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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: October 3, 1998
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from to
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Commission File Number: 0-22256
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MONACO COACH CORPORATION
35-1880244
Delaware (I.R.S. Employer
(State of Incorporation) Identification No.)
91320 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
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The number of shares outstanding of common stock, $.01 par value, as
of October 3, 1998: 8,312,764
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MONACO COACH CORPORATION
FORM 10-Q
OCTOBER 3, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION Reference
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of 4
January 3, 1998 and October 3, 1998.
Condensed Consolidated Statements of Income 5
for the quarters and nine month periods ended
September 27, 1997 and October 3, 1998.
Condensed Consolidated Statements of Cash 6
Flows for the nine month periods ended
September 27, 1997 and October 3, 1998.
Notes to Condensed Consolidated Financial Statements. 7 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10 - 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
JANUARY 3, OCTOBER 3,
1998 1998
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ASSETS
Current assets:
Trade receivables $ 25,309 $ 35,521
Inventories 45,421 67,635
Prepaid expenses 928 0
Deferred tax assets 8,222 11,045
Notes receivable 1,552 115
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Total current assets 81,432 114,316
Notes receivable 1,125 788
Property, plant and equipment, net 55,399 58,640
Debt issuance costs, net of accumulated amortization
of $755 and $1,076, respectively 1,358 1,037
Goodwill, net of accumulated amortization of $2,739
and $3,223, respectively 20,518 20,034
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Total assets $ 159,832 $ 194,815
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LIABILITIES
Current liabilities:
Book overdraft $ 6,762 $ 10,536
Short-term borrowings 9,353 6,399
Current portion of long-term note payable 4,375 5,000
Accounts payable 23,498 36,454
Income taxes payable 1,005 4,329
Accrued expenses and other liabilities 26,027 32,366
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Total current liabilities 71,020 95,084
Note payable, less current portion 11,500 6,650
Deferred tax liability 2,564 2,825
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85,084 104,559
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Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 8,244,703 and 8,312,764 issued
and outstanding respectively 55 83
Additional paid-in capital 44,241 44,721
Retained earnings 30,452 45,452
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Total stockholders' equity 74,748 90,256
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Total liabilities and stockholders' equity $ 159,832 $ 194,815
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See accompanying notes.
4
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
QUARTER ENDED NINE MONTHS ENDED
-------------------------------- ------------------------------
SEP 27, OCT 3, SEP 27, OCT 3,
1997 1998 1997 1998
--------------- --------------- ------------- ---------------
Net sales $ 105,796 $ 153,220 $ 320,801 $ 425,060
Cost of sales 91,712 131,891 277,354 367,255
----------- ----------- ----------- -----------
Gross profit 14,084 21,329 43,447 57,805
Selling, general and administrative expenses 8,564 10,402 26,877 30,804
Amortization of goodwill 159 165 477 484
----------- ----------- ----------- -----------
Operating income 5,361 10,762 16,093 26,517
Other expense (income), net (579) (549) (676) (680)
Interest expense 537 518 1,943 1,545
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Income before income taxes 5,403 10,793 14,826 25,652
Provision for income taxes 2,244 4,480 6,154 10,652
----------- ----------- ----------- -----------
Net income 3,159 6,313 8,672 15,000
Accretion of redeemable preferred stock (317)
----------- ----------- ----------- -----------
Net income attributable to
common stock $ 3,159 $ 6,313 $ 8,355 $ 15,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share:
Basic $ .38 $ .76 $ 1.15 $ 1.81
Diluted $ .38 $ .74 $ 1.14 $ 1.77
Weighted average common shares outstanding:
Basic 8,234,134 8,310,380 7,246,632 8,284,693
Diluted 8,391,709 8,478,931 7,603,234 8,471,585
See accompanying notes.
