<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: October 2, 1999
---------------
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: 1-14725
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MONACO COACH CORPORATION
35-1880244
Delaware (I.R.S. Employer
(State of Incorporation) Identification No.)
91320 Industrial Way
Coburg, Oregon 97408
(Address of principal executive offices)
Registrant's telephone number, including area code (541) 686-8011
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
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The number of shares outstanding of common stock, $.01 par value, as
of October 2, 1999: 18,861,529
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<PAGE>
MONACO COACH CORPORATION
FORM 10-Q
OCTOBER 2, 1999
INDEX
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Reference
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of 4
January 2, 1999 and October 2, 1999.
Condensed Consolidated Statements of Income 5
for the quarters and nine-month periods ended
October 3, 1998 and October 2, 1999.
Condensed Consolidated Statements of Cash 6
Flows for the nine-month periods ended
October 3, 1998 and October 2, 1999.
Notes to Condensed Consolidated Financial Statements. 7 - 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 9 - 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 15
PART II - OTHER INFORMATION
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 2, OCTOBER 2,
1999 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net $ 36,073 $ 45,380
Inventories 59,566 74,463
Prepaid expenses 143 149
Deferred income taxes 10,978 13,665
Notes receivable 141
---------------- ----------------
Total current assets 106,901 133,657
Notes receivable, less current portion 769
Property, plant and equipment, net 61,655 87,837
Debt issuance costs, net of accumulated amortization
of $1,184 and $1,976, respectively 929 137
Goodwill, net of accumulated amortization of $3,384
and $3,868, respectively 19,873 19,389
---------------- ----------------
Total assets $ 190,127 $ 241,020
================ ================
LIABILITIES
Current liabilities:
Book overdraft $ 10,519 $ 13,666
Line of credit 1,640 3,527
Current portion of long-term note payable 5,000
Accounts payable 28,498 43,686
Income taxes payable 4,149 3,225
Accrued expenses and other liabilities 33,419 41,833
---------------- ----------------
Total current liabilities 83,225 105,937
Note payable, less current portion 5,400
Deferred income tax liability 3,309 3,563
---------------- ----------------
91,934 109,500
---------------- ----------------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized, 12,481,095 and 18,861,529 issued
and outstanding respectively 125 189
Additional paid-in capital 44,947 45,648
Retained earnings 53,121 85,683
---------------- ----------------
Total stockholders' equity 98,193 131,520
---------------- ----------------
Total liabilities and stockholders' equity $ 190,127 $ 241,020
================ ================
</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 NINE MONTHS ENDED
--------------------------------- ------------------------------
OCTOBER 3, OCTOBER 2, OCTOBER 3, OCTOBER 2,
1998 1999 1998 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 153,223 $ 196,694 $ 425,078 $ 589,073
Cost of sales 131,891 165,696 367,252 497,564
-------------- --------------- -------------- --------------
Gross profit 21,332 30,998 57,826 91,509
Selling, general and administrative expenses 10,401 12,464 30,783 36,433
Amortization of goodwill 161 161 484 484
-------------- --------------- -------------- --------------
Operating income 10,770 18,373 26,559 54,592
Other income, net 540 24 638 89
Interest expense (518) (23) (1,546) (1,029)
-------------- --------------- -------------- ---------------
Income before income taxes 10,792 18,374 25,651 53,652
Provision for income taxes 4,479 7,147 10,652 21,090
-------------- --------------- -------------- --------------
Net income $ 6,313 $ 11,227 $ 14,999 $ 32,562
============== =============== ============== ==============
Earnings per common share:
Basic $ .34 $ .60 $ .80 $ 1.73
Diluted $ .33 $ .58 $ .79 $ 1.68
Weighted average common shares outstanding:
Basic 18,698,355 18,844,526 18,640,558 18,788,965
Diluted 19,077,594 19,428,870 19,061,065 19,353,818
</TABLE>
See accompanying notes.
