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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: July 3, 1999
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from to
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Commission File Number: 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
July 3, 1999: 18,821,030
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MONACO COACH CORPORATION
FORM 10-Q
JULY 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 July 3, 1999. 4
Condensed Consolidated Statements of Income 5
for the quarters and six-month periods ended
July 4, 1998 and July 3, 1999.
Condensed Consolidated Statements of Cash 6
Flows for the six-month periods ended
July 4, 1998 and July 3, 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
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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, JULY 3,
1999 1999
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net $ 36,073 $ 49,386
Inventories 59,566 68,542
Prepaid expenses 143 95
Deferred income taxes 10,978 12,966
Notes receivable 141
Total current assets 106,901 130,989
Notes receivable, less current portion 769
Property, plant and equipment, net 61,655 80,033
Debt issuance costs, net of accumulated amortization
of $1,184 and $1,953, respectively 929 160
Goodwill, net of accumulated amortization of $3,384
and $3,707, respectively 19,873 19,550
Total assets $ 190,127 $ 230,732
LIABILITIES
Current liabilities:
Book overdraft $ 10,519 $ 12,086
Line of credit 1,640 5,496
Current portion of long-term note payable 5,000
Accounts payable 28,498 47,908
Income taxes payable 4,149 1,548
Accrued expenses and other liabilities 33,419 40,076
Total current liabilities 83,225 107,114
Note payable, less current portion 5,400
Deferred income tax liability 3,309 3,500
91,934 110,614
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized, 12,481,095 and 18,821,030 issued
and outstanding respectively 125 188
Additional paid-in capital 44,947 45,478
Retained earnings 53,121 74,452
Total stockholders' equity 98,193 120,118
Total liabilities and stockholders' equity $ 190,127 $ 230,732
</TABLE>
See accompanying notes.
4
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
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JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
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<S> <C> <C> <C> <C>
Net sales $ 134,679 $ 199,177 $ 271,855 $ 392,378
Cost of sales 116,538 167,853 235,361 331,906
Gross profit 18,141 31,324 36,494 60,472
Selling, general and administrative expenses 9,810 12,248 20,382 23,934
Amortization of goodwill 158 161 323 323
Operating income 8,173 18,915 15,789 36,215
Other income, net 42 56 98 65
Interest expense (525) (23) (1,028) (1,006)
Income before income taxes 7,690 18,948 14,859 35,274
Provision for income taxes 3,197 7,495 6,173 13,943
Net income $ 4,493 $ 11,453 $ 8,686 $ 21,331
Earnings per common share:
Basic $ .24 $ .61 $ .47 $ 1.14
Diluted $ .24 $ .59 $ .46 $ 1.10
Weighted average common shares outstanding:
Basic 18,651,987 18,785,290 18,611,662 18,761,185
Diluted 19,079,601 19,346,131 19,052,799 19,316,293
</TABLE>
See accompanying notes.
5
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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July 4, July 3,
1998 1999
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<S> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 8,686 $ 21,331
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,346 2,989
Deferred income taxes (898) (1,797)
Changes in working capital accounts:
Trade receivables, net (1,734) (13,313)
Inventories (5,684) (8,976)
Prepaid expenses 928 48
Accounts payable 7,252 19,410
Income taxes payable (643) (2,601)
Accrued expenses and other liabilities 2,322 6,657
Net cash provided by operating activities 12,575 23,748
Cash flows from investing activities:
Additions to property, plant and equipment (4,482) (20,275)
Proceeds from collections on notes receivable 1,748 910
Net cash used in investing activities (2,734) (19,365)
Cash flows from financing activities:
Book overdraft 765 1,567
Borrowings (payments) on lines of credit, net (8,014) 3,856
Payments on long-term note payable (2,975) (10,400)
Issuance of common stock 383 594
Net cash used in financing activities (9,841) (4,383)
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
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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 July 3, 1999, and the results of its operations for
the quarters and six-month periods ended July 4, 1998 and July 3, 1999,
and cash flows of the Company for the six-month periods ended July 4, 1998
and July 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.