5
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
--------------------------------
SEP 27, OCT 3,
1997 1998
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INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 8,672 $ 15,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of retail stores (539)
Depreciation and amortization 2,556 3,591
Deferred income taxes (15) (2,562)
Changes in working capital accounts:
Trade receivables (14,962) (10,212)
Inventories 1,934 (22,214)
Prepaid expenses 1,129 928
Accounts payable 5,803 12,956
Accrued expenses and other current liabilities 2,986 6,339
Income taxes payable (6,626) 3,324
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Net cash provided by operating activities 938 7,150
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Cash flows from investing activities:
Additions to property, plant and equipment (14,312) (6,027)
Proceeds from sale of retail stores, collections on notes
receivable, net of closing costs 288 1,774
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Net cash used in investing activities (14,024) (4,253)
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Cash flows from financing activities:
Book overdraft 3,681 3,774
Borrowings (payments) on lines of credit, net (241) (2,954)
Borrowings (payments) on floor financing, net (4,650)
Payments on long-term notes payable (1,375) (4,225)
Issuance of common stock 16,326 508
Cost to issue shares of common stock (645)
Other (10)
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Net cash provided by (used in) financing activities 13,086 (2,897)
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Net change in cash 0 0
Cash at beginning of period 0 0
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Cash at end of period $ 0 $ 0
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SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest $ 554 $ 44
Conversion of preferred stock to common stock 3,000
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 October 3, 1998, and the results of operations for the quarters and
nine-month periods ended September 27, 1997 and October 3, 1998, and cash
flows of the Company for the nine-month periods ended September 27, 1997
and October 3, 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 consolidated financial statements and notes thereto
appearing in the Company's Annual Report to Stockholders for the year ended
January 3, 1998.
On November 2, 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
November 30, 1998 to stockholders of record November 16, 1998. Share and
per share data have not been restated for the stock split. If per share
amounts had been restated, diluted earnings per share would have been $0.25
and $0.76 for the quarter and nine-month period ended September 27, 1997,
respectively; and $0.50 and $1.18 for the quarter and nine-month period
ended October 3, 1998, respectively.
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, OCTOBER 3,
1998 1998
Raw materials $ 20,826 $ 35,581
Work-in-process 20,212 21,386
Finished units 4,383 10,668
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$ 45,421 $ 67,635
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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 $6.4 million at
October 3, 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 $11.7 million outstanding as of October 3,
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 and Diluted earnings per common
share and the corresponding weighted average number of common shares used
in the computation of earnings per common share are as follows:
(in thousands, except share and per share data)
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
SEPTEMBER 27, 1997 OCTOBER 3, 1998
---------------------------------- ---------------------------------
Net Per Net Per
Income Shares Share Income Shares Share
---------- -------- -------- --------- -------- -------
BASIC
Attributable to common stock $3,159 8,234,134 $0.38 $6,313 8,310,380 $0.76
EFFECT OF DILUTIVE SECURITIES
Stock options 157,575 168,551
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DILUTED $3,159 8,391,709 $0.38 $6,313 8,478,931 $0.74
------ --------- ------ ---------
------ --------- ------ ---------
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 27, 1997 OCTOBER 3, 1998
---------------------------------- ---------------------------------
Net Per Net Per
Income Shares Share Income Shares Share
---------- -------- -------- --------- -------- -------
BASIC
Attributable to common stock $8,355 7,246,632 $1.15 $15,000 8,284,693 $1.81
EFFECT OF DILUTIVE SECURITIES
Stock options 139,681 186,892
Convertible preferred stock 317 216,921
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DILUTED $8,672 7,603,234 $1.14 $15,000 8,471,585 $1.77
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7. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (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; SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes standards for reporting information
about operating segments; SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which establishes reporting of
pensions and other post-retirement benefits; and SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes
accounting for derivative instruments and hedging activities. The impact of
adopting these standards will have little or no effect on the Company's
accounting or reporting disclosures.
8
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.
9
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. Forward looking statements
include, but are not limited to, those items identified with a footnote (1)
symbol. 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.
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 3, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 27, 1997
Third quarter net sales increased 44.8% to $153.2 million compared to $105.8
million for the same period last year. Gross sales dollars on motorized
products were up 60.6%, reflecting strong demand for both the Company's new
and established motorized products combined with higher production rates in
both the Coburg, Oregon and Wakarusa, Indiana motorized plants. The Company's
gross towable sales were off 18.5% as production of towable units declined
from the prior year's third quarter due to the consolidation of the Company's
two towable lines into one line in Elkhart, Indiana. The year-to-year
comparison of third quarter net sales was positively affected by 13 weeks of
production in the third quarter of 1998 versus 12 weeks in the third quarter
of 1997. The Company's overall unit sales were up 29.7% in the third quarter
of 1998 (excluding 38 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 third quarter of 1998 to $88,000 from $78,000 in the
comparable 1997 quarter. The Company's recent introduction of two less
expensive gasoline motor coach models is likely to keep the overall average
selling price below $100,000(1).
