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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: September 30, 2000
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from _______________ to _________________
Commission File Number: 1-14725
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
September 30, 2000: 18,943,076
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MONACO COACH CORPORATION
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION REFERENCE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of 4
January 1, 2000 and September 30, 2000.
Condensed Consolidated Statements of Income 5
for the quarters and nine-month periods ended
October 2, 1999 and September 30, 2000.
Condensed Consolidated Statements of Cash 6
Flows for the nine-month periods ended
October 2, 1999 and September 30, 2000.
Notes to Condensed Consolidated Financial Statements. 7 - 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 9 - 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
SIGNATURES 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, SEPTEMBER 30,
2000 2000
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net $ 36,538 $ 71,209
Inventories 87,596 106,181
Prepaid expenses 322 1,171
Deferred income taxes 13,490 12,986
---------------- ----------------
Total current assets 137,946 191,547
Note Receivable 2,800
Property, plant and equipment, net 89,439 99,955
Debt issuance costs, net of accumulated amortization
of $1,999 and $2,113, respectively 114 0
Goodwill, net of accumulated amortization of $4,029
and $4,514, respectively 19,228 18,743
---------------- ----------------
Total assets $ 246,727 $ 313,045
---------------- ----------------
---------------- ----------------
LIABILITIES
Current liabilities:
Book overdraft $ 12,478 $ 15,895
Line of credit 7,853 19,742
Accounts payable 36,912 51,876
Income taxes payable 1,406 1,277
Accrued expenses and other liabilities 40,409 39,933
---------------- ----------------
Total current liabilities 99,058 128,723
Deferred income taxes 4,330 6,439
---------------- ----------------
103,388 135,162
---------------- ----------------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized, 18,871,084 and 18,943,076 issued
and outstanding respectively 189 189
Additional paid-in capital 46,268 46,939
Retained earnings 96,882 130,755
---------------- ----------------
Total stockholders' equity 143,339 177,883
---------------- ----------------
Total liabilities and stockholders' equity $ 246,727 $ 313,045
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes.
4
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED: DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
-------------------------------- ------------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 196,694 $ 226,393 $ 589,073 $ 690,468
Cost of sales 165,696 195,485 497,564 590,129
-------------- --------------- ------------- ---------------
Gross profit 30,998 30,908 91,509 100,339
Selling, general and administrative expenses 12,464 14,604 36,433 44,120
Amortization of goodwill 161 161 484 484
-------------- --------------- ------------- ---------------
Operating income 18,373 16,143 54,592 55,735
Other income, net 24 2 89 64
Interest expense (23) (220) (1,029) (458)
-------------- --------------- ------------- ---------------
Income before income taxes 18,374 15,925 53,652 55,341
Provision for income taxes 7,147 6,118 21,090 21,468
-------------- --------------- ------------- ---------------
Net income $ 11,227 $ 9,807 $ 32,562 $ 33,873
-------------- --------------- ------------- ---------------
-------------- --------------- ------------- ---------------
Earnings per common share:
Basic $ .60 $ .52 $ 1.73 $ 1.79
Diluted $ .58 $ .51 $ 1.68 $ 1.75
Weighted average common shares outstanding:
Basic 18,844,526 18,935,345 18,788,965 18,908,194
Diluted 19,428,870 19,307,026 19,353,818 19,317,297
</TABLE>
See accompanying notes.
5
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MONACO COACH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED: DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
OCTOBER 2, SEPTEMBER 30,
1999 2000
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH:
Cash flows from operating activities:
Net income $ 32,562 $ 33,873
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 4,210 4,664
Deferred income taxes (2,433) 2,613
Changes in working capital accounts:
Trade receivables, net (9,307) (34,671)
Inventories (14,897) (18,585)
Prepaid expenses (6) (849)
Accounts payable 15,188 14,964
Income taxes payable (924) (476)
Accrued expenses and other liabilities 8,414 (129)
--------------- ---------------
Net cash provided by operating activities 32,807 1,404
--------------- ---------------
Cash flows from investing activities:
Issuance of Note Receivable (2,800)
Additions to property, plant and equipment (29,116) (14,581)
Proceeds from collections on notes receivable 910
--------------- ---------------
Net cash used in investing activities (28,206) (17,381)
--------------- ---------------
Cash flows from financing activities:
Book overdraft 3,147 3,417
Borrowings (payments) on lines of credit, net 1,887 11,889
Payments on long-term note payable (10,400)
Issuance of common stock 765 671
--------------- ---------------
Net cash provided by (used in) financing activities (4,601) 15,977
--------------- ---------------
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 1, 2000
and September 30, 2000, and the results of its operations for the quarters
and nine-month periods ended October 2, 1999 and September 30, 2000, and
cash flows of the Company for the nine-month periods ended October 2, 1999
and September 30, 2000. 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 1, 2000 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 1, 2000.