5
<PAGE>
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------
OCTOBER 3, OCTOBER 2,
1998 1999
--------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 14,999 $ 32,562
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 3,591 4,210
Deferred income taxes (2,562) (2,433)
Changes in working capital accounts:
Trade receivables, net (10,212) (9,307)
Inventories (22,214) (14,897)
Prepaid expenses 928 (6)
Accounts payable 12,956 15,188
Income taxes payable 3,324 (924)
Accrued expenses and other liabilities 6,339 8,414
--------------- ---------------
Net cash provided by operating activities 7,149 32,807
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (6,026) (29,116)
Proceeds from collections on notes receivable 1,774 910
--------------- ----------------
Net cash used in investing activities (4,252) (28,206)
--------------- ----------------
Cash flows from financing activities:
Book overdraft 3,774 3,147
Borrowings (payments) on lines of credit, net (2,954) 1,887
Payments on long-term note payable (4,225) (10,400)
Issuance of common stock 508 765
--------------- ---------------
Net cash used in financing activities (2,897) (4,601)
--------------- ---------------
Net change in cash 0 0
Cash at beginning of period 0 0
--------------- ---------------
Cash at end of period $ 0 $ 0
=============== ===============
</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 2, 1999 and October 2, 1999, and the results of
its operations for the quarters and nine-month periods ended October 3,
1998 and October 2, 1999, and cash flows of the Company for the
nine-month periods ended October 3, 1998 and October 2, 1999. 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 2, 1999 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 2, 1999.
On June 7, 1999 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
July 7, 1999 to stockholders of record June 21, 1999. All share and per
share data, as appropriate, reflect this split. The effect of the split is
reflected within stockholders' equity at July 3, 1999 by transferring the
par value for the additional shares issued of $62,735 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 2, OCTOBER 2,
1999 1999
----------------- -----------------
<S> <C> <C>
Raw materials $ 34,207 $ 41,167
Work-in-process 21,299 24,274
Finished units 4,060 9,022
----------------- -----------------
$ 59,566 $ 74,463
================= =================
</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. LINE OF CREDIT
The Company has a bank line of credit consisting of a revolving line of
credit of up to $20.0 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 $3.5 million at
October 2, 1999. The revolving line of credit expires March 1, 2001 and
is collateralized by all the assets of the Company. The Company has
obtained a waiver from the lender for capital expenditures in 1999 that
exceeded the restrictive covenant that was established in the 1996
credit agreement.
7
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5. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average number
of shares outstanding during the period. Diluted earnings per common
share is based on the weighted average number of shares outstanding
during the period, after consideration of the dilutive effect of stock
options. The weighted average number of common shares used in the
computation of earnings per common share are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
-------------------------------- -------------------------------
OCTOBER 3, OCTOBER 2, OCTOBER 3, OCTOBER 2,
1998 1999 1998 1999
--------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
BASIC
Issued and outstanding shares 18,698,355 18,844,526 18,640,558 18,788,965
(weighted average)
EFFECT OF DILUTIVE SECURITIES
Stock Options 379,239 584,344 420,507 564,853
--------------- --------------- -------------- ----------------
DILUTED 19,077,594 19,428,870 19,061,065 19,353,818
=============== =============== ============== ================
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
REPURCHASE AGREEMENTS
Substantially all of the Company's sales to independent dealers are made
on terms requiring cash on delivery. However, most dealers finance units
on a "floor plan" basis with a bank or finance company lending the
dealer all or substantially all of the wholesale purchase price and
retaining 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 varying periods of up to 15 months after a unit is shipped,
the Company will repurchase its products from the financing institution
in the event that they have repossessed them upon a dealer's default.
The risk of loss resulting from these agreements is further reduced by
the resale value of the products repurchased. The Company's contingent
obligations under repurchase agreements vary from period to period and
totaled approximately $254.7 million as of October 2, 1999, with
approximately 6.5% concentrated with one dealer.
LITIGATION
The Company is involved in legal proceedings arising in the ordinary
course of its business, including a variety of product liability and
warranty claims typical in the recreational vehicle industry. The
Company does not believe that the outcome of its pending legal
proceedings will have a material adverse effect on the business,
financial condition, or results of operations of the Company.
8
<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 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
statements include, but are not limited to, those below that have been marked
with an asterisk (*). In addition, the Company may from time to time make
forward-looking statements through 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, including those set forth 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 $65,000 to $950,000 for motor coaches and from
$15,000 to $70,000 for towables.
