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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: JULY 4, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from ______________ to ________________
Commission File Number: 0-22256
MONACO COACH CORPORATION
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
July 4, 1998: 8,304,331
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<PAGE>
MONACO COACH CORPORATION
FORM 10-Q
JULY 4, 1998
INDEX
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Reference
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of
January 3, 1998 and July 4, 1998. 4
Condensed Consolidated Statements of Income
for the quarters and six month periods ended
June 28, 1997 and July 4, 1998. 5
Condensed Consolidated Statements of Cash
Flows for the six month periods ended
June 28, 1997 and July 4, 1998. 6
Notes to Condensed Consolidated Financial Statements. 7 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 10 - 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. 15
PART II - OTHER INFORMATION
- ---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 16
SIGNATURES 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 3, JULY 4,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables $ 25,309 $ 27,043
Inventories 45,421 51,105
Prepaid expenses 928 0
Deferred tax assets 8,222 9,294
Notes receivable 1,552 115
----------- -----------
Total current assets 81,432 87,557
Notes receivable 1,125 814
Property, plant and equipment, net 55,399 58,071
Debt issuance costs, net of accumulated amortization
of $755 and $969, respectively 1,358 1,144
Goodwill, net of accumulated amortization of $2,739
and $3,061, respectively 20,518 20,196
----------- -----------
Total assets $ 159,832 $ 167,782
----------- -----------
----------- -----------
LIABILITIES
Current liabilities:
Book overdraft $ 6,762 $ 7,527
Short-term borrowings 9,353 1,339
Current portion of long-term note payable 4,375 5,000
Accounts payable 23,498 30,750
Income taxes payable 1,005 362
Accrued expenses and other liabilities 26,027 28,349
----------- -----------
Total current liabilities 71,020 73,327
Note payable, less current portion 11,500 7,900
Deferred tax liability 2,564 2,738
----------- -----------
85,084 83,965
----------- -----------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 8,244,703 and 8,304,331 issued
and outstanding respectively 55 83
Additional paid-in capital 44,241 44,596
Retained earnings 30,452 39,138
----------- -----------
Total stockholders' equity 74,748 83,817
----------- -----------
Total liabilities and stockholders' equity $ 159,832 $ 167,782
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
4
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------ -----------------------
JUNE 28, JULY 4, JUNE 28, JULY 4,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 105,981 $ 134,673 $ 215,005 $ 271,841
Cost of sales 91,652 116,542 185,642 235,363
---------- ---------- ---------- ----------
Gross profit 14,329 18,131 29,363 36,478
Selling, general and administrative expenses 8,829 9,831 18,313 20,400
Amortization of goodwill 159 162 318 322
---------- ---------- ---------- ----------
Operating income 5,341 8,138 10,732 15,756
Other expense (income), net (58) (76) (97) (131)
Interest expense 585 526 1,406 1,027
---------- ---------- ---------- ----------
Income before income taxes 4,814 7,688 9,423 14,860
Provision for income taxes 1,998 3,197 3,910 6,174
---------- ---------- ---------- ----------
Net income 2,816 4,491 5,513 8,686
Accretion of redeemable preferred stock (292) (317)
---------- ---------- ---------- ----------
Net income attributable to
common stock $ 2,524 $ 4,491 $ 5,196 $ 8,686
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share:
Basic $ .37 $ .54 $ .77 $ 1.05
Diluted $ .36 $ .53 $ .76 $ 1.03
Weighted average common shares outstanding:
Basic 6,852,208 8,289,772 6,752,881 8,271,850
Diluted 6,992,578 8,479,823 7,208,997 8,467,911
</TABLE>
See accompanying notes.
