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: April 4, 1998
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from to
------------ ------------
Commission File Number: 0-22256
-------
MONACO COACH CORPORATION
35-1880244
Delaware (I.R.S. Employer
(State of Incorporation) Identification No.)
91320 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
April 4, 1998: 8,264,710
MONACO COACH CORPORATION
FORM 10-Q
APRIL 4, 1998
INDEX
Page
Reference
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of 4
January 3, 1998 and April 4, 1998.
Condensed Consolidated Statements of Income 5
for the quarter ended March 29, 1997 and
April 4, 1998.
Condensed Consolidated Statements of Cash 6
Flows for the quarter ended March 29, 1997
and April 4, 1998.
Notes to Condensed Consolidated Financial Statements. 7 - 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 9 - 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
SIGNATURES 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
JANUARY 3, APRIL 4,
1998 1998
---------- ----------
ASSETS
Current assets:
Trade receivables $ 25,309 $ 38,986
Inventories 45,421 50,990
Prepaid expenses 928 416
Deferred tax assets 8,222 9,013
Notes receivable 1,552 802
---------- -----------
Total current assets 81,432 100,207
Notes receivable 1,125 843
Property, plant and equipment, net 55,399 58,119
Debt issuance costs, net of accumulated amortization
of $755 and $862, respectively 1,358 1,251
Goodwill, net of accumulated amortization of $2,739
and $2,904, respectively 20,518 20,353
---------- -----------
Total assets $ 159,832 $ 180,773
---------- -----------
---------- -----------
LIABILITIES
Current liabilities:
Book overdraft $ 6,762 $ 8,165
Short-term borrowings 9,353 6,557
Current portion of long-term note payable 4,375 5,000
Accounts payable 23,498 37,954
Income taxes payable 1,005 3,737
Accrued expenses and other liabilities 26,027 27,337
---------- -----------
Total current liabilities 71,020 88,750
Note payable, less current portion 11,500 10,250
Deferred tax liability 2,564 2,651
---------- -----------
85,084 101,651
---------- -----------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 8,244,703 and 8,264,710 issued
and outstanding respectively 55 83
Additional paid-in capital 44,241 44,391
Retained earnings 30,452 34,648
---------- -----------
Total stockholders' equity 74,748 79,122
---------- -----------
Total liabilities and stockholders' equity $ 159,832 $ 180,773
---------- -----------
---------- -----------
See accompanying notes.
4
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
QUARTER ENDED
-------------------------
MARCH 29, APRIL 4,
1997 1998
---------- ----------
Net sales $ 109,024 $ 137,169
Cost of sales 93,990 118,822
---------- ----------
Gross profit 15,034 18,347
Selling, general and administrative expenses 9,484 10,564
Amortization of goodwill 159 165
---------- ----------
Operating income 5,391 7,618
Other expense (income), net (39) (55)
Interest expense 821 502
---------- ----------
Income before income taxes 4,609 7,171
Provision for income taxes 1,912 2,975
---------- ----------
Net income 2,697 4,196
Accretion of redeemable preferred stock (25)
---------- ----------
Net income attributable to
common stock $ 2,672 $ 4,196
---------- ----------
---------- ----------
Earnings per common share:
Basic $.40 $.51
Diluted $.38 $.50
Weighted average common shares outstanding:
Basic 6,653,554 8,253,928
Diluted 7,120,954 8,456,000
See accompanying notes.
5
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
QUARTER ENDED
-------------------------
MARCH 29, APRIL 3,
1997 1998
---------- ----------
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 2,697 $ 4,196
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 786 1,109
Deferred income taxes 84 (704)
Changes in working capital accounts:
Trade receivables (12,735) (13,677)
Inventories (611) (5,569)
Prepaid expenses 811 512
Accounts payable 4,104 14,456
Accrued expenses and other current liabilities 1,957 1,310
Income taxes payable (3,876) 2,732
---------- ----------
Net cash provided by operating activities (6,783) 4,365
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (3,780) (3,557)
Proceeds from sale of retail stores, collections on notes
receivable, net of closing costs 206 1,032
---------- ----------
Net cash (used) in investing activities (3,574) (2,525)
---------- ----------
Cash flows from financing activities:
Book overdraft 3,695 1,403
Borrowings (payments) on lines of credit, net 7,483 (2,796)
Borrowings (payments) on floor financing, net (468)
Payments on long-term notes payable (375) (625)
Issuance of common stock 22 178
---------- ----------
Net cash provided (used) by financing activities 10,357 (1,840)
---------- ----------
Net increase in cash 0 0
Cash at beginning of period 0 0
---------- ----------
Cash at end of period $ 0 $ 0
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest $ 146 $ 44
See accompanying notes.