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 2, 1999 COMPARED TO QUARTER ENDED OCTOBER 3, 1998
Third quarter net sales increased 28.4% to $196.7 million compared to $153.2
million for the same period last year. Gross sales dollars on motorized
products were up 25.4%, reflecting higher production rates in both the
Coburg, Oregon and Wakarusa, Indiana motorized plants. The Company's gross
towable sales were up 49.5% as both the Holiday Rambler and McKenzie towable
operations reported strong increases. The Company's overall unit sales were
up 34.7% in the third quarter of 1999 with motorized and towable unit sales
being up 25.6% and 56.8% respectively. Results in the third quarter of 1999
reflect 12 weeks of production versus 13 weeks of production in the third
quarter of 1998. The Company's average unit selling price decreased slightly
in the third quarter of 1999 to $83,000 from $88,000 in the comparable 1998
quarter as the Company's continued ramp-up of its lower priced gasoline motor
coaches and towable products offset the strong overall showing of the
Company's motorized products. The Company's continued push into the less
expensive gasoline motor coach market as well as the recent repositioning of
some of its existing towable models into slightly lower price points are
expected to keep the overall average selling price below $100,000.*
Gross profit for the third quarter of 1999 increased to $31.0 million, up
$9.7 million, from $21.3 million in 1998, and gross margin increased from
13.9% in the third quarter of 1998 to 15.8% in the third quarter of 1999.
Gross margin in the third quarter of 1999 benefited from a strong mix of
motorized products and manufacturing efficiencies from an increase in
production volume in all of the Company's manufacturing plants. The Company's
overall gross margin may fluctuate in future periods if the mix of products
shifts from higher to lower gross margin units or if the Company encounters
unexpected manufacturing difficulties or competitive pressures.
Selling, general, and administrative expenses increased by $2.1 million to
$12.5 million in the third quarter of 1999 but decreased as a percentage of
sales from 6.8% in 1998 to 6.3% in 1999. The decrease in selling, general,
and administrative expenses as a percentage of sales reflects efficiencies
arising from the Company's increased sales level.
Amortization of goodwill was $161,000 in both the third quarter of 1999 and
the same period of 1998. At October 2, 1999, goodwill, net of accumulated
amortization was $19.4 million.
9
<PAGE>
Operating income was $18.4 million in the third quarter of 1999 compared to
$10.8 million in the similar 1998 period. The Company's improvement in gross
margin combined with the reduction of selling, general, and administrative
expense as a percentage of sales resulted in an improvement in operating
margin to 9.3% in the third quarter of 1999 compared to 7.0% in the third
quarter of 1998.
Net interest expense was $23,000 in the third quarter of 1999 compared to
$518,000 in the comparable 1998 period. The Company capitalized $144,000 of
interest expense in the third quarter of 1999 relating to the construction in
progress at our Coburg, Oregon facility. Third quarter interest expense
included $23,000 in 1999 and $103,000 in 1998 related to the amortization of
debt issuance costs related to the credit facilities.
The Company reported a provision for income taxes of $7.1 million, or an
effective tax rate of 38.9% in the third quarter of 1999, compared to $4.5
million, or an effective tax rate of 41.5% for the comparable 1998 period.
Net income increased by $4.9 million, from $6.3 million in the third quarter
of 1998 to $11.2 million in 1999 due to the increase in sales combined with
an increase in operating margin and a decrease in interest expense.
NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 3,
1998.
Net sales increased $164.0 million, or 38.6%, to $589.1 million for the first
nine months of 1999, compared to the similar year earlier period. Gross sales
dollars on motorized and towable products were up 38.8% and 33.8%,
respectively for the first nine months of 1999. Overall unit sales for the
Company were up 44.8% in the first nine months of 1999 compared to the
similar period in 1998 with motorized and towable unit sales up 43.1% and
48.4%, respectively. The Company's average unit selling price decreased in
the first nine months of 1999 to $83,000 compared to $87,000 in the first
nine months of 1998.
Gross profit for the nine-month period ended October 2, 1999 was up $33.7
million to $91.5 million and gross margin increased to 15.5% in 1999 from
13.6% in 1998. Gross margin in the first nine months of 1999 benefited from a
strong mix of motorized products along with manufacturing efficiencies
created from an increase in production volume in all of the Company's
manufacturing plants. Gross margin for the first nine months of 1998 was
dampened by lower gross margins in the three towable plants due to reduced
production volumes in those plants. The Company consolidated its two
Indiana-based towable plants into one Company-owned facility in Elkhart,
Indiana in July of 1998 and expanded this facility in the second half of 1998.