Gross profit for the third quarter of 1998 increased to $21.3 million, up $7.2
million, from $14.1 million in the third quarter of 1997, and gross margin
increased to 13.9% from 13.3% in the third quarter of 1997. The improvement in
gross margin in the third quarter of 1998 reflects a strong mix of motorized
products as well as manufacturing efficiencies from the increase in production
in both motorized plants. Gross margin in the third quarter of 1997 was
adversely affected by discounting and write-downs of inventory prior to, and at
the sale of, the two remaining Holiday World retail dealerships. Absent such
factors, gross margin would have been 13.7% in the third quarter of 1997.
Selling, general, and administrative expenses increased by $1.8 million to
$10.4 million in the third quarter of 1998 but decreased as a percentage of
sales from 8.1% in 1997 to 6.8% 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 office space built in
conjunction with the expansion of production facilities in Wakarusa, Indiana.
Amortization of goodwill was $165,000 in the third quarter of 1998 compared to
$159,000 in the same period of 1997. At October 3, 1998, goodwill, net of
accumulated amortization, was $20.0 million.
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(1) Forward looking statement.
10
Operating income was $10.8 million in the third quarter of 1998, a $5.4
million, or 100.7% increase over the $5.4 million in the similar 1997 period.
The Company's reduction in selling, general, and administrative expense as a
percentage of sales combined with the increase in the Company's gross margin
resulted in an improvement in operating margin to 7.0% in the third quarter
of 1998 compared to 5.1% in the third quarter of 1997.
Net interest expense was $518,000 in the third quarter of 1998 compared to
$537,000 in the same 1997 period. The Company capitalized $167,000 of interest
expense in 1997 relating to the construction in progress at the now completed
manufacturing facility in Wakarusa, Indiana. The Company's interest expense
included $32,000 in the third quarter of 1997 related to floor plan financing at
the retail stores. Additionally, third 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 had other income of $523,000 in the third quarter of 1998 related to
insurance reimbursement of income loss from the fire at our Coburg manufacturing
plant in July of 1997. The impact was $306,000, net of tax, or 3.6 cents per
share. In the third quarter of 1997, the Company had other income from the sale
of its two remaining Holiday World retail dealerships which resulted in a pretax
gain on the sale of the buildings and fixed assets from the stores of $539,000.
The impact was $315,000, net of tax, or 3.8 cents per share.
The Company reported a provision for income taxes of $4.5 million, or an
effective tax rate of 41.5% in the third quarter of 1998, compared to $2.2
million, also an effective tax rate of 41.5% for the comparable 1997 period.
Net income increased by $3.1 million, or 99.8%, from $3.2 million in the third
quarter of 1997 to $6.3 million in 1998 due to the increase in net sales
combined with an increase in operating margin.
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27,
1997.
Net sales increased $104.3 million, or 32.5%, to $425.1 million, for the first
nine months of 1998, compared to the similar year earlier period. Gross sales
dollars on motorized products were up 44.1% for the first nine months of 1998,
while gross towable sales dollars were off 12.1% for the same period. Overall
unit sales for the Company were up 16.3% in the first nine months of 1998
compared to the similar period in 1997 (excluding 211 units in 1997 that were
sold by the Holiday World retail dealerships that were either previously owned
or not Holiday Rambler units). The Company's average unit selling price
increased in the first nine months of 1998 to $86,000 compared to $74,000 in the
first nine months of 1997, reflecting the strong showing of the Company's
motorized products.
Gross profit for the nine-month period ended October 3, 1998 was up $14.4
million to $57.8 million and gross margin increased slightly to 13.6% in 1998
from 13.5% in the same period in 1997. Gross margin for the first nine months of
1998 was aided by manufacturing efficiencies resulting from higher volume in
both motorized production facilities. This improvement was dampened by lower
gross margins in the three towable plants in the first half of 1998 due to
reduced production volumes in those plants and by costs incurred in the second
quarter of 1998 related to consolidation of the two Indiana-based towable plants
into one Company-owned facility in Elkhart, Indiana.
Selling, general, and administrative expenses increased by $3.9 million to $30.8
million in the first nine months of 1998 but decreased as a percentage of sales
from 8.4% in the first nine months of 1997 to 7.2% in the same period 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
office space built in conjunction with the expansion of production facilities in
Wakarusa, Indiana.
Amortization of goodwill was $484,000 in the first nine months of 1998 compared
to $478,000 in the same period of 1997.
Operating income was $26.5 million in the first nine months of 1998, a $10.4
million increase over the comparable period a year earlier. The Company's
improvement in selling, general, and administrative expense as a percentage of
sales combined with the slight increase in the Company's gross margin resulted
in an improvement in operating margin to 6.2% in the first nine months of 1998
compared to 5.0% in the similar 1997 period.