5
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 28, JULY 4,
1997 1998
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<S> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 5,513 $ 8,686
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,566 2,346
Deferred income taxes (307) (898)
Changes in working capital accounts:
Trade receivables (8,323) (1,734)
Inventories (5,947) (5,684)
Prepaid expenses 378 928
Accounts payable 7,306 7,252
Accrued expenses and other current liabilities 3,502 2,322
Income taxes payable (6,306) (643)
----------- ----------
Net cash provided by (used in) operating activities (2,618) 12,575
----------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (9,108) (4,482)
Proceeds from sale of retail stores, collections on notes
receivable, net of closing costs 241 1,748
----------- ----------
Net cash used in investing activities (8,867) (2,734)
----------- ----------
Cash flows from financing activities:
Book overdraft 437 765
Borrowings (payments) on lines of credit, net (3,789) (8,014)
Borrowings (payments) on floor financing, net (194)
Payments on long-term notes payable (750) (2,975)
Issuance of common stock 16,181 383
Cost to issue shares of common stock (390)
Other (10)
----------- ----------
Net cash provided by (used in) financing activities 11,485 (9,841)
----------- ----------
Net increase in cash 0 0
Cash at beginning of period 0 0
----------- ----------
Cash at end of period $ 0 $ 0
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE
Amount of capitalized interest $ 387 $ 44
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 January 3, 1998 and July 4, 1998, and
the results of operations for the quarters and six-month periods
ended June 28, 1997 and July 4, 1998, and cash flows of the Company
for the six-month periods ended June 28, 1997 and July 4, 1998. The
condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, and all significant
intercompany accounts and transactions have been eliminated in
consolidation. The balance sheet data as of January 3, 1998 was
derived from audited financial statements, but does not include all
disclosures contained in the Company's Annual Report to Stockholders.
These interim condensed consolidated financial statements should be
read in conjunction with the audited financial statements and notes
thereto appearing in the Company's Annual Report to Stockholders for
the year ended January 3, 1998.
On March 16, 1998 the Board of Directors declared a 3-for-2 stock
split in the form of a 50% stock dividend on the Company's common
stock, payable April 16, 1998 to stockholders of record April 2,
1998. All share and per share data, as appropriate, reflect this
split. The effect of the split is presented within stockholders'
equity at April 4, 1998 by transferring the par value for the
additional shares issued of $27,549 from the additional paid-in
capital account to the common stock account.
2. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or
market. The composition of inventory is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------- -----------
JANUARY 3, JULY 4,
1998 1998
<S> <C> <C>
Raw materials $ 20,826 $ 22,146
Work-in-process 20,212 23,565
Finished units 4,383 5,394
---------- -----------
$ 45,421 $ 51,105
---------- -----------
---------- -----------
</TABLE>
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 $1.3 million at July 4, 1998. The revolving line of
credit expires March 1, 2001 and is collateralized by all the assets
of the Company.
7
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5. LONG-TERM BORROWINGS
The Company has a term loan of $12.9 million outstanding as of July 4,
1998. The term loan bears interest at various rates based on the
Company's interest coverage ratio, and expires on March 1, 2001. The
term loan requires monthly interest payments, quarterly principal
payments and certain mandatory prepayments, and is collateralized by
all the assets of the Company.
6. Earnings Per Common Share
The Company has adopted Statement of Financial Accounting Standard
(SFAS) No. 128, "Earnings Per Share", and has disclosed per share
information in accordance with those standards. Basic 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:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
JUNE 28, 1997 JULY 4, 1998
--------------------------------- -------------------------------
Income Per Income Per
(in 000's) Shares Share (in 000's) Shares Share
---------- --------- ----- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
BASIC
Net income attributable to
common stock $2,524 6,852,208 $0.37 $4,491 8,289,772 $0.54
EFFECT OF DILUTIVE SECURITIES
Stock Options 140,370 190,051
Convertible preferred stock*
------ --------- ------ ---------
DILUTED $2,524 6,992,578 $0.36 $4,491 8,479,823 $0.53
------ --------- ------ ---------
------ --------- ------ ---------
</TABLE>
* Effect in the second quarter of 1997 would have been anti-dilutive.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 28, 1997 JULY 4, 1998
------------------------------------ ---------------------------------
Income Per Income Per
(in 000's) Shares Share (in 000's) Shares Share
---------- ------ ----- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
BASIC
Net income attributable to
common stock $5,196 6,752,881 $0.77 $8,686 8,271,850 $1.05
EFFECT OF DILUTIVE SECURITIES
Stock Options 130,734 196,061
Convertible preferred stock 317 325,382
------ --------- ------ ---------
DILUTED $5,513 7,208,997 $0.76 $8,686 8,467,911 $1.03
------ --------- ------ ---------
------ --------- ------ ---------
</TABLE>
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; and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for reporting information about operating segments; and
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
<PAGE>
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
<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 a broad line of motor coaches, fifth wheel
trailers and travel trailers under the "Monaco", "Holiday Rambler", and
"McKenzie Towables" brand names. The Company's products, which are typically
priced at the high end of their respective product categories, range in
suggested retail price from $60,000 to $900,000 for motor coaches and from
$15,000 to $70,000 for towables.