6
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated 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, consisting only of normal recurring adjustments, to
present fairly the financial position of the Company as of January 3, 1998
and April 4, 1998, and the results of operations for the quarters ended
March 29, 1997 and April 4, 1998, and cash flows of the Company for the
quarters ended March 29, 1997 and April 4, 1998. The condensed
consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, and all significant intercompany accounts
and transactions have been eliminated in consolidation. The balance sheet
data as of January 3, 1998 was derived from audited financial statements,
but does not include all disclosures contained in the Company's Annual
Report to Stockholders. These interim condensed consolidated 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 January 3, 1998.
On March 16, 1998 the Board of Directors declared a 3-for-2 stock split in
the form of a 50% stock dividend on the Company's common stock, payable
April 16, 1998 to stockholders of record April 2, 1998. All share and per
share data, as appropriate, reflect this split. The effect of the split is
presented within stockholders' equity at April 4, 1998 by transferring the
par value for the additional shares issued of $27,549 from the additional
paid-in capital account to the common stock account.
2. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
The composition of inventory is as follows:
(IN THOUSANDS)
JANUARY 3, APRIL 4,
1998 1998
---------- ----------
Raw materials $ 20,826 $ 20,663
Work-in-process 20,212 23,420
Finished units 4,383 6,907
---------- ----------
$ 45,421 $ 50,990
---------- ----------
---------- ----------
3. GOODWILL
Goodwill, which represents the excess of the cost of acquisition over the
fair value of net assets acquired, is being amortized on a straight-line
basis over 20 and 40 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.
4. SHORT-TERM BORROWINGS
The Company has a bank line of credit consisting, in part, of a revolving
line of credit of up to $45.0 million, 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 0.375%.
Outstanding borrowings under the line of credit were $6.6 million at April
4, 1998. The revolving line of credit expires March 1, 2001 and is
collateralized by all the assets of the Company.
7
5. LONG-TERM BORROWINGS
The Company has a term loan of $15.3 million outstanding as of April 4,
1998. 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.
6. EARNINGS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standard (SFAS)
No. 128, "Earnings Per Share", and has disclosed per share information in
accordance with those standards. Basic earnings per common share is based
on the weighted average number of shares outstanding during the period and
net income attributable to common stock. Diluted earnings per common
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, and net income. The weighted average
number of common shares used in the computation of earnings per common
share are as follows:
MARCH 29, APRIL 4,
1997 1998
---------- ----------
BASIC
Issued and outstanding shares (weighted average) 6,653,554 8,253,928
EFFECT OF DILUTIVE SECURITIES
Stock Options 121,098 202,072
Convertible preferred stock 346,302
---------- ----------
DILUTED 7,120,954 8,456,000
---------- ----------
---------- ----------
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components of revenues, expenses, gains, and
losses; and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes standards for reporting
information about operating segments. The Company has adopted the
requirements of these statements for the first quarter of 1998.
8. 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. The Company
does not believe that the outcome of its pending legal proceedings will
have a material adverse effect on the business, financial condition, or
results of operations of the Company.
8
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 achievements 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 a broad line of motor coaches, fifth wheel trailers
and travel trailers under the "Monaco", "Holiday Rambler", and "McKenzie
Towables" 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 $900,000 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 acquisition
of Holiday Rambler (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 midrange
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 acquired operations were incorporated
into the Company's consolidated financial statements from March 4, 1996.
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 4, 1998 COMPARED TO QUARTER ENDED MARCH 29, 1997
First quarter net sales increased 25.8% to $137.2 million compared to $109.0
million for the same period last year. Motorized gross sales dollars were up
35.3% reflecting strong demand for the Company's motorized products combined
with expanded motorized production capacity that became available in Wakarusa,
Indiana last year. The Company's gross towable sales were off 4.6% as slow
retail sales of the Company's towable products led to reduced towable sales to
dealers in the first quarter. The Company's overall unit sales increased 10.5%
in the first quarter of 1998 (excluding 98 units in 1997 that were sold by the
Company's Holiday World retail dealerships that were either previously owned or
not Holiday Rambler units). Reflecting the stronger performance on the
motorized side of the Company's product offering, the Company's average unit
selling price increased in the first quarter of 1998 to $84,000 from $72,000 in
the first quarter of 1997. Due to the inclusion of Holiday Rambler's generally
lower priced products and the Company's expected introduction of new, less
expensive gasoline motor coach models later this year, the Company expects its
overall average selling price to remain less than $100,000.
Gross profit for the first quarter of 1998 increased to $18.3 million, up $3.3
million from $15.0 million in 1997, and gross margin decreased to 13.4% in 1998
from 13.8% in 1997. Gross margin in 1998 was dampened by lower gross margins in
the three towable plants due to lower production volumes in those plants. The
Company plans to consolidate its two Indiana-based towable plants into one
facility that the Company owns in Elkhart, Indiana. This will eliminate the
need for leased facilities currently being occupied in Wakarusa, Indiana. The
Company expects to complete this consolidation by the end of the third quarter
of 1998.
