<PAGE>
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: JUNE 28, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from __________________ to _____________
Commission File Number: 0-22256
MONACO COACH CORPORATION
Delaware 35-1880244
(State of Incorporation) (I.R.S. Employer
Identification No.)
91320 Industrial Way
Coburg, Oregon 97408
(Address of principal executive offices)
Registrant's telephone number, including area code (541) 686-8011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of common stock, $.01 par value, as of
June 28, 1997: 5,481,699
<PAGE>
MONACO COACH CORPORATION
FORM 10-Q
JUNE 28, 1997
INDEX
PAGE
PART I - FINANCIAL INFORMATION REFERENCE
----------
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of 4
December 28, 1996 and June 28, 1997.
Condensed Consolidated Statements of Income 5
for the quarter ended June 29, 1996 and
June 28, 1997 and for the six months ended
June 29, 1996 and June 28, 1997.
Condensed Consolidated Statements of Cash 6
Flows for the six months ended June 29, 1996
and June 28, 1997.
Notes to Condensed Consolidated Financial Statements. 7 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 12 - 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 21
SIGNATURES 22
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
DECEMBER 28, JUNE 28,
1996 1997
------------- --------
ASSETS
Current assets:
Trade receivables $ 14,891 $ 23,230
Inventories 46,930 50,585
Prepaid expenses 1,343 965
Deferred tax assets 8,278 8,978
Notes receivable 1,064 177
Assets held for sale 1,383 908
--------- ---------
Total current assets 73,889 84,843
Notes receivable 636 2,058
Debt issuance costs, net of accumulated
amortization of $343 and $549, respectively 1,760 1,565
Property, plant and equipment, net 38,309 46,356
Goodwill, net of accumulated amortization of
$2,084 and $2,408, respectively 20,774 20,849
--------- ---------
Total assets $ 135,368 $ 155,671
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Book overdraft $ 2,455 $ 2,892
Short-term borrowings 9,991 4,456
Current portion of long-term note payable 2,000 2,500
Accounts payable 24,218 31,524
Accrued expenses and other liabilities 23,361 27,073
Income taxes payable 7,362 1,056
--------- ---------
Total current liabilities 69,387 69,501
Deferred income 200 200
Notes payable, less current portion 16,500 15,250
Deferred tax liability 2,787 3,180
--------- ---------
88,874 88,131
--------- ---------
Redeemable convertible preferred stock,
redemption value of $3,005 2,687
--------- ---------
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 5,481,699 shares (4,430,467 shares
at December 28, 1996) issued and outstanding 44 55
Additional paid-in capital 25,430 44,000
Retained earnings 18,333 23,485
--------- ---------
Total stockholders' equity 43,807 67,540
--------- ---------
Total liabilities and stockholders' equity $ 135,368 $ 155,671
--------- ---------
--------- ---------
See accompanying notes.
4
<PAGE>
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 29, JUNE 28, JUNE 29, JUNE 28,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 106,729 $ 105,981 $ 168,694 $ 215,005
Cost of sales 94,321 91,652 149,558 185,630
---------- ---------- ---------- ----------
Gross profit 12,408 14,329 19,136 29,375
Selling, general and administrative expenses 9,277 8,811 13,927 18,292
Management fees 18 18 36 36
Amortization of goodwill 179 159 309 319
---------- ---------- ---------- ----------
Operating income 2,934 5,341 4,864 10,728
Other expense (income), net 11 (58) 3 (97)
Interest expense 1,362 585 2,226 1,408
---------- ---------- ---------- ----------
Income before income taxes 1,561 4,814 2,635 9,417
Provision for income taxes 670 1,998 1,110 3,907
---------- ---------- ---------- ----------
Net income 891 2,816 1,525 5,510
Preferred stock dividends (38) (18) (50) (41)
Accretion of redeemable preferred stock (25) (292) (33) (317)
---------- ---------- ---------- ----------
Net income attributable to
common stock $ 828 $ 2,506 $ 1,442 $ 5,152
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share:
Primary $.19 $.54 $.32 $1.12
Fully diluted (see note 7) $.19 $.58 $.33 $1.14
Weighted average common shares outstanding:
Primary 4,472,357 4,661,323 4,469,130 4,588,769
Fully diluted 4,703,043 4,882,348 4,621,549 4,828,931
</TABLE>
See accompanying notes.
5
<PAGE>
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 29, JUNE 28,
1996 1997
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 1,525 $ 5,510
Adjustments to reconcile net income to net cash
generated (used) by operating activities:
Depreciation and amortization 1,489 1,566
Deferred income taxes 168 (307)
Changes in working capital accounts, net of effect
of business acquisition and sale of retail stores:
Trade receivables (4,457) (8,323)
Inventories 13,659 (5,947)
Prepaid expenses (342) 378
Accounts payable 873 7,306
Accrued expenses and other current liabilities 3,305 3,502
Income taxes payable (128) (6,306)
-------- ---------
Net cash provided by (used in) operating activities 16,092 (2,621)
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (726) (9,105)
Payment for business acquisition (see note 2) (23,177)
Proceeds from sale of retail stores, collections on notes
receivable, net of closing costs 3,213 241
-------- ---------
Net cash used in investing activities (20,690) (8,864)
-------- ---------
Cash flows from financing activities:
Book overdraft (516) 437
Payments on lines of credit, net (3,968) (3,789)
Payments on subordinated note (1,277)
Advances (payments) on floor financing, net 1,089 (194)
Borrowings on long-term notes payable 20,000
Debt issuance costs (2,024)
Payments on long-term notes payable (7,000) (750)
Issuance of common stock 16,181
Cost to issue shares of common stock (390)
Other 42 (10)
-------- ---------
Net cash provided by financing activities 6,346 11,485
-------- ---------
Net increase in cash 1,748 0
Cash at beginning of period 0 0
-------- ---------
Cash at end of period $ 1,748 $ 0
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest $ 136 $ 387
Conversion of preferred stock to common stock 3,000
</TABLE>
See accompanying notes.