Net interest expense declined in the first nine months of 1998 to $1.5 million
from $1.9 million 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 now completed paint facility and capitalized $554,000 of interest
expense in the first nine months of 1997 as a result of the construction in
progress for the now completed Wakarusa, Indiana manufacturing facility.
11
The Company's interest expense included $281,000 in 1997 related to floor
plan financing at the retail stores. Additionally, second quarter interest
expense in both years included $321,000 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 $10.7 million, or an
effective tax rate of 41.5% for the first nine months of 1998, compared to $6.2
million, or an effective tax rate of 41.5% for the comparable 1997 period.
Net income increased to $15.0 million in the first nine months of 1998 from $8.7
million in the first nine months of 1997, primarily due to the increase in net
sales combined with an improvement 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 nine months of 1998, the Company had cash flows of $7.2 million from
operating activities. Net income and non-cash expenses, such as depreciation and
amortization, generated $18.6 million. Additionally, increases in accounts
payable and accrued expenses generated another $19.3 million. However, the
combination was partially offset by increases in accounts receivable and
inventories resulting from the Company's increased production and sales levels.
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 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 October 3, 1998, the Company was still holding $903,000 in
notes receivable relating to the sales of the stores which will fall under
provision (ii) when payment is received. At October 3, 1998, the balance on the
Term Loan was $11.7 million, with $11.0 million at an effective interest rate of
7.0% and $650,000 at 8.25%. 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 October 3, 1998, $6.4 million was outstanding
under the Revolving Loans, with an effective interest rate of 8.25%. 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 October 3, 1998, the
Company had working capital of approximately $19.2 million, an increase of $8.8
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.
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(1). The Company's capital expenditures were
$6.0 million in the first nine months 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 $12.0 million(1). The
Company recently announced plans to expand its Coburg, Oregon manufacturing
facilities. The Company is increasing capacity on its existing high-end diesel
line from 3 to 4 units per day. Additionally, the Company will build a separate
manufacturing facility designed to build up to 12 gasoline motor homes per day
to provide
- - --------------------------
(1) Forward looking statement.
12
additional capacity to build its gasoline motor home models which are
currently built exclusively in Wakarusa, Indiana. The Company expects to
spend approximately $15 to $16 million to complete these two projects,
including the cost of the land, with approximately $5 million of that to be
spent in the fourth quarter of 1998(1). The remaining capital expenditures for
1998 and 1999 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 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
October 3, 1998, approximately $160.1 million of products sold by the Company to
independent dealers were subject to potential repurchase under existing floor
plan financing agreements with approximately 8.7% 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. 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
recent new model introductions, the Company now 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, a decline
in consumer confidence and/or a slowing of the overall economy has had a
material adverse effect on the recreational vehicle market in the past and no
assurances can be given that the reoccurrence of these conditions would not have
a material adverse effect on the Company's business, results of operations and
financial condition.
MANAGEMENT OF GROWTH Over the past three years 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
- - --------------------------
(1) Forward looking statement.
13
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 has significantly increased its
manufacturing capacity over the last few years and has recently announced
plans for additional expansion of manufacturing facilities. The expansion of
the Company's manufacturing operations involve a number of risks including
unexpected building and production difficulties. In the past the Company
experienced start-up inefficiencies in manufacturing a new model and also has
experienced difficulty in increasing production rates at a plant.
The set-up of new models and scale-up of production facilities involve various
risks and uncertainties, including timely performance by 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 238 dealerships located primarily in the United States and Canada at
the end of the third quarter of 1998, 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 three dealers accounted for
approximately 19.5% 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 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 $160.1 million as of October 3, 1998, with approximately 8.7%
concentrated with one dealer. See "Liquidity and Capital Resources" and Note 8
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), 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. Allison continues to have
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.
14
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 just over a
year, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Without upgrades,
computer systems could fail or miscalculate causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company has identified its Year 2000 risk in four categories: internal
computer hardware infrastructure, application software (including a combination
of "canned" software applications and internally written or modified
applications for both financial and non-financial uses), imbedded chip
technology, and third-party suppliers and customers.
The Company's Year 2000 risk project phases consist of assessment of potential
year 2000 related problems, development of strategies to mitigate those
problems, remediation of the affected systems, and internal certification that
the process is complete through documentation and testing of remediation
efforts. None of the Company's other information technology (IT) projects has
been delayed due to the implementation of the Year 2000 Project.
INTERNAL COMPUTER HARDWARE INFRASTRUCTURE
During the Company's acquisition of Holiday Rambler in 1996, the Company
decided not to purchase the existing hardware or software that was being used
by that operation. Instead, the Company decided to convert the operation to a
client/server based hardware configuration which is Year 2000 compliant.