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 1, SEPTEMBER 30,
2000 2000
---------------- ----------------
<S> <C> <C>
Raw materials $ 48,300 $ 49,559
Work-in-process 26,743 31,837
Finished units 12,553 24,785
---------------- ----------------
$ 87,596 $ 106,181
---------------- ----------------
---------------- ----------------
</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
During the third quarter of 2000, the Company paid off its revolving line
of credit and obtained a commitment from another lender for financing. As
part of the transition between credit facilities, the Company's new lender
issued the Company a temporary revolving line of credit of up to $40
million (the "Temporary Revolving Loans") which is due and payable on
November 30, 2000. The Company's new permanent credit facilities will
consist of a revolving line of credit of up to $50.0 million (the
"Revolving Loans"). At the election of the Company, the Temporary Revolving
Loans and the Revolving Loans bear interest at variable interest rates
based on the Prime Rate or LIBOR. The Revolving Loans will be due and
payable in full on April 30, 2003, and require monthly interest payments.
The balance outstanding under the Temporary Revolving Loans at September
30, 2000 was $19.7 million. The Temporary Revolving Loans and the Revolving
Loans are collateralized by a security interest in all of the assets of the
Company and include various restrictions and financial covenants.
7
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5. EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted average number of
shares outstanding during the period. Diluted earnings per common share is
based on the weighted average number of shares outstanding during the
period, after consideration of the dilutive effect of stock options. The
weighted average number of common shares used in the computation of
earnings per common share are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
-------------------------------- ------------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
BASIC
Issued and outstanding shares 18,844,526 18,935,345 18,788,965 18,908,194
(weighted average)
EFFECT OF DILUTIVE SECURITIES
Stock Options 584,344 371,681 564,853 409,103
-------------- --------------- ------------- ---------------
DILUTED 19,428,870 19,307,026 19,353,818 19,317,297
-------------- --------------- ------------- ---------------
-------------- --------------- ------------- ---------------
</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 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. The Company's contingent obligations under repurchase
agreements vary from period to period and totaled approximately $306.6
million as of September 30, 2000, with approximately 7.3% 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.
7. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, SEC Staff Accounting Bulletin (SAB) No. 101 - Revenue
Recognition in Financial Statements (SAB 101), was issued. This
pronouncement summarizes certain of the SEC Staff's views on applying
generally accepted accounting principles to revenue recognition. In March
2000, SAB 101A was issued to defer the implementation date to the second
quarter of 2000. In June 2000, SAB 101B was issued to defer the
implementation date to the fourth quarter of 2000. The Company is currently
reviewing the requirements of SAB 101 and assessing the impact on the
financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
include, but are not limited to, those below that have been marked with an
asterisk (*). In addition, the Company may from time to time make
forward-looking statements through statements that include the words "believes",
"expects", "anticipates" or similar expressions. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of the Company to differ materially
from those expressed or implied by such forward-looking statements, including
those set forth below under the caption "Factors That May Affect Future
Operating Results" and elsewhere in this Quarterly Report on Form 10-Q. The
reader should carefully consider, together with the other matters referred to
herein, the factors set forth under the caption "Factors That May Affect Future
Operating Results". The Company cautions the reader, however, that these factors
may not be exhaustive.