Prior to March, 1996, the Company's product line consisted exclusively of
High-Line Class A motor coaches (units with retail prices above $120,000).
On March 4, 1996, the Company acquired Holiday Rambler, a manufacturer of a
full line of towable products and mid to upper priced motor coaches. The
acquisition of Holiday Rambler (the "Holiday Acquisition") more than doubled
the Company's net sales, significantly broadened the range of products the
Company offered (including the Company's first offerings of towables and
entry-level to midrange motor coaches) and significantly lowered the price
threshold for first-time buyers of the Company's products, making them
affordable for a significantly larger base of potential customers. The
acquired operations were incorporated into the Company's consolidated
financial statements on March 4, 1996.
RESULTS OF OPERATIONS
QUARTER ENDED JULY 4, 1998 COMPARED TO QUARTER ENDED JUNE 28, 1997
Second quarter net sales increased 27.1% to $134.7 million compared to $106.0
million for the same period last year. Gross sales dollars on motorized
products were up 35.2%, reflecting strong demand for both the Company's new
and established motorized products combined with expanded motorized
production capacity that came on stream in Wakarusa, Indiana last year. The
Company's gross towable sales were off 12.5% as dealers deferred purchases of
towables based on expectations of significant changes to the Company's
towable products at the upcoming model change. The Company's overall unit
sales were up 9.7% in the second quarter of 1998 (excluding 75 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 second quarter of
1998 to $87,000 from $74,000 in the comparable 1997 quarter. The Company has
recently introduced two less expensive gasoline motor coach models which are
likely to keep the overall average selling price below $100,000.
Gross profit for the second quarter of 1998 increased to $18.1 million, up
$3.8 million, from $14.3 million in 1997, and gross margin was unchanged at
13.5%. Gross margin in the second quarter of 1998 was dampened by costs
related to model changeovers in all of the plants and by consolidation of the
two Indiana towable plants into one Company-owned facility in Elkhart,
Indiana. This eliminated the need for leased facilities the Company had
occupied in Wakarusa, Indiana.
Selling, general, and administrative expenses increased by $1.0 million to
$9.8 million in the second quarter of 1998 but decreased as a percentage of
sales from 8.3% in 1997 to 7.3% in 1998. The decrease in selling, general,
and administrative expenses as a percentage of sales reflected efficiencies
arising from the Company's increased sales level as well as savings derived
from consolidation of Indiana-based office staff into recently completed
office space built in conjunction with the expansion of production facilities
in Wakarusa, Indiana.
10
<PAGE>
Amortization of goodwill was $162,000 in the second quarter of 1998 compared
to $159,000 in the same period of 1997. At July 4, 1998, goodwill, net of
accumulated amortization was $20.2 million.
Operating income was $8.1 million in the second quarter of 1998, an increase
of $2.8 million, or 52.4%, over the $5.3 million in the similar 1997 period.
The Company's improvement in selling, general, and administrative expense as
a percentage of sales combined with stability in the Company's gross margin,
resulted in an improvement in operating margin to 6.0% in the second quarter
of 1998 compared to 5.0% in the second quarter of 1997.
Net interest expense was $526,000 in the second quarter of 1998 compared to
$585,000 in the comparable 1997 period. The Company capitalized $241,000 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 $96,000 in 1997 related to floor plan financing at
the retail stores. Additionally, second quarter interest expense in both
years included $103,000 related to the amortization of $2.1 million in debt
issuance costs recorded in conjunction with the Holiday Acquisition. These
costs are being written off over a five-year period.