Selling, general, and administrative expenses increased by $1.1 million to $10.6
million in the first quarter of 1998 but decreased as a percentage of sales from
8.7% in 1997 to 7.7% in 1998. The decrease in selling, general, and
administrative expenses as a percentage of sales reflected efficiencies arising
from the Company's increased sales level as well as savings derived from
consolidation of Indiana-based office staff into recently completed office space
built in conjunction with the expansion of production facilities in Wakarusa,
Indiana.
9
Amortization of goodwill was $165,000 in the first quarter of 1998 compared to
$159,000 in the same period of 1997.
Operating income was $7.6 million in the first quarter of 1998, a 41.3%
increase over the $5.4 million in the similar 1997 period. The Company's
improvement in selling, general, and administrative expense as a percentage of
sales was greater than the decline in the Company's gross margin, resulting in
an improvement in operating margin to 5.6% in the first quarter of 1998
compared to 4.9% in the first quarter of 1997.
Net interest expense was $502,000 in the first quarter of 1998 compared to
$821,000 in the comparable 1997 period. The Company capitalized $44,000 of
interest expense in 1998 relating to the construction in progress in Indiana for
the recently completed paint facility and capitalized $146,000 of interest in
1997 related to the construction in progress for the new manufacturing facility
in Wakarusa, Indiana. The Company's interest expense included $153,000 in 1997
related to floor plan financing at the retail stores. Additionally, first
quarter interest expense in both years 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 $3.0 million in the first
quarter of 1998 compared to $1.9 million for the comparable 1997 period. Both
periods reflect an effective tax rate of 41.5%.
Net income increased by $1.5 million, or 55.6%, from $2.7 million in the first
quarter of 1997 to $4.2 million in 1998 due to the increase in sales combined
with an increase in operating margin and a decrease in interest expense.
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 three months of 1998, the Company had cash flow of $4.4 million from
operating activities. The Company generated $5.3 million from net income and
non-cash expenses such as depreciation and amortization. This amount was reduced
by increases in the levels of accounts receivable and inventory, caused by a
large volume of end of the quarter shipments and increased production levels in
the Coburg and Wakarusa motorized plants, which more than offset increases in
accounts payable and other accrued liabilities.
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 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 January 3, 1998); 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. While the Company
has sold all of the Holiday World dealerships, as of April 4, 1998, the
Company was still holding $1.6 million in notes receivable relating to the sales
of the stores which will fall under provision (ii) when payment is received.
At April 4, 1998, the balance on the Term Loan was $15.3 million with $14
million at an effective interest rate of 7.16% and $1.3 million at 8.50%. 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. As
of April 4, 1998, $6.6 million was outstanding under the Revolving Loans, with
an effective interest rate of 8.50%. 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 utilizes
"zero balance" bank disbursement accounts in which an advance on the line of
credit is automatically made for checks clearing each day. Since the balance of
the disbursement account at the bank returns to zero at the end of each day, a
book overdraft arises from the outstanding checks of the Company. These book
overdraft accounts are combined with the Company's positive cash balance
accounts to reflect a net book overdraft or a net cash balance for financial
reporting.
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 as described below. At April 4, 1998, the
Company had working capital of approximately $11.4 million, an increase of $1
million from working capital of $10.4 million at January 3, 1998. The Company
has been using short-term credit facilities and cash flow to finance its
construction of facilities and other capital expenditures.
10
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's capital expenditures were
$3.6 million in the first quarter of 1998, primarily for the completion of the
new Indiana paint facility. The Company anticipates that capital expenditures
for all of 1998 will total approximately $7.0 million. The Company's capital
expenditures are expected to be for computer system upgrades and various
smaller-scale plant expansion or remodeling projects as well as normal
replacement of outdated or worn-out equipment. 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 April 4, 1998, approximately $145.7 million of
products sold by the Company to independent dealers were subject to potential
repurchase under existing floor plan financing agreements with approximately
11.6% 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.
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 and recent new model introductions, 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.
11
MANAGEMENT OF GROWTH As a result of the Holiday Acquisition and the recent
expansion of its manufacturing facilities, the Company has experienced
significant growth in the number of its employees and the scope of its business.
This growth has resulted in the addition of new management personnel, increased
responsibilities for existing management personnel, and has placed added
pressure on the Company's operating, financial and management information
systems. While management believes it has been successful in managing this
expansion there can be no assurance that the Company will not encounter problems
in the future associated with the continued growth of the Company. Failure to
adequately support and manage the growth of its business could have a material
adverse effect on the Company's business, results of operations and financial
condition.