Selling, general, and administrative expenses increased by $5.7 million to
$36.4 million in the first nine months of 1999 but decreased as a percentage
of sales from 7.2% in 1998 to 6.2% in 1999. Selling, general, and
administrative expenses benefited in the first nine months of 1999 from a
$1.75 million reduction in the estimated accrual for 1998 incentive based
compensation. Without this benefit selling, general, and administrative
expenses in the first nine months of 1999 would have increased by $7.4
million to $38.2 million or 6.5% of sales, still significantly less than the
7.2% in the first nine months of 1998. The decrease in selling, general, and
administrative expenses as a percentage of sales reflected efficiencies
arising from the Company's increased sales level.
Amortization of goodwill was $484,000 in both the first nine months of 1999
and the same period of 1998.
Operating income increased $28.0 million in the first nine months of 1999 to
$54.6 million, compared to $26.6 million in the year earlier period. The
Company's lower selling, general, and administrative expense as a percentage
of sales combined with the improvement in the Company's gross margin,
resulted in an increase in operating margin to 9.3% in the first nine months
of 1999 compared to 6.2% in the first nine months of 1998. The Company's
operating margin in the first nine months of 1999 was positively affected by
the $1.75 million reduction of incentive based compensation accrued for 1998.
Without this benefit operating margin in the first nine months of 1999 would
have been 9.0%.
Net interest expense declined in the first nine months of 1999 to $1,029,000
from $1,546,000 in the comparable 1998 period. The Company capitalized
$195,000 of interest expense in the first nine months of 1999 relating to the
construction in progress in Coburg, Oregon and $44,000 in the first nine
months of 1998 relating to the construction in progress in Indiana. The
Company's interest expense included $153,000 in the first nine months of 1999
and $321,000 in the first nine months of 1998 related to the amortization of
debt issuance costs recorded in conjunction with the Company's credit
facilities. Additionally, interest expense in the first nine months of 1999
included $639,000 from accelerated amortization of debt issuance costs
related to the credit facilities. The Company paid off
10
<PAGE>
its long term debt of approximately $10 million at the end of the first
quarter of 1999 and also reduced the amount of availability on its revolving
line of credit. See "Liquidity and Capital Resources".
The Company reported a provision for income taxes of $21.0 million, or an
effective tax rate of 39.3% for the first nine months of 1999, compared to
$10.7 million, or an effective tax rate of 41.5% for the comparable 1998
period.
Net income increased to $32.6 million in the first nine months of 1999 from
$15.0 million in the first nine months of 1998, due to the increase in net
sales combined with an improvement in operating margin and a decrease in
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are internally generated cash from
operations and available borrowings under its credit facilities. During the
first nine months of 1999, the Company had cash flows of $32.8 million from
operating activities. The Company generated $36.8 million from net income and
non-cash expenses such as depreciation and amortization. Additionally,
increases in accounts payable and accrued expenses largely offset increases
in trade receivables, inventories, and deferred taxes and a decrease in
income taxes payable.
At the end of 1998 the Company had 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 bore interest at
various rates based upon the prime lending rate announced from time to time
by Banker's Trust Company (the "Prime Rate") or Eurodollar and was due and
payable in full on March 1, 2001. At the end of the first quarter of 1999 the
Company paid off the remaining balance on the Term Loan, $10.4 million,
without penalty. Additionally, at the end of the first quarter of 1999, the
Company elected to reduce the availability on its Revolving Loans from $45
million to $20 million. At the election of the Company, the Revolving Loans
bear interest at variable interest rates based on the Prime Rate or
Eurodollar. The Revolving Loans are due and payable in full on March 1, 2001,
and require monthly interest payments. As of October 2, 1999, $3.5 million
was outstanding under the Revolving Loans, with an effective interest rate of
8.25%. 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 the outstanding checks of the Company
are reflected as a liability. The outstanding check liability is combined
with the Company's positive cash balance accounts to reflect a net book
overdraft or a net cash balance for financial reporting.