The Company reported a provision for income taxes of $3.2 million, or an
effective tax rate of 41.6% in the second quarter of 1998, compared to $2.0
million, or an effective tax rate of 41.5% for the comparable 1997 period.
Net income increased by $1.7 million, or 59.5%, from $2.8 million in the
second quarter of 1997 to $4.5 million in 1998 due to the increase in sales
combined with an increase in operating margin and a small decrease in
interest expense.
SIX MONTHS ENDED JULY 4, 1998 COMPARED TO SIX MONTHS ENDED JUNE 28, 1997.
Net sales increased $56.8 million, or 26.4% for the first six months of 1998,
compared to the year earlier period. Gross sales dollars on motorized
products were up 35.2% for the first half of 1998, while gross towable sales
dollars were off 8.3% for the same period. Overall unit sales for the
Company were up 4.0% in the first half of 1998 compared to the similar period
in 1997 (excludng 173 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 six
months of 1998 to $86,000 compared to $73,000 in the first half of 1997,
reflecting the strong showing of the Company's motorized products.
Gross profit for the six-month period ended July 4, 1998 was up $7.1 million
to $36.5 million and gross margin decreased to 13.4% in 1998 from 13.7% in
1997. Gross margin for the first half of 1998 was dampened by lower gross
margins in the three towable plants due to reduced production volumes in
those plants and by costs incurred at the end of the six month period 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 $2.1 million to
$20.4 million in the first six months of 1998 but decreased as a percentage
of sales from 8.5% in 1997 to 7.5% in 1998. The decrease in selling,
general, and administrative expenses as a percentage of sales reflected
efficiencies arising from the Company's increased sales level as well as
savings derived from consolidation of Indiana based office staff into
recently completed office space built in conjunction with the expansion of
production facilities in Wakarusa, Indiana.
Amortization of goodwill was $322,000 in the first half of 1998 compared to
$318,000 in the same period of 1997.
Operating income increased $5.0 million in the first six months of 1998 to
$15.8 million, compared to $10.7 million in the year earlier period. The
Company's improvement in selling, general, and administrative expense as a
percentage of sales was more significant than the decline in the Company's
gross margin, resulting in an improvement in operating margin to 5.8% in the
first half of 1998 compared to 5.0% in the first half of 1997.
Net interest expense declined in the first six months of 1998 to $1.0 million
from $1.4 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 $387,000 of
interest expense in the first six months of 1997 as a result of the
construction in progress for the now completed Wakarusa, Indiana
manufacturing facility. The Company's interest expense included $249,000 in
1997 related to floor plan financing at the retail stores. Additionally,
second quarter interest expense in both years included $214,000 related to
the amortization of
11
<PAGE>
$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 $6.2 million, or an
effective tax rate of 41.5% for the first six months of 1998, compared to
$3.9 million, or an effective tax rate of 41.5% for the comparable 1997
period.
Net income increased to $8.7 million in the first six months of 1998 from
$5.5 million in the first six 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 six months of 1998, the Company had cash flows of $12.6 million from
operating activities, including $11.0 million generated from net income and
non-cash expenses such as depreciation and amortization. Additionally,
increases in accounts payable and accrued expenses more than offset increases
in accounts receivable and inventories.
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 July 4, 1998, the Company was
still holding $929,000 in notes receivable relating to the sales of the
stores which will fall under provision (ii) when payment is received. At
July 4, 1998, the balance on the Term Loan was $12.9 million, with $12
million at an effective interest rate of 7.125% and $900,000 at 8.50%. At
the election of the Company, the Revolving Loans bear interest at variable
interest rates based on the Prime Rate or LIBOR. The Revolving Loans are due
and payable in full on March 1, 2001, and require monthly interest payments.