Following the conversion in the Wakarusa facilities to the new hardware
configurations during 1996, the Company has continued to upgrade the hardware
infrastructure at all other Company facilities in Indiana and Oregon. The
upgrading of computer hardware is on schedule and the Company estimates that
approximately 90 percent of these upgrades had been completed by
15
October 3, 1998. The certification and testing phase is ongoing as affected
components are remediated and upgraded. All hardware infrastructure
activities are expected to be completed by the end of the second quarter of
1999(1).
APPLICATION SOFTWARE
As part of the system conversion in Wakarusa in 1996, the Company decided to
convert company-wide to a fully integrated financial and manufacturing
application called Intergy, purchased from PowerCerv. The Intergy
implementation, which is expected to make approximately 90 percent of the
Company's business application software Year 2000 compliant, is scheduled for
company-wide completion during the second quarter of 1999. Implementation of
Intergy is behind the original schedule; however, the software conversion was
approximately 80 percent complete at October 3, 1998 and full implementation is
still expected by mid-1999(1). Other application software that the Company
uses is in the remediation phase which is being accomplished through vendor
software replacements or upgrades. These application upgrades are
approximately 85% complete and are expected to be completed by the end of the
first quarter of 1999(1). The certification and testing phase of all
application software is ongoing and is expected to be complete by mid-1999(1).
IMBEDDED CHIP TECHNOLOGY
Year 2000 risk does exist among other types of machinery and equipment that
use imbedded computer chips or processors. For example: phone systems,
elevators, security alarm systems, or other diagnostic equipment may contain
computer chips that rely on date information to function properly. The
Company will begin the assessment phase of this category during fourth
quarter of 1998 which is on schedule with its Year 2000 project timeline. The
Company does not expect that a significant amount of equipment used by the
Company will be found to have Year 2000 problems that will require extensive
remediation efforts or contingency plans(1). All phases of this category are
scheduled to be completed in the second quarter of 1999.
THIRD-PARTY SUPPLIERS AND CUSTOMERS
The third-party suppliers and customers category includes completing all phases
of the Year 2000 project using a prioritized list of third-parties most critical
to the Company's operations and communicating with them about their plans and
progress toward addressing the Year 2000 problem. The most significant
third-party relationships and dependencies exist with financial institutions,
along with suppliers of materials, communication services, utilities, and
supplies. The Company is currently on schedule within this category in the phase
of assessing the most critical third-parties' state of readiness for Year 2000.
These assessments will be followed by development of strategies and contingency
plans, with completion scheduled for mid-1999. Less critical third-party
dependencies will be in the assessment phase in the fourth quarter of 1998 with
contingency planning scheduled for completion by the latter part of 1999.
COSTS
From the time the Company began its hardware infrastructure and application
software upgrades in 1996, the Company has spent approximately $1,100,000
through October 3, 1998 and expects to spend a total of approximately
$250,000 in the future to complete upgrades in these categories(1). No
significant costs have been incurred in the categories of imbedded chip
technology and third-party suppliers and customers. Total future costs
related to these two categories are estimated to be less than $200,000(1).
RISKS
Although the Company expects its Year 2000 project to reduce the risk of
business interruptions due to the Year 2000 problem, there can be no
assurance that these results will be achieved. Failure to correct a Year 2000
problem could result in an interruption in, or failure of, certain normal
business activities or operations. Factors that give rise to uncertainty
include failure to identify all susceptible systems, failure by third parties
to address the Year 2000 problem whose systems or products, directly or
indirectly, are depended on by the Company, loss of personnel resources
within the Company to complete the Year 2000 project, or other similar
uncertainties. Based on an assessment of the Company's current state of
readiness with respect to the Year 2000 problem the Company believes that the
most reasonably likely worst case scenario would involve the noncompliance of
one or more of the Company's third-party financial institutions or key
suppliers. Such an event could result in a material disruption to the
Company's operations. Specifically, the Company could experience an
interruption in its ability to collect from dealer finance companies, process
payments to suppliers, and receive key material components from suppliers
thus slowing or interrupting the production process. If such a scenario were
to occur it could, depending on its duration, have a material impact on the
Company's business, results of operations, financial condition and cash flows.
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(1) Forward looking statement.
16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the
quarter ended October 3, 1998, for which this report is filed.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONACO COACH CORPORATION
Dated: November 17, 1998 /s/: John W. Nepute
---------------------- --------------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
18