The Company's principal working capital requirements are for purchases of
inventory and, to a lesser extent, financing of trade receivables. The
Company's dealers typically finance product purchases under wholesale floor
plan arrangements with third parties as described below. At October 2, 1999,
the Company had working capital of approximately $27.8 million, an increase
of $4.1 million from working capital of $23.7 million at January 2, 1999. 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
$29.1 million in the first nine months of 1999, primarily for the acquisition
of the Coburg property and construction costs for the new Coburg
manufacturing facilities. The Company anticipates that capital expenditures
for all of 1999 will total approximately $33 to $35 million.* The Company's
remaining capital expenditures for 1999 are expected to be for additional
expansion in Coburg, Oregon for the existing high-end motor home line and
purchase and initial remodeling of an additional production facility in
Elkhart, Indiana that we reached an agreement to acquire.* The Elkhart
facility is adjacent to our existing Elkhart operations, and includes 30
acres and 250,000 square feet of additional production space which will be
used to more than double our diesel motor home capacity in Indiana.* The
Company is expecting capital expenditures in 2000 to be approximately $20 to
$25 million which includes finishing the expansion projects started in the
second half of 1999 as well as $4 to $5 million of maintenance capital
expenditures for computer system upgrades and additions, smaller scale plant
remodeling projects and 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
11
<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 October 2, 1999, approximately
$254.7 million of products sold by the Company to independent dealers were
subject to potential repurchase under existing floor plan financing
agreements with approximately 6.5% 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, material shortages,
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 sold
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, 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, the Company
now offers a much broader range of recreational vehicle products and will
likely be more susceptible to recreational vehicle industry cyclicality than
in the past. Factors affecting cyclicality in the recreational vehicle
industry include fuel availability and fuel prices, prevailing interest
rates, the level of discretionary spending, the availability of credit and
overall consumer confidence. In particular, a decline in consumer confidence
and/or a slowing of the overall economy has had a material adverse effect on
the recreational vehicle market in the past. Recurrence of these conditions
could 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 and 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 and recently announced plans
for additional expansion of manufacturing facilities. In 1999 the Company has
substantially expanded its existing Coburg, Oregon motorized facilities. The
integration of the
12
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Company's facilities and the expansion of the Company's manufacturing
operations involve a number of risks including unexpected building and
production difficulties. In the past the Company experienced startup
inefficiencies in manufacturing a new model and also has experienced
difficulty in increasing production rates at a plant. 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 setup 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 setup 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 250 dealerships located primarily in the United States and
Canada at the end of third quarter 1999, 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 during the first nine
months of 1999, the top two dealers accounted for approximately 14.8% 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. The Company's contingent obligations under these repurchase
agreements are reduced by the proceeds received upon the sale of any
repurchased units. 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 $254.7 million as of October 2, 1999,
with approximately 6.5% concentrated with one dealer. See "Liquidity and
Capital Resources" and Note 6 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 (Dana) for all diesel motor coaches other than
the Holiday Rambler Endeavor Diesel model and chassis (Workhorse, Ford and
Freightliner) for certain of its motorhome products. 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. In 1997, Allison put all chassis
manufacturers on allocation with respect to one of the transmissions the
Company uses. The Company presently believes that its expected allocation of
transmissions is sufficient to enable the unit volume increases that are
planned for models using this component.* In the second quarter of 1999, Ford
announced a temporary reduction, starting in the fourth quarter of 1999, in
the availability of a particular gasoline chassis that the Company uses for
five of its models. Recently, Ford announced further reductions of chassis
shipments for the first quarter of 2000. Based on Ford's announcement, the
Company intends to increase its use of Workhorse gasoline chassis for a
portion of its gasoline models.* The Company believes that the increased use
of Workhorse chassis, combined with the Ford chassis the Company expects to
receive through the first quarter of 2000, and a planned ramp-up of the
Company's new low-end diesel models, will enable the unit volume increases
that are planned by the Company in the fourth quarter of 1999 and the first
quarter of 2000.* Nevertheless, the reduction of Ford chassis shipments will
mean a reduction in the number of gasoline units produced by the Company and
the industry. Moreover, Allison, Ford, or any of the other suppliers may not
be able to meet the Company's future requirements for transmissions, chassis,
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, result of operations and
financial condition.
13
<PAGE>
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, unexpected costs associated
with model changes have adversely affected the Company's gross margin in the
past. Future product introductions could 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, many of which have
significant financial resources and extensive distribution capabilities.
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.