As of July 4, 1998, $1.3 million was outstanding under the Revolving Loans,
with an effective interest rate of 8.50%. The Term Loan and the Revolving
Loans are collateralized by a security interest in all of the assets of the
Company and include various restrictions and financial covenants. The
Company utilizes "zero balance" bank disbursement accounts in which an
advance on the line of credit is automatically made for checks clearing each
day. Since the balance of the disbursement account at the bank returns to
zero at the end of each day, a book overdraft arises from the outstanding
checks of the Company. These book overdraft accounts are combined with the
Company's positive cash balance accounts to reflect a net book overdraft or a
net cash balance for financial reporting.
The Company's principal working capital requirements are for purchases of
inventory and, to a lesser extent, financing of trade receivables. The
Company's dealers typically finance product purchases under wholesale floor
plan arrangements with third parties as described below. At July 4, 1998,
the Company had working capital of approximately $14.2 million, an increase
of $3.8 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. The Company's capital expenditures were
$4.5 million in the first six 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 $7.0 to $8.0 million.
The Company's remaining capital expenditures for 1998 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
12
<PAGE>
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 July 4, 1998, approximately $127.3
million of products sold by the Company to independent dealers were subject
to potential repurchase under existing floor plan financing agreements with
approximately 9.2% 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. In addition, unusually severe weather conditions
in certain markets could delay the timing of shipments from one quarter to
another.
CYCLICALITY The recreational vehicle industry has been characterized by
cycles of growth and contraction in consumer demand, reflecting prevailing
economic, demographic and political conditions that affect disposable income
for leisure-time activities. Unit sales of recreational vehicles (excluding
conversion vehicles) reached a peak of approximately 259,000 units in 1994
and declined to approximately 247,000 units in 1996. Although unit sales of
High-Line Class A motor coaches have increased in each year since 1989, there
can be no assurance that this trend will continue. Furthermore, as a result
of the Holiday Acquisition and recent new model introductions, the Company
offers a much broader range of recreational vehicle products and will likely
be more susceptible to recreational vehicle industry cyclicality than in the
past. Factors affecting cyclicality in the recreational vehicle industry
include fuel availability and fuel prices, prevailing interest rates, the
level of discretionary spending, the availability of credit and overall
consumer confidence. In particular, interest rates rose significantly in 1994
and while recent interest rates have not had a material adverse effect on the
Company's business, no assurances can be given that an increase in interest
rates would not have a material adverse effect on the Company's business,
results of operations and financial condition.
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 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. The expansion of the
Company's manufacturing operations involve a number of risks including
unexpected 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.
13
<PAGE>
The set-up of new models and scale-up of production facilities involve
various risks and uncertainties, including timely performance of a large
number of contractors, subcontractors, suppliers and various government
agencies that regulate and license construction, each of which is beyond the
control of the Company. The set-up of production for new models involves
risks and costs associated with the development and acquisition of new
production lines, molds and other machinery, the training of employees, and
compliance with environmental, health and safety and other regulatory
requirements. The inability of the Company to complete the scale-up of its
facilities and to commence full-scale commercial production in a timely
manner could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company may
from time to time experience lower than anticipated yields or production
constraints that may adversely affect its ability to satisfy customer orders.
Any prolonged inability to satisfy customer demand could have a material
adverse effect on the Company's business, results of operations and financial
condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS Although the Company's products
were offered by 208 dealerships located primarily in the United States and
Canada at the end of 1997, a significant percentage of the Company's sales
have been and will continue to be concentrated among a relatively small
number of independent dealers. Although no single dealer accounted for as
much as 10.0% of the Company's net sales in 1997, the top two dealers
accounted for approximately 15.0% of the Company's net sales in that period.
The loss of a significant dealer or a substantial decrease in sales by such a
dealer could have a material adverse effect on the Company's business,
results of operations and financial condition.
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS As is common in the
recreational vehicle industry, the Company enters into repurchase agreements
with the financing institutions used by its dealers to finance their
purchases. These agreements obligate the Company to repurchase a dealer's
inventory under certain circumstances in the event of a default by the dealer
to its lender. If the Company were obligated to repurchase a significant
number of its products in the future, it could have a material adverse effect
on the Company's financial condition, business and results of operations. The
Company's contingent obligations under repurchase agreements vary from period
to period and totaled approximately $127.3 million as of July 4, 1998, with
approximately 9.2% 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.
