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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: April 3, 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: 0-22256
MONACO COACH CORPORATION
35-1880244
Delaware (I.R.S. Employer
(State of Incorporation) Identification No.)
91320 Industrial Way
Coburg, Oregon 97408
(Address of principal executive offices)
Registrant's telephone number, including area code (541) 686-8011
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
The number of shares outstanding of common stock, $.01 par value, as
of April 3, 1999: 12,498,365
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MONACO COACH CORPORATION
FORM 10-Q
APRIL 3, 1999
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 2, 1999 and
April 3, 1999. 4
Condensed Consolidated Statements of Income for the quarter ended
April 4, 1998 and April 3, 1999. 5
Condensed Consolidated Statements of Cash Flows for the quarter
ended April 4, 1998 and April 3, 1999. 6
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
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2, APRIL 3,
1999 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net $ 36,073 $ 43,981
Inventories 59,566 65,221
Prepaid expenses 143
Deferred income taxes 10,978 11,480
Notes receivable 141 722
---------------- ----------------
Total current assets 106,901 121,404
Notes receivable, less current portion 769
Property, plant and equipment, net 61,655 69,323
Debt issuance costs, net of accumulated amortization
of $1,184 and $1,930, respectively 929 183
Goodwill, net of accumulated amortization of $3,384
and $3,546, respectively 19,873 19,711
---------------- ----------------
Total assets $ 190,127 $ 210,621
---------------- ----------------
---------------- ----------------
LIABILITIES
Current liabilities:
Book overdraft $ 10,519 $ 10,695
Line of credit 1,640
Current portion of long-term note payable 5,000
Accounts payable 28,498 43,946
Income taxes payable 4,149 8,779
Accrued expenses and other liabilities 33,419 35,686
---------------- ----------------
Total current liabilities 83,225 99,106
Note payable, less current portion 5,400
Deferred income tax liability 3,309 3,396
---------------- ----------------
91,934 102,502
---------------- ----------------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 20,000,000 shares
authorized, 12,481,095 and 12,498,365 issued
and outstanding respectively 125 125
Additional paid-in capital 44,947 44,995
Retained earnings 53,121 62,999
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Total stockholders' equity 98,193 108,119
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Total liabilities and stockholders' equity $ 190,127 $ 210,621
---------------- ----------------
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</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
--------------------------------
APRIL 4, APRIL 3,
1998 1999
--------------- ---------------
<S> <C> <C>
Net sales $ 137,176 $ 193,201
Cost of sales 118,823 164,154
--------------- ---------------
Gross profit 18,353 29,047
Selling, general and administrative expenses 10,572 11,586
Amortization of goodwill 165 161
--------------- ---------------
Operating income 7,616 17,300
Other income, net 56 9
Interest expense (503) (983)
--------------- ---------------
Income before income taxes 7,169 16,326
Provision for income taxes 2,976 6,448
--------------- ---------------
Net income $ 4,193 $ 9,878
--------------- ---------------
--------------- ---------------
Earnings per common share:
Basic $ .34 $ .79
Diluted $ .33 $ .77
Weighted average common shares outstanding:
Basic 12,380,892 12,491,385
Diluted 12,684,000 12,857,142
</TABLE>
See accompanying notes.
5
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------
APRIL 4, APRIL 3,
1998 1999
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 4,193 $ 9,878
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,109 1,843
Deferred income taxes (704) (415)
Changes in working capital accounts:
Trade receivables, net (13,677) (7,908)
Inventories (5,569) (5,655)
Prepaid expenses 512 143
Accounts payable 14,456 15,448
Income taxes payable 2,732 4,630
Accrued expenses and other liabilities 1,310 2,267
--------------- ---------------
Net cash provided by operating activities 4,362 20,231
--------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (3,554) (8,603)
Proceeds from collections on notes receivable 1,032 188
--------------- ---------------
Net cash used in investing activities (2,522) (8,415)
--------------- ---------------
Cash flows from financing activities:
Book overdraft 1,403 176
Borrowings (payments) on lines of credit, net (2,796) (1,640)
Payments on long-term note payable (625) (10,400)
Issuance of common stock 178 48
--------------- ---------------
Net cash used in financing activities (1,840) (11,816)
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Net change in cash 0 0
Cash at beginning of period 0 0
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Cash at end of period $ 0 $ 0
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes.
6
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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 April 3, 1999, and the results of its operations and its cash flows for
the quarters ended April 4, 1998 and April 3, 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.
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, APRIL 3,
1999 1999
--------------- ---------------
<S> <C> <C>
Raw materials $ 34,207 $ 32,038
Work-in-process 21,299 23,180
Finished units 4,060 10,003
--------------- ---------------
$ 59,566 $ 65,221
--------------- ---------------
--------------- ---------------
</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%. There were
no outstanding borrowings under the line of credit at April 3, 1999. 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. 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>
APRIL 4, APRIL 3,
1998 1999
------------ ------------
<S> <C> <C>
BASIC
Issued and outstanding shares (weighted average) 12,380,892 12,491,385
EFFECT OF DILUTIVE SECURITIES
Stock Options 303,108 365,757
------------ ------------
DILUTED 12,684,000 12,857,142
------------ ------------
------------ ------------
</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 up to 18 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.