6
<PAGE>
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 December 28, 1996 and June 28, 1997, and the results of
operations for the quarters and six-month periods ended June 29, 1996 and
June 28, 1997, and cash flows of the Company for the six-month periods
ended June 29, 1996 and June 28, 1997. The condensed consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiary, and all significant intercompany accounts and
transactions have been eliminated in consolidation. The balance sheet
data as of December 28, 1996 was derived from audited financial
statements, but do 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 December 28, 1996.
2. HOLIDAY ACQUISITION
On March 4, 1996, the Company acquired certain assets of the Holiday
Rambler LLC Recreational Vehicle Manufacturing Division ("Holiday
Rambler") and ten retail dealerships ("Holiday World") from an affiliate
of Harley-Davidson, Inc. ("Harley-Davidson"). The acquisition (the
"Holiday Acquisition") was accounted for as a purchase.
The purchase price for Holiday Rambler and Holiday World was comprised of:
(IN THOUSANDS)
Cash, including transaction costs of $2,131,
net of $836 received from Harley-Davidson $ 24,645
Preferred stock 2,599
Subordinated debt 12,000
----------
$ 39,244
----------
----------
The purchase price was allocated to the assets acquired based on estimated fair
values at March 4, 1996, as follows:
(IN THOUSANDS)
Receivables $ 9,536
Inventories 61,269
Property and equipment 11,592
Prepaids and other assets 86
Assets held for sale 7,100
Goodwill 2,560
Notes payable (21,784)
Accounts payable (16,851)
Accrued liabilities (14,264)
-----------
$ 39,244
-----------
-----------
The allocation of the purchase price and the related goodwill was subject to
adjustment upon resolution of pre-Holiday Acquisition contingencies. The
effects of resolution of pre-Holiday Acquisition contingencies occurring: (i)
within one year of the acquisition date were reflected as an adjustment of
the allocation of the purchase price and of goodwill, and (ii) after one year
will be recognized in the determination of net income.
7
<PAGE>
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
2. HOLIDAY ACQUISITION (CONTINUED)
The ten acquired Holiday World retail store properties were classified as
"assets held for sale". Seven of the stores were sold during 1996 at a
gain of $1,402,000, which has been reflected as an adjustment of
goodwill. One store was sold during the first quarter of 1997 at a loss
of $399,000, which also has adjusted goodwill. The remaining two stores
are still held for sale. The Company's results of operations and cash
flows include Holiday World since March 4, 1996, as the operating
activities of Holiday World are not clearly distinguishable from other
continuing operations. Net sales of Holiday World stores subsequent to
the purchase and included in the six months ended June 29, 1996 and June
28, 1997 were $16.3 million and $4.5 million, respectively.
The following unaudited pro forma information presents the consolidated
results as if the Holiday Acquisition had occurred at the beginning of
1996 and giving effect to the adjustments for the related interest on
financing the purchase price, goodwill and depreciation. The pro forma
information does not necessarily reflect actual results that would have
occurred nor is it necessarily indicative of future operating results.
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
SIX MONTHS ENDED
JUNE 29,
1996
-----------------
Net sales $ 222,495
Net loss 158
Loss per common share 0.03
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or
market. The composition of inventory is as follows:
(IN THOUSANDS)
DECEMBER 28, JUNE 28,
1996 1997
------------ -----------
Raw materials $ 16,844 $ 20,354
Work-in-process 17,592 18,977
Finished units 3,998 5,686
Holiday World retail inventory 8,496 5,568
------------ -----------
$ 46,930 $ 50,585
------------ -----------
------------ -----------
4. GOODWILL
Goodwill represents the excess of the cost of acquisition over the fair
value of net assets acquired. The goodwill arising from the acquisition
of the assets and operations of the Company's Predecessor in March 1993
is being amortized on a straight-line basis over 40 years and, at June
28, 1997, the unamortized amount was $18.4 million. The goodwill arising
from the Holiday Acquisition is being amortized on a straight-line basis
over 20 years; at June 28, 1997 the unamortized amount was $2.4 million.
Management assesses whether there has been permanent impairment in the
value of goodwill and the amount of such impairment by comparing
anticipated undiscounted future cash flows from operating activities with
the carrying value of the goodwill. The factors considered by management
in performing this assessment include current operating results, trends
and prospects, as well as the effects of obsolescence, demand,
competition and other economic factors.
8
<PAGE>
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
5. SHORT-TERM BORROWINGS
In connection with the Holiday Acquisition, the Company replaced its bank
line of credit with new credit facilities consisting, in part, of a
revolving line of credit of up to $45,000,000, with interest payable
monthly at varying rates based on the Company's interest coverage ratio
and interest payable monthly on the unused available portion of the line
at 0.5%. There were no outstanding borrowings at June 28, 1997. The
revolving line of credit expires March 1, 2001 and is collateralized by
all the assets of the Company. The Holiday World subsidiary has various
loans outstanding to finance retail inventory at the dealerships which
amounted to approximately $4,456,000 at June 28, 1997, which bear
interest at various rates based on the prime rate and are collateralized
by the assets of the subsidiary.
