To date, the Company has been successful in obtaining product liability
insurance on terms the Company considers acceptable. The Company's current
policies jointly provide coverage against claims based on occurrences within
the policy periods up to a maximum of $26.0 million for each occurrence and
$27.0 million in the aggregate. There can be no assurance that the Company
will be able to obtain insurance coverage in the future at acceptable levels
or that the costs of insurance will be reasonable. Furthermore, successful
assertion against the Company of one or a series of large uninsured claims,
or of one or a series of claims exceeding any insurance coverage, could have
a material adverse effect on the Company's business, results of operations
and financial condition.
ENVIRONMENTAL REGULATION AND REMEDIATION
REGULATION. The Company's recreational vehicle manufacturing operations are
subject to a variety of federal and state environmental regulations relating
to the use, generation, storage, treatment and disposal of hazardous
materials. These laws are often revised and made more stringent, and it is
likely that future amendments to these laws will impact the Company's
operations.
The Company has submitted applications for "Title V" air permits for its
operations in Elkhart, Indiana, Nappanee, Indiana and Wakarusa, Indiana
(including the new motor coach production facility under construction) and is
in the process of preparing an application for its facility in Coburg,
Oregon. The Company has provided the relevant state agency with a schedule of
completion for the Coburg application, which will be filed after the
regulatory deadline, and the agency has indicated to the Company that the
schedule will be acceptable.
The Company does not currently anticipate that any additional air pollution
control equipment will be required as a condition of receiving new air
permits, although new regulations and their interpretation may change over
time, and there can be no assurance that additional expenditures will not be
required.
While the Company has in the past provided notice to the relevant state
agencies that air permit violations have occurred at its facilities, the
Company has resolved all such issues with those agencies, and the Company
believes that there are no ongoing violations of any of its existing air
permits at any of its owned or leased facilities at this time. However, the
failure of the Company to comply with present or future regulations could
subject the Company to: (i) fines; (ii) potential civil and criminal
liability; (iii) suspension of production or cessation of operations; (iv)
alterations to the manufacturing process; or (v) costly clean-up or capital
expenditures, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
-16-
REMEDIATION. The Company has identified petroleum and/or solvent ground
contamination at the Elkhart, Indiana manufacturing facility, at the
Wakarusa, Indiana manufacturing facility and the Leesburg, Florida dealership
acquired in the Holiday Acquisition. The Company has remediated the Elkhart
site and recommended to the relevant Indiana regulatory authority that no
further action be taken because the remaining contaminants are below the
state's clean-up standards. The Company currently expects that the regulatory
authority will concur with this finding, although there is no assurance that
such approval will be forthcoming or that the regulatory authority will not
require additional investigation and/or remediation. The Company is
investigating the Wakarusa site and expects soon to recommend to the relevant
regulatory authority that no further action be taken at that site based on
the Company's consultants' view that there is a limited risk associated with
the remaining contamination. It is unclear whether the regulatory authority
will concur in this finding or whether additional remediation will be
required. In Florida, the Company and its consultants are conducting
investigations to determine the appropriate remediation program to recommend
to the relevant Florida regulatory authority for the contamination associated
with former underground storage tanks at the Leesburg dealership. With regard
to the Wakarusa and Leesburg sites, the Company is indemnified by
Harley-Davidson for investigation and remediation costs incurred by the
Company (subject to a $300,000 deductible in the case of the Wakarusa site
and subject to a $10 million maximum in the case of the Wakarusa site and a
$5 million maximum in the case of the Leesburg site for matters, such as
these, that were identified at the closing of the Holiday Acquisition).
The Company does not believe that any costs it will bear with respect to
continued investigation or remediation of the foregoing locations and other
facilities currently or formerly owned or occupied by the Company will have a
material adverse effect upon the Company's business, results of operations or
financial condition. Nevertheless, there can be no assurance that the Company
will not discover additional environmental problems or that the cost to the
Company of the remediation activities will not exceed the Company's
expectations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is involved in legal proceedings arising in the ordinary course
of its business, including a variety of product liability and warranty
claims typical in the recreational vehicle industry. In addition, in
connection with the Holiday Acquisition, the Company assumed most of the
liabilities of that business, including product liability and warranty
claims. The company does not believe that the outcome of its pending legal
proceedings, in excess of insurance coverage and accruals recorded for
estimated settlements, will have a material adverse effect on the business,
financial condition or results of operations of the Company.
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
March 29, 1997, for which this report is filed.
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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: May 13, 1997 /s/ John W. Nepute
--------------------- -------------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
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