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 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 $900,000 for motor coaches and from
$15,000 to $70,000 for towables.
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 3, 1999 COMPARED TO QUARTER ENDED APRIL 4, 1998
First quarter net sales increased 40.8% from $137.2 million in 1998 to $193.2
million in 1999. Gross sales dollars on motorized products were up 44.1%
reflecting strong demand for the Company's motorized products combined with
higher production rates in both the Coburg, Oregon and Wakarusa, Indiana
motorized plants. The Company's gross towable sales were up 16.2% as a result
of the ramp-up of the expanded and remodeled Indiana towable facility as well
as increased demand for our McKenzie Towable models produced in our
Springfield, Oregon facility. The Company's overall unit sales were up 44.3%
in the first quarter of 1999 with motorized and towable unit sales being up
52.4% and 30.2% respectively. Even with the Company's recent successful
introduction of two less expensive gasoline motor coach models the Company's
average unit selling price declined just slightly in the first quarter of
1999 to $82,000 from $84,000 in the first quarter of 1998 reflecting the
continued strong overall showing of the Company's motorized products.
Gross profit increased $10.6 million from $18.4 million in the first quarter
of 1998 to $29.0 million in the first quarter of 1999 and gross margin
increased from 13.4% in the first quarter of 1998 to 15.0% in the first
quarter of 1999. In the first quarter of 1999 gross margin 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 in 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. 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 $1.0 million from
$10.6 million in the first quarter of 1998 to $11.6 million in the first
quarter of 1999 and decreased as a percentage of sales from 7.7% in 1998 to
6.0% in 1999. Selling, general and administrative expenses benefited in the
first quarter of 1999 from a $1.75 million adjustment in the estimated
accrual for 1998 incentive based compensation. Without this benefit selling,
general and administrative expenses in the first quarter of 1999 would have
increased by $2.8 million to $13.3 million or 6.9% of sales, still
significantly less than the 7.7% in the first quarter of 1998. The decrease
in selling, general and administrative expenses as a percentage of sales
reflects efficiencies arising from the Company's increased sales level.
9
<PAGE>
Amortization of goodwill was $161,000 in the first quarter of 1999 compared
to $165,000 in the same period of 1998. At April 3, 1999, goodwill, net of
accumulated amortization, was $19.7 million.
Operating income was $17.3 million in the first quarter of 1999 compared to
$7.6 million in the similar 1998 period. The Company's increase in gross
margin combined with the reduction of selling, general and administrative
expenses as a percentage of net sales, resulted in an increase in operating
margin from 5.6% in the first quarter of 1998 to 9.0% in the first quarter of
1999. The Company's operating margin in the first quarter of 1999 was
positively affected by the $1.75 million adjustment of incentive based
compensation accrued for 1998. Without this benefit operating margin in the
first quarter of 1999 would have been 8.1%.
Net interest expense was $983,000 in the first quarter of 1999 compared to
$503,000 in the comparable 1998 period. The Company capitalized $44,000 of
interest expense in 1998 relating to the construction in progress in Indiana.
First quarter interest expense in both years also included $103,000 related
to the amortization of $2.1 million in debt issuance costs recorded in
conjunction with the Company's credit facilities. Additionally, interest
expense in the first quarter of 1999 included $639,000 from accelerated
amortization of debt issuance costs related to the credit facilities. The
Company paid off 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. The Company had no borrowings outstanding on
the revolver at quarter end. See "Liquidity and Capital Resources".
The Company reported a provision for income taxes of $3.0 million, or an
effective tax rate of 41.5%, for the first quarter of 1998 compared to $6.4
million, or an effective tax rate of 39.5% for the comparable 1999 period.
Net income increased by $5.7 million, from $4.2 million in the first quarter
of 1998 to $9.9 million in the first quarter of 1999 due to the benefit of
the increases in sales and operating margin being greater than the increase
in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are internally generated cash from
operations and available borrowings under its credit facilities. During the
first three months of 1999, the Company had cash flow of $20.2 million from
operating activities. The Company generated $11.7 million from net income and
non-cash expenses such as depreciation and amortization. The balance of
operating cash flow resulted from increases in accounts payable and other
accrued liabilities which more than offset the increases in the levels of
accounts receivable and inventory.
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 April 3, 1999, there were no
outstanding borrowings under the Revolving Loans. 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 April 3, 1999,
the Company had working capital of approximately $22.3 million, a decrease of
$1.4 million from working capital of $23.7 million at January 2, 1999. The
Company has been using its short-term credit facilities and operating cash
flows to finance its construction of facilities and other capital
expenditures.