6. LONG-TERM BORROWINGS
The Company has a term loan of $17,750,000 outstanding as of June 28,
1997 which was obtained in connection with the Holiday Acquisition. The
term loan bears interest at various rates based on the Company's interest
coverage ratio, and expires on March 1, 2001. The term loan requires
monthly interest payments, quarterly principal payments and certain
mandatory prepayments, and is collateralized by all the assets of the
Company.
7. EARNINGS PER COMMON SHARE
Earnings per share is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect
of stock options and convertible preferred stock. Common shares issued
and options granted by the Company are considered outstanding for the
period presented, using the treasury stock method. The weighted average
number of common shares used in the computation of earnings per common
share are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------------------
JUNE 29, JUNE 28,
1996 1997
----------------------------- ----------------------------
Primary Fully Diluted Primary Fully Diluted
----------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Issued and outstanding (weighted average) 4,416,751 4,416,751 4,501,921 4,501,921
Stock options 52,379 56,473 86,848 110,140
Convertible preferred stock 148,325 216,870
----------- -------------- ------------ -------------
4,469,130 4,621,549 4,588,769 4,828,931
----------- -------------- ------------ -------------
----------- -------------- ------------ -------------
</TABLE>
Fully diluted earnings per share for the quarter and year to date ended
June 28, 1997 were greater than primary earnings per share by $.04 and
$.02 per share respectively. The antidilutive effect was caused
principally by the conversion of all shares of preferred stock to shares
of common stock during the second quarter, which required all remaining
accretion related to preferred stock share to be charged against retained
earnings.
9
<PAGE>
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
8. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share",
which is required to be adopted for periods ending after December 15,
1997. The following table presents unaudited pro forma earnings per
share, calculated in accordance with the provisions of this new standard:
QUARTER ENDED SIX MONTHS ENDED
----------------------------------------------------------
JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997
------------- ------------- ------------- -------------
Basic $.19 $.55 $.32 $1.14
Diluted $.19 $.55 $.32 $1.14
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting of Comprehensive Income, which establishes standards
for reporting and display of comprehensive income and its components of
revenues, expenses, gains, and losses.
In June of 1997, the FASB also issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement
establishes standards for reporting information about operating segments.
Both SFAS No. 130 Reporting of Comprehensive Income, and SFAS No. 131
Disclosures about Segments of an Enterprise and Related Information, are
effective for periods beginning after December 15, 1997. The Company
will be adopting the requirements of these statements in the first
quarter of 1998.
9. COMMITMENTS AND CONTINGENCIES
REPURCHASE AGREEMENTS
Substantially all of the Company's sales to independent dealers are made
on terms requiring cash on delivery. The Company does not finance dealer
purchases. However, most dealers are financed on a "floor plan" basis by
a bank or finance company which lends the dealer all or substantially all
of the wholesale purchase price and retains a security interest in the
vehicles. Upon request of a lending institution financing a dealer's
purchases of the Company's product, the Company will execute a repurchase
agreement. These agreements provide that, for up to 18 months after a
unit is shipped, the Company will repurchase a dealer's inventory in the
event of default by a dealer to its lender.
The Company's liability under repurchase agreements is limited to the
unpaid balance owed to the lending institution by reason of its extending
credit to the dealer to purchase its vehicles. The Company does not
anticipate any significant losses will be incurred under these agreements
in the foreseeable future.
LITIGATION
The Company is involved in legal proceedings arising in the ordinary
course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. In
addition, in connection with the Holiday Acquisition, the Company assumed
most of the liabilities of that business, including product liability and
warranty claims. The Company does not believe that the outcome of its
pending legal proceedings will have a material adverse effect on the
business, financial condition, or results of operations of the Company.
OTHER COMMITMENTS
In 1996, the Company began construction of the manufacturing facility in
Wakarusa, Indiana. The main plant was operational at the end of second
quarter 1997 and the offices are expected to be completed in third
quarter 1997 at a total estimated cost of approximately $15 million. At
June 28, 1997, the Company had incurred approximately $11.8 million in
expenditures related to construction in progress on the facility.
10. SUBSEQUENT EVENT
Subsequent to June 28, 1997, the Company suffered a fire in one of the
buildings at its manufacturing facilities in Coburg, Oregon. The plant
itself was not significantly damaged and normal operations resumed the
following week. The Company believes it has adequate insurance coverage
for the loss.
10
<PAGE>
MONACO COACH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
11. STOCK OFFERING
On June 17, 1997, the Company completed a secondary public offering of
800,000 new shares of its common stock. In connection with the offering,
65,217 shares of preferred stock were converted to 230,767 shares of
common stock. The net proceeds of $15.4 million were used to reduce
amounts outstanding under short-term borrowings with the remainder being
added to working capital.
11
<PAGE>
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 ten models of motor coaches and seven
models of 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 $750,000
for motor coaches and from $15,000 to $70,000 for towables.
Prior to March 1996, the Company's product line consisted exclusively of
High-Line Class A motor coaches (units with retail prices above $120,000).