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
14
<PAGE>
introductions in the future will not divert revenues from existing models and
adversely affect the Company's business, results of operations and financial
condition.
COMPETITION The market for the Company's products is highly competitive. The
Company currently competes with a number of other manufacturers of motor
coaches, fifth wheel trailers and travel trailers, some of which have
significantly greater financial resources and more extensive marketing
capabilities than the Company. There can be no assurance that either existing
or new competitors will not develop products that are superior to, or that
achieve better consumer acceptance than, the Company's products, or that the
Company will continue to remain competitive.
RISKS OF LITIGATION The Company is subject to litigation arising in the
ordinary course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. Although the
Company does not believe that the outcome of any pending litigation, net of
insurance coverage, will have a material adverse effect on the business,
results of operations or financial condition of the Company, due to the
inherent uncertainties associated with litigation, there can be no assurance
in this regard.
To date, the Company has been successful in obtaining product liability
insurance on terms the Company considers acceptable. The Company's current
policies jointly provide coverage against claims based on occurrences within
the policy periods up to a maximum of $41.0 million for each occurrence and
$42.0 million in the aggregate. There can be no assurance that the Company
will be able to obtain insurance coverage in the future at acceptable levels
or that the costs of insurance will be reasonable. Furthermore, successful
assertion against the Company of one or a series of large uninsured claims,
or of one or a series of claims exceeding any insurance coverage, could have
a material adverse effect on the Company's business, results of operations
and financial condition.
IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. To
be in "Year 2000 compliance" a computer program must be written using four
digits to define years. As a result, in less than two years, computer
systems and/or software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements.
The Company is currently in the process of implementing "Year 2000 compliant"
software and hardware to upgrade the Company's management and operating
information systems at all its locations. The Company spent approximately
$700,000 on the implementation in 1997 and expects to spend approximately
$500,000 in 1998 to complete these upgrades.
The Company has also begun evaluating significant suppliers, financial
institutions and customers to determine the extent to which the Company is
vulnerable to those third parties failing to remediate their own Year 2000
issues. While the Company currently expects that the Year 2000 will not pose
significant operational problems, delays in the implementation of the new
information systems, or a failure of its vendors, customers or financial
institutions to become Year 2000 compliant could have a material adverse
effect on the Company's business, financial condition and results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on May 20,
1998 in Coburg, Oregon, the Stockholders (i) elected three Class I
directors to serve on the Company's Board of Directors, and (ii)
ratified the Company's appointment of Coopers & Lybrand L.L.P. as
independent auditors.
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Kay L. Toolson 4,522,807 52,000
Michael J. Kluger 4,522,807 52,000
Lee Posey 4,522,807 52,000
</TABLE>
The vote for ratifying the appointment of Coopers & Lybrand L.L.P. was
as follows:
For Against Abstained
--- ------- ---------
4,568,379 5,000 1,428
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the
quarter ended April 4, 1998, for which this report is filed.
16
<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 14, 1998 /s/: JOHN W. NEPUTE
-------------------------- -------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME OF MONACO COACH
CORPORATION AS OF AND FOR THE SIX MONTHS ENDED JULY 4, 1998 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> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 27,234
<ALLOWANCES> 191
<INVENTORY> 51,105
<CURRENT-ASSETS> 87,557
<PP&E> 65,456
<DEPRECIATION> 7,385
<TOTAL-ASSETS> 167,782
<CURRENT-LIABILITIES> 73,327
<BONDS> 7,900
0
0
<COMMON> 83
<OTHER-SE> 83,734
<TOTAL-LIABILITY-AND-EQUITY> 167,782
<SALES> 271,841
<TOTAL-REVENUES> 271,841
<CGS> 235,363
<TOTAL-COSTS> 256,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,027
<INCOME-PRETAX> 14,860
<INCOME-TAX> 6,174
<INCOME-CONTINUING> 8,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,686
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
</TABLE>