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, JULY 3,
1999 1999
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<S> <C> <C>
Raw materials $ 34,207 $ 32,553
Work-in-progress 21,299 24,481
Finished units 4,060 11,508
$ 59,566 $ 68,542
</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 $5.5 million at July 3, 1999. The
revolving line of credit expires March 1, 2001 and is collateralized by all
the assets of the Company. The Company has requested a waiver from the
lender for capital expenditures in 1999 that exceed the restrictive
covenant of its credit agreement obtained in 1996.
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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 SIX MONTHS ENDED
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JULY 4, JULY 3, JULY 4, JULY 3,
1998 1999 1998 1999
----------------------------------------------------
<S> <C> <C> <C> <C>
BASIC
Issued and outstanding shares 18,651,987 18,785,290 18,611,662 18,761,185
(weighted average)
EFFECT OF DILUTIVE SECURITIES
Stock Options 427,614 560,841 441,137 555,108
DILUTED 19,079,601 19,346,131 19,052,799 19,316,293
</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
$260.6 million as of July 3, 1999, with approximately 7.6% 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
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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 $950,000 for motor coaches and from
$15,000 to $70,000 for towables.
RESULTS OF OPERATIONS
QUARTER ENDED JULY 3, 1999 COMPARED TO QUARTER ENDED JULY 4, 1998
Second quarter net sales increased 47.9% to $199.2 million compared to $134.7
million for the same period last year. Gross sales dollars on motorized
products were up 49.1%, 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
also up 40.9% as both the Holiday Rambler and McKenzie towable operations
reported strong increases. The Company's overall unit sales were up 56.7% in
the second quarter of 1999 with motorized and towable unit sales being up
54.4% and 61.5% respectively. Results in the second quarter of 1999 reflect
thirteen weeks of production versus 12 weeks of production in the second
quarter of 1998. The Company's average unit selling price decreased slightly
in the second quarter of 1999 to $82,000 from $87,000 in the comparable 1998
quarter as the Company's continued ramp-up of its lower priced gasoline motor
coaches and towable products was largely offset by the continued 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 likely to keep the overall average selling price below
$100,000.*
Gross profit for the second quarter of 1999 increased to $31.3 million, up
$13.2 million, from $18.1 million in 1998, and gross margin increased from
13.5% in the second quarter of 1998 to 15.7% in the second quarter of 1999.
Gross margin in the second quarter of 1999 benefited from smooth model
changeovers in the manufacturing plants, a strong mix of motorized products,
and manufacturing efficiencies from an increase in production volume in all
of the Company's manufacturing plants. Gross margin in the second quarter of
1998 was dampened by costs related to model changeovers in all of the plants
and by consolidation of the two Indiana towable plants into one Company-owned
facility of Elkhart, Indiana. 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 $2.4 million to
$12.2 million in the second quarter of 1999 but decreased as a percentage of
sales from 7.3% in 1998 to 6.1% 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.
9
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Amortization of goodwill was $161,000 in the second quarter of 1999 compared
to $158,000 in the same period of 1998. At July 3, 1999, goodwill, net of
accumulated amortization was $19.6 million.
Operating income was $18.9 million in the second quarter of 1999 compared
to $8.2 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 9.5% in the second quarter of 1999 compared to 6.1% in
the second quarter of 1998.
Net interest expense was $23,000 in the second quarter of 1999 compared to
$525,000 in the comparable 1998 period. The Company capitalized $51,000 of
interest expense in the second quarter of 1999 relating to the construction
in progress at our Coburg, Oregon facility. Second quarter interest expense
included $23,000 in 1999 and $107,000 in 1998 related to the amortization of
debt issuance costs related to the credit facilities.
The Company reported a provision for income taxes of $7.5 million, or an
effective tax rate of 39.6% in the second quarter of 1999, compared to $3.2
million, or an effective tax rate of 41.6% for the comparable 1998 period.
Net income increased by $7.0 million, from $4.5 million in the second quarter
of 1998 to $11.5 million in 1999 due to the increase in sales combined with
an increase in operating margin and a decrease in interest expense.
SIX MONTHS ENDED JULY 3, 1999 COMPARED TO SIX MONTHS ENDED JULY 4, 1998.
Net sales increased $120.5 million, or 44.3%, to $392.4 million for the first
six months of 1999, compared to the similar year earlier period. Gross sales
dollars on motorized and towable products were up 46.6% and 27.1%,
respectively for the first half of 1999. Overall unit sales for the Company
were up 50.3% in the first half of 1999 compared to the similar period in
1998 with motorized and towable unit sales up 53.4% and 44.5%, respectively.