On March 4, 1996, the Company acquired Holiday Rambler, a manufacturer of a
full line of Class A motor coaches and towables. 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. Therefore, the Company's
consolidated financial statements for the first half of 1996 include only
four months of Holiday Rambler operations while the first half of 1997
includes a full six months of Holiday Rambler results. Both 1996 and 1997
results contain expenses related to the Holiday Acquisition, primarily
interest expense, and the amortization of debt issuance costs and of Holiday
Acquisition goodwill.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 28, 1997 COMPARED TO QUARTER ENDED JUNE 29, 1996
Net sales for the second quarter of 1997 were basically even with the same
period in 1996 at $106.0 million versus $106.7 million. However, 1996 sales
included $11.3 million of previously-owned or non-Holiday Rambler unit sales
at the Holiday World retail dealerships versus only $2.6 million in 1997 due
to the sale of 8 of the 10 Holiday World retail stores subsequent to June
29, 1996. Excluding the sales of the previously-owned or non-Holiday Rambler
products at the retail dealerships, net sales in the second quarter of 1997
would have been up 8.3%. The Company's overall unit sales were up 3.3% in
the second quarter of 1997 (excluding 75 units in 1997 and 391 units in 1996
that were sold by the Company's Holiday World retail dealerships that were
either previously-owned or non-Holiday Rambler units). On a wholesale basis
sales were up 9.4%, with motorized products up 10.9% and towable products
level with those in the prior period. The Company's average unit selling
price increased to $74,000 in the second quarter of 1997 from $69,000 in the
second quarter of 1996 primarily due to the strong performance on the
motorized side of the Company's product offering. Due to the inclusion of
Holiday Rambler's generally lower priced products in the sales mix, the
Company expects its overall average selling price to remain less than
$100,000.
12
<PAGE>
Gross profit for the second quarter of 1997 increased to $14.3 million, up
$1.9 million from $12.4 million in 1996, and gross margin increased to 13.5%
in 1997 from 11.6% in 1996. Gross margin in the second quarter of 1996 was
limited by a $1.1 million increase in cost of sales resulting from an
inventory write-up to fair value arising from the Holiday Acquisition.
Without this charge, gross margin in the second quarter of 1996 would have
been 12.7% of sales. Gross margin in the second quarter of 1997 was dampened
slightly by costs associated with the startup of the Springfield, Oregon
towables plant and costs related to model changeovers in all of the other
plants. Excluding the expenses relating to the startup in Springfield,
Oregon, gross margin would have been 13.7% in the second quarter of 1997.
The Company's overall gross margin may fluctuate in future periods if the mix
of products shifts from higher to lower gross margin units or if the Company
encounters unexpected manufacturing difficulties or competitive pressures.
Selling, general, and administrative expenses decreased by $466,000 to $8.8
million in the second quarter of 1997 and decreased as a percentage of sales
from 8.7% in 1996 to 8.3% in 1997. The decrease in selling, general, and
administrative expenses as a percentage of sales was primarily due to having
only two Holiday World stores included in the operating results in the second
quarter of 1997, compared to ten in the second quarter of 1996. The Holiday
World stores spent more on selling, general, and administrative expenses, on
a percentage basis, than the manufacturing operations in both periods. The
Company has reduced and plans to continue lowering the level of spending by
the Holiday Rambler division for selling, general, and administrative
expenses as a percentage of net sales, which have historically been higher
than the Company's Monaco Coach operations. However, the Company's overall
selling, general, and administrative expenses as a percentage of net sales is
expected to remain higher than the level prior to the Holiday Acquisition.
Amortization of goodwill was $159,000 in the second quarter of 1997 compared
to $179,000 in the same period of 1996. At June 28, 1997, goodwill, net of
accumulated amortization was $20.8 million.
Operating income was $5.3 million in the second quarter of 1997, a $2.4
million increase over the $2.9 million in 1996. The improvement in the
Company's gross margin combined with the decrease in selling, general, and
administrative expense as a percentage of sales, resulted in an increase in
operating margin from 2.7% in the second quarter of 1996 to 5.0% in 1997.
The Company's operating margin in the second quarter of 1996 was adversely
affected by a $1.1 million expense related to an inventory write-up to fair
value as a result of the Holiday Acquisition. Without that charge, the
Company's operating margin in the second quarter of 1996 would have been 3.8%.
Net interest expense was $585,000 in the second quarter of 1997 compared to
$1.4 million in the comparable 1996 period. The Company capitalized $241,000
of interest expense in the second quarter of 1997 relating to the
construction in progress for a new motorized manufacturing facility in
Wakarusa, Indiana, and capitalized $102,000 of interest in the second quarter
of 1996 stemming from the acquisition of the Holiday World retail stores held
for resale. The Company's interest expense included $96,000 in the second
quarter of 1997 and $414,000 in the second quarter of 1996 relating to floor
plan financing at the retail stores. Additionally, 1997 second quarter
interest expense included $103,000 related to the amortization of $2.1
million in debt issuance costs recorded in conjunction with the Holiday
Acquisition. These costs are being written off over a five-year period.
The Company reported a provision for income taxes of $2.0 million, or an
effective tax rate of 41.5% in the second quarter of 1997, compared to
$670,000, or an effective tax rate of 42.9% for the comparable 1996 period.
Net income increased by $1.9 million from $891,000 in the second quarter of
1996 to $2.8 million in the same period of 1997 due to the increase in
operating margin and the reduction of interest expense.
SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO SIX MONTHS ENDED JUNE 29, 1996
Net sales increased $46.3 million, or 27.5% for the first six months of 1997,
compared to the year earlier period. The increase was primarily due to the
addition of the sales of Holiday Rambler for a full six months in 1997 versus
four months in 1996. Overall unit sales increased to 2918 units in the first
half of 1997 compared to 2022 in 1996 (excluding 173 units in 1997 and 584
units in 1996 that were sold at the Holiday World retail dealerships that
were either previously-owned or not Holiday Rambler units). On a pro forma
basis, assuming the Company had acquired Holiday Rambler at the beginning of
1996, wholesale sales for the first six months of 1997 would have been up
13
<PAGE>
8.3%, with motorized products up 7.4% and towables up 13.4% over the
comparable 1996 period. The Company's overall average unit selling price was
$72,900 compared to $76,400 in the year earlier period.