YEAR 2000 READINESS DISCLOSURE
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,
before the end of 1999, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Without upgrades, computer systems could fail or miscalculate
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
The Company has identified its Year 2000 risk in four categories: internal
computer hardware infrastructure, application software (including a
combination of "canned" software applications and internally written or
modified applications for both financial and non-financial uses), imbedded
chip technology, and third-party suppliers and customers.
The Company's Year 2000 risk project phases consist of assessment of
potential year 2000 related problems, development of strategies to mitigate
those problems, remediation of the affected systems, and internal
certification that the process is complete through documentation and testing
of remediation efforts. None of the Company's other information technology
(IT) projects has been delayed due to the implementation of its Year 2000
project.
INTERNAL COMPUTER HARDWARE INFRASTRUCTURE
During the Company's acquisition of Holiday Rambler in 1996, the Company
decided not to purchase the existing hardware or software that was being used
by that operation. Instead, the Company decided to convert the operation to a
client/server based hardware configuration which is Year 2000 compliant.
Following the conversion in the Wakarusa facilities to the new hardware
configurations during 1996, the Company has continued to upgrade the hardware
infrastructure at all other Company facilities in Indiana and Oregon. The
upgrading of computer hardware is substantially complete. The certification
and testing phase is ongoing as affected components are remediated and
upgraded.
14
<PAGE>
APPLICATION SOFTWARE
As part of the system conversion in Wakarusa in 1996, the Company decided to
convert company-wide to a fully integrated financial and manufacturing
software application. This software implementation is substantially complete.
Other application software that the Company uses has also been replaced or
upgraded. The certification and testing phase of all application software is
substantially complete.
IMBEDDED CHIP TECHNOLOGY
The Year 2000 risk also exists among other types of machinery and equipment
that use imbedded computer chips or processors. For example: phone systems,
security alarm systems, or other diagnostic equipment may contain computer
chips that rely on date information to function properly. The Company began
the assessment phase of this category during the fourth quarter of 1998. All
phases of this category are substantially complete.
THIRD-PARTY SUPPLIERS AND CUSTOMERS
The third-party suppliers and customers category includes completing all
phases of the Year 2000 project using a prioritized list of third-parties
most critical to the Company's operations and communicating with them about
their plans and progress toward addressing the Year 2000 problem. The most
significant third-party relationships and dependencies exist with financial
institutions, along with suppliers of materials, communication services,
utilities, and supplies. The Company has assessed the most critical
third-parties' state of readiness for Year 2000. The company is currently
developing and implementing strategies and contingency plans for potential
problems identified through this assessment, with completion expected early
in the fourth quarter of 1999 .* Less critical third-party dependencies
continue to be assessed with any necessary contingency planning scheduled for
completion before the end of 1999.*
COSTS
From the time the Company began its hardware infrastructure and application
software upgrades in 1996, the Company has spent approximately $1,300,000
through October 2, 1999, excluding internal payroll costs. No significant
costs have been incurred in the categories of imbedded chip technology and
third-party suppliers and customers. Total future costs related to all
categories are estimated to be less than $50,000.*
RISKS
Although the Company expects its Year 2000 project to reduce the risk of
business interruptions due to the Year 2000 problem, there can be no
assurance that these results will be achieved. Failure to correct a Year 2000
problem could result in an interruption in, or failure of, certain normal
business activities or operations. Factors that give rise to uncertainty
include failure to identify all susceptible systems, failure by third parties
to address the Year 2000 problem whose systems or products, directly or
indirectly, are depended on by the Company, loss of personnel resources
within the Company to complete the Year 2000 project, or other similar
uncertainties. Based on an assessment of the Company's current state of
readiness with respect to the Year 2000 problem, the Company believes that
the most reasonably likely worst case scenario would involve the
noncompliance of one or more of the Company's third-party financial
institutions or key suppliers.* Such an event could result in a material
disruption to the Company's operations. Specifically, the Company could
experience an interruption in its ability to collect funds from dealer
finance companies, process payments to suppliers, and receive key material
components from suppliers thus slowing or interrupting the production
process. If this were to occur it could, depending on its duration, have a
material impact on the Company's business, results of operations, financial
condition and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the quarter
ended October 2, 1999, 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: November 15, 1999 /s/: John W. Nepute
----------------------------- ----------------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
17
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<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 NINE MONTHS ENDED OCTOBER 2, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
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