10
<PAGE>
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
$8.6 million in the first quarter of 1999, primarily for the acquisition of
the new Coburg property and initial construction costs for the new Coburg
manufacturing facilities. The Company anticipates that capital expenditures
for all of 1999 will total approximately $20.0 to $25.0 million, of which an
estimated $15 to $18 million is expected to be used to further expand its
existing Coburg, Oregon manufacturing facilities.* The Company's remaining
capital expenditures are expected to be for computer system upgrades and
various smaller-scale plant expansion or remodeling projects as well as
normal replacement of outdated or worn-out equipment.* The Company may
require additional equity or debt financing to address working capital and
facilities expansion needs, particularly if the Company further expands its
operations to address greater than anticipated growth in the market for its
products. The Company may also from time to time seek to acquire businesses
that would complement the Company's current business, and any such
acquisition could require additional financing. There can be no assurance
that additional financing will be available if required or on terms deemed
favorable by the Company.
As is typical in the recreational vehicle industry, many of the Company's
retail dealers utilize wholesale floor plan financing arrangements with third
party lending institutions to finance their purchases of the Company's
products. Under the terms of these floor plan arrangements, institutional
lenders customarily require the recreational vehicle manufacturer to agree to
repurchase any unsold units if the dealer fails to meet its commitments to
the lender, subject to certain conditions. The Company has agreements with
several institutional lenders under which the Company currently has
repurchase obligations. The Company's contingent obligations under these
repurchase agreements are reduced by the proceeds received upon the sale of
any repurchased units. The Company's obligations under these repurchase
agreements vary from period to period. At April 3, 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 7.4% 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.
11
<PAGE>
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
plans to greatly expand its existing Coburg, Oregon motorized facilities. The
integration of the 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 263 dealerships located primarily in the United States and
Canada at the end of 1998, a significant percentage of the Company's sales
have been and will continue to be concentrated among a relatively small
number of independent dealers. Although no single dealer accounted for as
much as 10% of the Company's net sales in 1998, the top two dealers accounted
for approximately 14% 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 April 3, 1999, with
approximately 7.4% 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.
12
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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 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 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.
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,
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.
13
<PAGE>
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 on schedule and the Company estimates that
more than 90 percent of these upgrades had been completed by April 3, 1999.
The certification and testing phase is ongoing as affected components are
remediated and upgraded. Substantially all hardware infrastructure activities
are expected to be completed by the end of the second quarter of 1999.*
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, which is expected to make
approximately 90 percent of the Company's business application software Year
2000 compliant, is scheduled for company-wide implementation by the end of
the second quarter of 1999.* Other application software that the Company uses
is in the remediation phase which is being accomplished through vendor
software replacements or upgrades. These application upgrades are expected to
be completed by the end of the second quarter of 1999, except for the Oregon
payroll processing software upgrades which are expected to be completed by
the middle of the third quarter of 1999.* The certification and testing phase
of all application software is ongoing and is expected to be complete in the
third quarter of 1999.*
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. The
Company does not expect that a significant amount of equipment used by the
Company will be found to have Year 2000 problems that will require extensive
remediation efforts or contingency plans.* All phases of this category are
scheduled to be completed in the third quarter of 1999.*
THIRD-PARTY SUPPLIERS AND CUSTOMERS
The third-party suppliers and customers category includes completing all
phases of the Year 2000 project using a prioritized list of third-parties
most critical to the Company's operations and communicating with them about
their plans and progress toward addressing the Year 2000 problem. The most
significant third-party relationships and dependencies exist with financial
institutions, along with suppliers of materials, communication services,
utilities, and supplies. The Company is currently behind the original
schedule within this category and is assessing the most critical
third-parties' state of readiness for Year 2000. These assessments will be
followed by development of strategies and contingency plans, with completion
scheduled for mid-1999.* Less critical third-party dependencies will be in
the assessment phase in the second and third quarters of 1999 with
contingency planning scheduled for completion by the latter part of 1999.*
COSTS
From the time the Company began its hardware infrastructure and application
software upgrades in 1996, the Company has spent approximately $1,150,000
through April 3, 1999 and expects to spend a total of approximately $200,000
in the future to complete upgrades in these categories.* No significant costs
have been incurred in the categories of imbedded chip technology and
third-party suppliers and customers. Total future costs related to these two
categories are estimated to be less than $200,000.*
14
<PAGE>
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 April 3, 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: MAY 18, 1999 /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 THREE MONTHS ENDED APRIL 3, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 44,162
<ALLOWANCES> 181
<INVENTORY> 65,221
<CURRENT-ASSETS> 121,404
<PP&E> 79,669
<DEPRECIATION> 10,346
<TOTAL-ASSETS> 210,621
<CURRENT-LIABILITIES> 99,106
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0
0
<COMMON> 125
<OTHER-SE> 107,994
<TOTAL-LIABILITY-AND-EQUITY> 210,621
<SALES> 193,201
<TOTAL-REVENUES> 193,201
<CGS> 164,154
<TOTAL-COSTS> 175,901
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 983
<INCOME-PRETAX> 16,326
<INCOME-TAX> 6,448
<INCOME-CONTINUING> 9,878
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<NET-INCOME> 9,878
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