Gross profit for the six-month period ended June 28, 1997 was up $10.2
million to $29.4 million and gross margin increased to 13.7% in 1997 from
11.3% in 1996. Gross margin for the first six months of 1996 was negatively
affected by a $1.75 million increase in cost of sales resulting from an
inventory write-up to fair value arising from the Holiday Acquisition.
Without this charge, gross margin in the first six months of 1996 would have
been 12.4%. Also contributing to the lower gross margin in 1996 were lower
than expected gross margins at the Company's Elkhart, Indiana facility due to
reduced production volumes and a higher than expected mix of lower margin
Windsor models.
Selling, general, and administrative expenses increased $4.4 million to $18.3
million in the first six months of 1997 and increased slightly as a
percentage of sales to 8.5% in 1997 from 8.3% in the year earlier period.
The increase in selling, general, and administrative expenses as a percentage
of sales was primarily due to the inclusion of Holiday Rambler results for a
full six months in 1997 versus only four months in 1996. Historically,
Holiday Rambler has spent more for selling, general, and administrative
expenses as a percentage of sales than the Company's Monaco Coach operations.
The Company has reduced and plans to continue lowering the level of spending
by Holiday Rambler as a percentage of net sales. However, the Company's
overall selling, general, and administrative expenses as a percentage of net
sales is expected to remain higher than the level prior to the Holiday
Acquisition.
Amortization of goodwill was $319,000 for the six-month period ended June 28,
1997 versus $309,000 in the year earlier period.
Operating income was $10.7 million for the first six months of 1997, a $5.9
million increase over the comparable 1996 period. The Company's higher gross
margin coupled with the relatively small increase in selling, general, and
administrative expense as a percentage of net sales, resulted in an
improvement in operating margin in 1997 to 5.0% compared to 2.9% in 1996.
Results for the first six months of 1996 included a $1.75 million expense
related to an inventory write-up to fair value as a result of the Holiday
Acquisition. Excluding that charge, operating margin for the first six months
of 1996 would have been 3.9% of net sales.
Net interest expense declined in the first six months of 1997 to $1.4 million
from $2.2 million in the comparable 1996 period. The Company capitalized
$387,000 of interest expense in the first six months of 1997 as a result of
the construction in progress for a new motorized manufacturing facility in
Wakarusa, Indiana and $136,000 in the first six months of 1996 primarily
related to the Holiday World retail stores held for resale. The Company's
interest expense included $249,000 in the first six months of 1997 and
$623,000 in the first six months of 1996 related to floor plan financing at
the retail stores. Additionally, interest expense for the first half of 1997
included $206,000 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 $3.9 million, or an
effective tax rate of 41.5% for the first six months of 1997 versus $1.1
million, or 42.1% in the comparable 1996 period.
Net income increased to $5.5 million in the first six months of 1997 from
$1.5 million in the first six months of 1996, primarily due to the increase
in net sales combined with an improvement in operating margin and a decrease
in net 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 six months of 1997, the Company had a cash outflow of $2.6 million from
operating activities. The Company used cash due to an abnormally large
increase in trade receivables, arising primarily from a trade show the first
week of July, a decrease in income taxes payable and an increase in inventory
related to model changeover and the startup of a new manufacturing facility
in Springfield, Oregon. Combined, these more than offset the $7.1 million
generated from net income and non-cash expenses such as depreciation and
amortization, as well as increases in accounts payable and accrued expenses.
The increase in trade receivables was temporary and the Company's trade
receivable balance has since returned to a more normal level.
14
<PAGE>
The Company has credit facilities consisting of a term loan of $20.0 million
(the "Term Loan") and a revolving line of credit of up to $45.0 million ( the
"Revolving Loans"). The Term Loan bears interest at various rates based upon
the prime lending rate announced from time to time by Banker's Trust Company
(the "Prime Rate") or LIBOR and is due and payable in full on March 1, 2001.
The Term Loan requires monthly interest payments, quarterly principal
payments and certain mandatory prepayments. The mandatory prepayments
consist of: (i) an annual payment on April 30 of each year, beginning April
30, 1997 of seventy-five percent (75%) of the Company's defined excess cash
flow for the then most recently ended fiscal year (no defined excess cash
flow existed for the year ended December 28, 1996); and (ii) a payment within
two days of the sale of any Holiday World dealership, of the net cash
proceeds received by the Company from such sale. At the election of the
Company, the Revolving Loans bear interest at variable interest rates based
on the Prime Rate or LIBOR. At June 28, 1997, the effective interest rate on
the Term Loan was 8.59%. The Revolving Loans are due and payable in full on
March 1, 2001, and require monthly interest payments. As of June 28, 1997,
$17.75 million was outstanding under the Term Loan and no amount was
outstanding under the Revolving Loans. The Term Loan and the Revolving Loans
are collateralized by a security interest in all of the assets of the Company
and include various restrictions and financial covenants. The Company also
has various loans outstanding to finance retail inventory at the two
remaining Holiday World dealerships which amounted to $4.5 million at June
28, 1997 and which bear interest at various rates based on the prime rate and
are collateralized by the assets of the Company.
The Company's principal working capital requirements are for purchases of
inventory and, to a lesser extent, financing of trade receivables. The
Company's dealers typically finance product purchases under wholesale floor
plan arrangements with third parties as described below. At June 28, 1997,
the Company had working capital of approximately $15.3 million, an increase
of $10.8 million from working capital of $4.5 million at December 28, 1996.