The Company's average unit selling price decreased slightly in the first six
months of 1999 to $82,000 compared to $86,000 in the first half of 1998.
Gross profit for the six-month period ended July 3, 1999 was up $24.0 million
to $60.5 million and gross margin increased to 15.4% in 1999 from 13.4% in 1998.
Gross margin in the first six 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 half 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 $3.5 million to
$23.9 million in the first six months of 1999 but decreased as a percentage
of sales from 7.5% in 1998 to 6.1% in 1999. Selling, general, and
administrative expenses benefited in the first half 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 half of 1999 would have increased by $5.3 million to
$25.7 million or 6.5% of sales, still significantly less than the 7.5% in the
first half 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 $323,000 in both the first half of 1999 and the
same period of 1998.
Operating income increased $20.4 million in the first six months of 1999 to
$36.2 million, compared to $15.8 million in the year earlier period. The
Company's improvement in selling, general, and administrative expense as a
percentage of sales combined with the improvement in the Company's gross
margin, resulted in an improvement in operating margin to 9.2% in the first
half of 1999 compared to 5.8% in the first half of 1998. The Company's
operating margin in the first half 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 half of 1999 would have
been 8.8%.
Net interest expense declined slightly in the first six months of 1999 to
$1,006,000 from $1,028,000 in the comparable 1998 period. The Company
capitalized $51,000 of interest expense in the first half of 1999 relating to
the construction in progress in Coburg, Oregon and $44,000 in the first six
months of 1998 relating to the construction in progress in Indiana for the now
completed paint facility. The Company's interest expense included $130,000 in
the first six months of 1999 and 214,000 in the first half of 1998 related
to the amortization of debt
10
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issuance costs recorded in conjunction with the Company's credit facilities.
Additionally, interest expense in the first half 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. See "Liquidity and Capital
Resources".
The Company reported a provision for income taxes of $13.9 million, or an
effective tax rate of 39.5% for the first six months of 1999, compared to
$6.2 million, or an effective tax rate of 41.5% for the comparable 1998
period.
Net income increased to $21.3 million in the first six months of 1999 from
$8.7 million in the first six 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 six months of 1999, the Company had cash flows of $23.7 million from
operating activities. The Company generated $24.3 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 July 3, 1999, $5.5 million was
outstanding under the Revolving Loans, with an effective interest rate of
8.0%. 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 July 3, 1999, the
Company had working capital of approximately $23.9 million, an increase of
$199,000 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
$20.3 million in the first six 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 $25.0 to $26.0 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 building preparation for our new production
space in Elkhart, Indiana that we recently reached an agreement to acquire.
The Elkhart property is adjacent to our existing Elkart 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 $10 to $12 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
as well as normal smaller scale plant remodeling projects or 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
11
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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 July 3, 1999, approximately $260.6
million of products sold by the Company to independent dealers were subject
to potential repurchase under existing floor plan financing agreements with
approximately 7.6% 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.
12
<PAGE>
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 is
substantially expanding 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 $260.6 million as of July 3, 1999, with
approximately 7.6% 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. In the second quarter of 1999, Ford announced a temporary
reduction in the availability of a particular chassis that the Company uses
in four of its models. Ford indicates that this will affect chassis
shipments starting in the fourth quarter of 1999. The Company presently
believes that its expected allocation of transmissions and chassis is
sufficient to
13
<PAGE>
enable the unit volume increases that are planned for models using these
components and does not foresee any operating difficulties with respect to this
issue.* Nevertheless, there can be no assurance that Allison, Ford, 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.
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
14
<PAGE>
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 with only one small plant location remaining to be
upgraded in the first part of the fourth quarter. The certification and
testing phase is ongoing as affected components are remediated and upgraded.