MANUFACTURING EXPANSION The Company significantly increased its manufacturing
capacity in 1995 by expanding its Elkhart, Indiana facility and opening its
Coburg, Oregon facility. In 1997, in order to meet market demand and realize
manufacturing efficiencies, the Company completed construction of a new motor
coach manufacturing facility in Wakarusa, Indiana, has relocated its Elkhart,
Indiana motor coach production to the new Wakarusa facility, and has opened a
Springfield, Oregon facility to manufacture towables. In the first quarter of
1998 the Company expects to begin a third line of production in its motorized
facility in Wakarusa, Indiana. By June 1998 the Company expects to consolidate
its existing Wakarusa, Indiana towable production with existing Elkhart, Indiana
towable production. 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.
The set-up of new models and scale-up of production facilities in Wakarusa,
Elkhart, 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 production for new
models involves risks and costs associated with the development and acquisition
of new production lines, molds and other machinery, the training of employees,
and compliance with environmental, health and safety and other regulatory
requirements. The inability of the Company to complete the scale-up of its
facilities and to commence full-scale commercial production in a timely manner
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the Company may from time to
time experience lower than anticipated yields or production constraints that may
adversely affect its ability to satisfy customer orders. Any prolonged inability
to satisfy customer demand could have a material adverse effect on the Company's
business, results of operations and financial condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS Although the Company's products were
offered by 208 dealerships located primarily in the United States and Canada at
the end of 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 10.0% of the
Company's net sales in 1997, the top two dealers accounted for approximately
15.0% 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 dealer's inventory under
certain circumstances in the event of a default by the dealer to its lender. If
the Company were obligated to repurchase a significant number of its products in
the future, it could have a material adverse effect on the Company's financial
condition, business and results of operations. The Company's contingent
obligations under repurchase agreements vary from period to period and totaled
approximately $145.7 million as of April 4, 1998, with approximately 11.6%
concentrated with one dealer. See "Liquidity and Capital Resources" and Note 8
of Notes to the Company's Condensed Consolidated Financial Statements.
12
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), substantially all of its transmissions
(Allison), axles for all diesel motor coaches other than the Holiday Rambler
Endeavor Diesel model and chassis for certain of its Holiday Rambler products
(Chevrolet, Ford and Freightliner). The Company has no long term supply
contracts with these suppliers or their distributors. Recently, Allison, put
all chassis manufacturers on allocation with respect to one of the transmissions
the Company uses. The Company believes that its allocation is sufficient to
enable the unit volume increases that are planned for models using that
transmission and does not foresee any operating difficulties with respect to
this issue. Nevertheless, there can be no assurance that Allison or any of the
other suppliers will be able to meet the Company's future requirements for
transmissions or other key components. An extended delay or interruption in the
supply of any components obtained from a single or limited source supplier could
have a material adverse effect on the Company's business, results of operations
and financial condition.
NEW PRODUCT INTRODUCTIONS The Company believes that the introduction of new
features and new models will be critical to its future success. Delays in the
introduction of new models or product features or a lack of market acceptance of
new models or features and/or quality problems with new models or features could
have a material adverse effect on the Company's business, results of operations
and financial condition. For example, 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.
RISKS OF LITIGATION The Company is subject to litigation arising in the
ordinary course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. Although the
Company does not believe that the outcome of any pending litigation, net of
insurance coverage, will have a material adverse effect on the business, results
of operations or financial condition of the Company, due to the inherent
uncertainties associated with litigation, there can be no assurance in this
regard.
To date, the Company has been successful in obtaining product liability
insurance on terms the Company considers acceptable. The Company's current
policies jointly provide coverage against claims based on occurrences within the
policy periods up to a maximum of $41.0 million for each occurrence and $42.0
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.
IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. To be
in "Year 2000 compliance" a computer program must be written using four digits
to define years. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
13
The Company is currently in the process of implementing "Year 2000 compliant"
software and hardware to upgrade the Company's management information systems at
all its locations. The Company spent approximately $700,000 on the
implementation in 1997 and expects to spend approximately $500,000 in 1998 to
complete these upgrades.
The Company has also begun evaluating significant suppliers, financial
institutions and customers to determine the extent to which the Company is
vulnerable to those third parties failing to remediate their own Year 2000
issues. While the Company currently expects that the Year 2000 will not pose
significant operational problems, delays in the implementation of the new
information systems, or a failure of its vendors, customers or financial
institutions to become Year 2000 compliant could have a material adverse effect
on the Company's business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
14
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 april 4, 1998, for which this report is filed.
15
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 19, 1998 /s/: John W. Nepute
----------------------- --------------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
16