The Company completed a public offering of a total of 1,955,000 shares of its
Common Stock in June 1997 at $21.25 per share, of which 800,000 shares were
sold by the Company. The approximately $15.4 million of net proceeds to the
Company from this offering were used to pay off the outstanding balance under
its revolving line of credit with the remainder being added to working
capital. The Company had been using short-term credit facilities and cash
flow to finance construction of the new motorized manufacturing facility in
Wakarusa, Indiana. The Company primarily used long-term debt and redeemable
preferred stock to finance the Holiday Acquisition.
The Company's capital expenditures were $9.1 million in the first six months
of 1997, primarily for the Wakarusa, Indiana manufacturing facility. This
facility, approximately doubled the Company's production capacity of motor
coaches. The total cost of the Wakarusa facility, including the main plant
and offices, is estimated to be approximately $15.0 million, and the main
plant was operational at the end of the second quarter of 1997 and the
offices are expected to be completed in the third quarter of 1997. The
Company recently decided to start construction of a new paint facility and
finish area adjacent to the new Wakarusa facility. It is expected that the
new paint facility will cost between $7 million to $8 million and will be
operational by the end of the first quarter of 1998.
The Company believes that cash flow from operations and funds available under
its credit facilities will be sufficient to meet the Company's liquidity
requirements for the next 12 months. The Company anticipates that capital
expenditures for all of 1997 will total approximately $17.0 to $20.0 million,
of which an estimated $10.0 million will have been spent on the new Wakarusa
facility, $4 million will be used to start construction of the paint
facility, $520,000 was used to set up the new towable manufacturing facility
in Springfield, Oregon, and up to $2.0 million will be used to upgrade the
Company's management information systems, including software to handle the
"Year 2000" issue. The Company may require additional equity or debt
financing to address working capital and facilities expansion needs,
particularly if the Company further expands its operations to address greater
than anticipated growth in the market for its products. The Company may also
from time to time seek to acquire businesses that would complement the
Company's current business, and any such acquisition could require additional
financing. There can be no assurance that additional financing will be
available if required or on terms deemed favorable by the Company.
As is typical in the recreational vehicle industry, many of the Company's
retail dealers, including the Holiday World dealerships, utilize wholesale
floor plan financing arrangements with third-party lending institutions to
finance their purchases of the Company's products. Under the terms of these
floor plan arrangements, institutional lenders customarily require the
recreational vehicle manufacturer to agree to repurchase any unsold units if
the dealer fails to meet its commitments to the lender, subject to certain
conditions. The Company has agreements with several
15
<PAGE>
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 June 28, 1997, approximately $129.3
million of products sold by the Company to independent dealers were subject
to potential repurchase under existing floor plan financing agreements with
approximately 10.2% 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, the Company offers a much broader range of
recreational vehicle products and will likely be more susceptible to
recreational vehicle industry cyclicality than in the past. Factors
affecting cyclicality in the recreational vehicle industry include fuel
availability and fuel prices, prevailing interest rates, the level of
discretionary spending, the availability of credit and overall consumer
confidence. In particular, interest rates rose significantly in 1994 and
while recent interest rates have not had a material adverse effect on the
Company's business, no assurances can be given that an increase in interest
rates would not have a material adverse effect on the Company's business,
results of operations and financial condition.
MANAGEMENT OF GROWTH. As a result of the Holiday Acquisition, the Company
has experienced significant growth in the number of its employees, in the
size of its manufacturing operations and in the scope of its business. This
growth has resulted in the addition of new management personnel, increased
responsibilities for existing management personnel, and has placed added
pressure on the Company's operating, financial and management information
systems. While management believes it has substantially completed the
integration of Holiday Rambler's operations and personnel into the Company,
due to the large size of the Holiday Acquisition relative to the Company,
there can be no assurance that the Company will not encounter problems in the
future associated with the integration of Holiday Rambler's operations and
personnel or that the anticipated benefits of the Holiday Acquisition will be
fully realized. In addition, there can be no assurance that the Company will
adequately support and manage the growth of its business and the failure to
do so could have a material adverse effect on the Company's business, results
of operations and financial condition.
MANUFACTURING EXPANSION. The Company significantly increased its
manufacturing capacity in 1995 by expanding its Elkhart, Indiana facility
and opening its Coburg, Oregon facility. In order to meet market demand and
realize manufacturing efficiencies, the Company has recently completed
construction of a new motor coach manufacturing facility in Wakarusa,
Indiana, and intends to relocate its Elkhart, Indiana motor coach
16
<PAGE>
production to the new Wakarusa facility, and recently completed the set-up of
the new Springfield, Oregon facility to manufacture towables. The
integration of the Company's facilities and the expansion of the Company's
manufacturing operations involve a number of risks including unexpected
production difficulties. In 1995, the Company experienced start-up
inefficiencies in manufacturing the Windsor model and, beginning in 1996 and
continuing in the first half of 1997, the Company has 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 the new facilities involves risks and costs associated with the
development and acquisition of new production lines, molds and other
machinery, the training of employees, and compliance with environmental,
health and safety and other regulatory requirements. The inability of the
Company to commence full-scale commercial production at its Wakarusa and
Springfield facilities in a timely manner could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, at such time as the Company commences production at
these new facilities, it may from time to time experience lower than
anticipated yields or production constraints that may adversely affect its
ability to satisfy customer orders. Any prolonged inability to satisfy
customer demand could have a material adverse effect on the Company's
business, results of operations and financial condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS. Although the Company's products
were offered by more than 150 dealerships located primarily in the United
States and Canada as of June 28, 1997, a significant percentage of the
Company's sales have been and will continue to be concentrated among a
relatively small number of independent dealers. Although no single dealer
accounted for as much as 10% of the Company's net sales in 1996, the top
three dealers accounted for approximately 22.5% of the Company's net sales in
that period. The loss of a significant dealer or a substantial decrease in
sales by such a dealer could have a material adverse effect on the Company's
business, results of operations and financial condition.