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 has made
approximately 90 percent of the Company's business application software Year
2000 compliant, 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 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 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 this year.* Less critical third-party dependencies are
in the assessment phase 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 $1,250,000
through July 3, 1999. 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 $200,000.*
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on May 19,
1999 in Wakarusa, Indiana, the Stockholders (i) elected three Class II
directors to serve on the Company's Board of Directors, (ii) amended the
Company's Certificate of Incorporation to increase the authorized number of
shares of Common Stock to 50,000,000, (iii) approved the Company's Executive
Variable Compensation Plan, and (iv) ratified the Company's appointment of
PricewaterhouseCoopers L.L.P. as independent auditors.
<TABLE>
<CAPTION>
Nominee For Withheld
--------------------------------------------- ----------
<S> <C> <C>
Carl E. Ring, Jr. 11,559,979 118,377
Richard A. Rouse 11,559,979 118,377
Roger A. Vandenberg 11,559,979 118,377
</TABLE>
The vote for amending the Company's Certificate of Incorporation to increase
the authorized number of shares of Common Stock to 50,000,000 was as follows:
<TABLE>
<CAPTION>
For Against Abstained
--------- --------- -----------
<S> <C> <C>
10,598,995 1,076,530 2,831
</TABLE>
The vote for approval of the Company's Executive Variable Compensation Plan
was as follows:
<TABLE>
<CAPTION>
For Against Abstained
--------- --------- -----------
<S> <C> <C>
11,298,404 365,516 14,436
</TABLE>
The vote for ratifying the appointment of PricewaterhouseCoopers L.L.P. was
as follows:
<TABLE>
<CAPTION>
For Against Abstained
--------- --------- -----------
<S> <C> <C>
11,668,025 7,100 3,131
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Monaco Coach Corporation, filed with the office
of the Secretary of State of Delaware on June 30, 1999.
10.1 Executive Variable Compensation Plan, incorporated by reference
to Exhibit A to the Registrant's definitive Schedule 14A filed
with the Securities and Exchange Commission on April 19, 1999.
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 July 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: August 17, 1999 /s/: John W. Nepute
--------------------------- --------------------------------
John W. Nepute
Vice President of Finance and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
17
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF MONACO COACH CORPORATION
Monaco Coach Corporation, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Monaco Coach Corporation. The
corporation was originally incorporated under the name of KLT Acquisition
Co., and the original Certificate of Incorporation of the corporation was
filed with the Secretary of State of the State of Delaware on December 30,
1992. An Amended and Restated Certificate of Incorporation of the corporation
was filed with the Secretary of State of the State of Delaware on February 25,
1994.
2. This Certificate of Amendment of Amended and Restated Certificate of
Incorporation has been duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware by the
Board of Directors and the stockholders of the corporation.
3. Pursuant to such Section 242, this Certificate of Amendment of
Amended and Restated Certificate of Incorporation amends the provisions of
this corporation's Amended and Restated Certificate of Incorporation as set
forth herein.
4. The first paragraph of Article IV of the corporation's Amended and
Restated Certificate of Incorporation is hereby amended to read in its
entirety as follows:
"The Corporation is authorized to issue two classes of stock to be
designated, respectively, Common Stock, par value $.01 per share, and
Preferred Stock, par value $.01 per share. The total number of shares of
Common Stock which the Corporation has the authority to issue is
50,000,000. The total number of shares of Preferred Stock which the
Corporation has the authority to issue is 1,934,783."
-1-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment
of Amended and Restated Certificate of Incorporation to be signed by Richard E.
Bond, its Secretary, effective as of June 30, 1999.
MONACO COACH CORPORATION
By: /s/ Richard E. Bond
--------------------------
Richard E. Bond
Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME OF MONACO COACH
CORPORATION AS OF AND FOR THE SIX MONTHS ENDED JULY 3, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 49,581
<ALLOWANCES> 195
<INVENTORY> 68,542
<CURRENT-ASSETS> 130,989
<PP&E> 91,341
<DEPRECIATION> 11,308
<TOTAL-ASSETS> 230,732
<CURRENT-LIABILITIES> 107,114
<BONDS> 0
0
0
<COMMON> 188
<OTHER-SE> 119,993
<TOTAL-LIABILITY-AND-EQUITY> 230,732
<SALES> 199,177
<TOTAL-REVENUES> 199,177
<CGS> 167,853
<TOTAL-COSTS> 180,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 18,948
<INCOME-TAX> 7,495
<INCOME-CONTINUING> 11,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,453
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.59
</TABLE>