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS. As is common in the
recreational vehicle industry, the Company enters into repurchase agreements
with the financing institutions used by its dealers to finance their
purchases. These agreements obligate the Company to repurchase a dealers'
inventory under certain circumstances in the event of a default by the dealer
to its lender. In 1993, the Company's then third largest dealer went into
default with its lenders, and the Company was required to repurchase 16 motor
coaches. Although the Company was able to resell these motor coaches within
three months, the Company incurred expenses of approximately $291,000 in
connection with this dealer's default. Additionally, the need to resell
these motor coaches and the loss of that dealer temporarily limited the
Company's sales of new motor coaches. If the Company were obligated to
repurchase a significant number of its products in the future, it could have
a material adverse effect on the Company's financial condition, business and
results of operations. The Company's contingent obligations under repurchase
agreements vary from period to period and totaled approximately $129.3
million as of June 28, 1997, with approximately 10.2% concentrated with one
dealer. See "Liquidity and Capital Resources" and Note 10 of Notes to the
Company's Condensed Consolidated Financial Statements.
AVAILABILITY AND COST OF FUEL. An interruption in the supply or a
significant increase in the price or tax on the sale of diesel fuel or
gasoline on a regional or national basis could have a material adverse effect
on the Company's business, results of operations and financial condition.
Diesel fuel and gasoline have, at various times in the past, been difficult
to obtain, and there can be no assurance that the supply of diesel fuel or
gasoline will continue uninterrupted, that rationing will not be imposed, or
that the price of or tax on diesel fuel or gasoline will not significantly
increase in the future, any of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
DEPENDENCE ON CERTAIN SUPPLIERS. A number of important components for
certain of the Company's products are purchased from single or limited
sources, including its turbo diesel engines (Cummins Engine Company, Inc.),
substantially all of its transmissions (Allison Transmission Division of
General Motors Corporation), axles for all diesel motor coaches other than
the Holiday Rambler Endeavor Diesel model (Eaton Corporation) and chassis for
certain of its Holiday Rambler products (Chevrolet Motor Division of General
Motors Corporation, Ford Motor
17
<PAGE>
Company and Freightliner Custom Chassis Corporation). The Company has no
long term supply contracts with these suppliers or their distributors, and
there can be no assurance that these suppliers will be able to meet the
Company's future requirements for these components. Although the Company
believes that adequate alternative suppliers exist for each of these
components, an extended delay or interruption in the supply of any of the
components currently obtained from a single source supplier or limited
supplier could have a material adverse effect on the Company's business,
results of operations and financial condition.
NEW PRODUCT INTRODUCTIONS. To address changing consumer preferences, the
Company modifies and improves its products each model year and typically
redesigns each model every three to four years. 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, a lack of market acceptance of new models or features, or quality
problems with new models or features could have a material adverse effect on
the Company's business, results of operations and financial condition. For
example, in the third quarter of 1995 the Company incurred unexpected costs
associated with three model changes introduced in that quarter which
adversely affected the Company's gross margin. There also can be no
assurance that product introductions in the future will not divert revenues
from existing models and adversely affect the Company's business, results of
operations and financial condition.
COMPETITION. The market for the Company's products is highly competitive.
The Company currently competes with a number of other manufacturers of motor
coaches, fifth wheel trailers and travel trailers, some of which have
significantly greater financial resources and more extensive marketing
capabilities than the Company. There can be no assurance that either existing
or new competitors will not develop products that are superior to, or that
achieve better consumer acceptance than, the Company's products, or that the
Company will continue to remain competitive.
RISK OF LITIGATION. The Company is subject to litigation arising in the
ordinary course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. In addition,
as a result of the Holiday Acquisition, the Company assumed most of the
liabilities of Holiday Rambler, including product liability and warranty
claims. Although the Company does not believe that the outcome of any
pending litigation will have a material adverse effect on the business,
results of operations or financial condition of the Company, due to the
inherent uncertainties associated with litigation, there can be no assurance
in this regard.
To date, the Company has been successful in obtaining product liability
insurance on terms the Company considers acceptable. The Company's current
policies jointly provide coverage against claims based on occurrences within
the policy periods up to a maximum of $26.0 million for each occurrence and
$27.0 million in the aggregate. There can be no assurance that the Company
will be able to obtain insurance coverage in the future at acceptable levels
or that the costs of insurance will be reasonable. Furthermore, successful
assertion against the Company of one or a series of large uninsured claims,
or of one or a series of claims exceeding any insurance coverage, could have
a material adverse effect on the Company's business, results of operations
and financial condition.
ENVIRONMENTAL REGULATION AND REMEDIATION
REGULATION. The Company's recreational vehicle manufacturing operations are
subject to a variety of federal and state environmental regulations relating
to the use, generation, storage, treatment and disposal of hazardous
materials. These laws are often revised and made more stringent, and it is
likely that future amendments to these laws will impact the Company's
operations.
The Company has submitted applications for "Title V" air permits for its
operations in Elkhart, Indiana, Nappanee, Indiana, Wakarusa, Indiana, and
Coburg, Oregon, and is in the process of preparing an application for its
newly acquired facility in Springfield, Oregon. The Company does not
currently anticipate that any additional air pollution control equipment will
be required as a condition of receiving new air permits, although new
regulations and their interpretation may change over time, and there can be
no assurance that additional expenditures will not be required.
The Company believes that there are no ongoing violations of any of its
existing air permits at any of its owned or leased facilities at this time.
However, the failure of the Company to comply with present or future
regulations could subject the Company to: (i) fines; (ii) potential civil and
criminal liability; (iii) suspension of production or cessation
18
<PAGE>
of operations; (iv) alterations to the manufacturing process; or (v) costly
clean-up or capital expenditures, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition.
REMEDIATION. The Company has identified petroleum and/or solvent ground
contamination at the Elkhart, Indiana manufacturing facility, the Wakarusa,
Indiana manufacturing facility and the Leesburg, Florida dealership acquired
in the Holiday Acquisition. The Company has remediated the Elkhart site and
recommended to the relevant Indiana regulatory authority that no further
action be taken because the remaining contaminants are below the state's
clean-up standards. The Company currently expects that the regulatory
authority will concur with this finding, although there is no assurance that
such approval will be forthcoming or that the regulatory authority will not
require additional investigation and/or remediation. The Company has
completed its investigation of the Wakarusa site and expects soon to
recommend to the relevant regulatory authority that no further action be
taken at that site based on its consultants' view that there is a limited
risk associated with the remaining contamination. It is unclear whether the
regulatory authority will concur in this finding or whether additional
remediation will be required. In Florida, the Company and its consultants
are conducting additional site investigations to determine the extent of
contamination associated with former underground storage tanks at the
Leesburg dealership. Pending the completion of the additional site
investigation work, Harley-Davidson and its consultant are preparing a site
remediation work plan for submittal to the relevant Florida regulatory
authority. With regard to the Wakarusa and Leesburg sites, the Company is
indemnified by Harley-Davidson for investigation and remediation costs
incurred by the Company (subject to a $300,000 deductible in the case of the
Wakarusa site and subject to a $10 million maximum in the case of the
Wakarusa site and a $5 million maximum in the case of the Leesburg site for
matters, such as these, that were identified at the closing of the Holiday
Acquisition).
The Company does not believe that any costs it will bear with respect to
continued investigation or remediation of the foregoing locations and other
facilities currently or formerly owned or occupied by the Company will have a
material adverse effect upon the Company's business, results of operations or
financial condition. Nevertheless, there can be no assurance that the
Company will not discover additional environmental problems or that the cost
to the Company of the remediation activities will not exceed the Company's
expectations.
OTHER REGULATORY MATTERS. The Company, its products and its manufacturing
operations are subject to a variety of federal, state and local regulations,
including the National Traffic and Motor Vehicle Safety Act and numerous
state consumer protection laws and regulations relating to the operation of
motor vehicles, including so-called "Lemon Laws." Amendments to these
regulations and laws and the implementation of new regulations and laws could
significantly increase the costs of manufacturing, purchasing, operating or
selling the Company's products and could have a material adverse effect on
the Company's business, results of operations and financial condition. The
failure of the Company to comply with present or future regulations and laws
could subject the Company to fines, potential civil and criminal liability,
suspension of production or cessation of operations.
Certain U.S. tax laws currently afford favorable tax treatment for the
purchase and sale of recreational vehicles that are financed through mortgage
loans. These laws and regulations have historically been amended frequently,
and it is likely that further amendments and additional laws and regulations
will be applicable to the Company and its business in the future. Amendment
or repeal of these laws and regulations and the implementation of new laws
and regulations could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company is subject to regulations that may require the Company to recall
products with safety defects. Product defects may also result in a large
number of product liability or warranty claims. The Company has on occasion
voluntarily recalled certain products. The occurrence of a major product
recall or the incurrence of warranty claims in excess of warranty reserves in
any period could have a material adverse effect on the Company's business,
results of operations and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that the market
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, changes in
earnings estimates by investment analysts, announcements of new products by
the Company or its competitors, general economic conditions and conditions in
the recreational vehicle market and other events or factors. In addition,
the stocks of many recreational vehicle companies have experienced price and
volume fluctuations that
19
<PAGE>
have not necessarily been directly related to the companies' operating
performance, and the market price of the Company's Common Stock could
experience similar fluctuations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings arising in the ordinary
course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. In
addition, in connection with the Holiday Acquisition, the Company
assumed most of the liabilities of that business, including product
liability and warranty claims. The Company does not believe that the
outcome of its pending legal proceedings will have a material adverse
effect on the business, financial condition or results of operations
of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the quarter
ended June 28, 1997, for which this report is filed.
21
<PAGE>
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: AUGUST 12, 1997 /S/: John W. Nepute
-------------------------- ----------------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME OF MONACO COACH CORPORATION
AS OF AND FOR THE SIX MONTHS ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> JUN-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 23,375
<ALLOWANCES> 145
<INVENTORY> 50,585
<CURRENT-ASSETS> 84,843
<PP&E> 50,526
<DEPRECIATION> 4,170
<TOTAL-ASSETS> 155,671
<CURRENT-LIABILITIES> 69,501
<BONDS> 15,250
0
0
<COMMON> 55
<OTHER-SE> 67,485
<TOTAL-LIABILITY-AND-EQUITY> 155,671
<SALES> 215,005
<TOTAL-REVENUES> 215,005
<CGS> 185,630
<TOTAL-COSTS> 204,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,408
<INCOME-PRETAX> 9,417
<INCOME-TAX> 3,907
<INCOME-CONTINUING> 5,510
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