GENERAL
Monaco Coach Corporation is a leading manufacturer of premium Class A motor
coaches and towable recreational vehicles ("towables"). The Company's product
line currently consists of a broad line of motor coaches, fifth wheel trailers
and travel trailers under the "Monaco", "Holiday Rambler", "Royale Coach", 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 $70,000 to $900,000 for motor coaches and from
$18,000 to $70,000 for towables.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED OCTOBER 2, 1999
Third quarter net sales increased 15.1% to $226.4 million compared to $196.7
million for the same period last year. Gross sales dollars on motorized products
were up 19.4%, reflecting a strong showing by the Company's Monaco brand
high-end diesel models as well as sales from three new motorized products
produced in late 1999. The Company's gross towable sales were up 3.4% as the
McKenzie towable operations reported increases that more than offset decreases
on the Holiday Rambler towable sales. The Company's overall unit sales were up
2.8% in the third quarter of 2000 with motorized unit sales up 5.9% to 1,652
units, and towable unit sales off by 3.1% to 778 units. The Company's average
unit selling prices increased in the third quarter of 2000 to $128,000 from
$114,000 for motorized and to $25,500 from $24,000 for towables. The Company's
total average unit selling price increased to $95,500 from $83,500 in the same
period last year. The Company's continued push into the less expensive diesel
and gasoline motor coach market as well as the recent repositioning of some of
its existing towable models into slightly lower price points are expected to
keep the overall average selling price below $100,000.*
Gross profit for the third quarter of 2000 decreased slightly to $30.9 million,
down $90,000, from $31.0 million in 1999, and gross margin decreased from 15.8%
in the third quarter of 1999 to 13.7% in the third quarter of 2000. Gross margin
declined in the third quarter of 2000 due to a combination of factors. Above
normal sales discounts, which net against gross sales, accounted for two-thirds
of the decrease. Despite the Company's strong retail numbers the challenging
retail environment for our industry coupled with our dealers' desire to maintain
lower inventory levels on their lots has made for a very competitive wholesale
market. This situation has forced the Company to offer above normal incentives
to maintain Company branded product on dealer lots. The Company does not see
this competitive environment changing in the fourth quarter of 2000.* The
remainder of the difference in gross margin was a result of production
inefficiencies created from shifting our volume among production lines in the
plants as well as shifting the mix of products on those lines. 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. *
9
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Selling, general, and administrative expenses increased by $2.1 million to $14.6
million in the third quarter of 2000 but only slightly increased as a percentage
of sales from 6.3% in 1999 to 6.5% in 2000. The Company's selling, general, and
administrative expense may increase in future periods if the Company is forced
to increase its selling and promotional expenses as a result of difficult market
conditions or competitive pressures.*
Amortization of goodwill was $161,000 in both the third quarter of 2000 and the
same period of 1999. At September 30, 2000, goodwill, net of accumulated
amortization was $18.7 million.
Operating income was $16.1 million in the third quarter of 2000 compared to
$18.4 million in the similar 1999 period. The Company's operating margin was
negatively impacted by the decline in gross margin resulting in a reduction in
operating margin to 7.1% in the third quarter of 2000 compared to 9.3% in the
third quarter of 1999.
Net interest expense was $220,000 in the third quarter of 2000 compared to
$23,000 in the comparable 1999 period. The Company capitalized $133,000 of
interest expense in the third quarter of 2000 relating to the construction in
progress in Indiana which compared to $144,000 capitalized in the third quarter
of 1999 related to construction in progress in Oregon. Third quarter interest
expense included $68,000 in 2000 and $23,000 in 1999 related to the amortization
and subsequent write-off of debt issuance costs associated with the Company's
credit facilities which were paid off in the third quarter of 2000.
The Company reported a provision for income taxes of $6.1 million, or an
effective tax rate of 38.4% in the third quarter of 2000, compared to $7.1
million, or an effective tax rate of 38.9% for the comparable 1999 period.
Net income for the third quarter of 2000 was $9.8 million compared to $11.2
million in 1999 due to the increase in sales being more than offset by the
decline in gross margin.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED OCTOBER 2,
1999
Net sales increased $101.4 million, or 17.2%, to $690.5 million for the first
nine months of 2000, compared to the similar year earlier period. Gross sales
dollars on motorized and towable products were up 18.5% and 15.3%, respectively
for the first nine months of 2000. Overall unit sales for the Company were up
9.6% in the first nine months of 2000 compared to the similar period in 1999
with motorized unit sales up 8.4% to 5,187 units and towable unit sales up 12.2%
to 2,702. The Company's average unit selling prices increased in the first nine
months of 2000 compared to the similar 1999 period to $122,500 from $112,000 for
motorized and to $24,500 from $24,000 for towables.
Gross profit for the nine-month period ended September 30, 2000 was up $8.8
million to $100.3 million and gross margin decreased to 14.5% in 2000 from 15.5%
in 1999. Gross margin in the first nine months of 2000 was negatively impacted
by the discounting, product mix, and model change issues discussed in the second
and third quarter comparisons. Gross margin for the first nine months of 1999
benefited from a strong mix of motorized products along with manufacturing
efficiencies created from an increase in production volume in all of the
Company's manufacturing plants.
Selling, general, and administrative expenses increased by $7.7 million to $44.1
million in the first nine months of 2000 and increased as a percentage of sales
from 6.2% in 1999 to 6.4% in 2000. Selling, general, and administrative expenses
benefited in the first nine months of 1999 from a $1.75 million reduction in the
estimated accrual for 1998 incentive based compensation. Without this benefit
selling, general, and administrative expenses in the first nine months of 1999
would have been 6.5% of sales.
Amortization of goodwill was $484,000 in both the first nine months of 2000 and
the same period of 1999.
Operating income increased $1.1 million in the first nine months of 2000 to
$55.7 million, compared to $54.6 million in the year earlier period. The
Company's higher selling, general, and administrative expense as a percentage of
sales combined with the decline in the Company's gross margin, resulted in a
decrease in operating margin to 8.1% in the first nine months of 2000 compared
to 9.3% in the first nine months of 1999. The Company's operating margin in the
first nine months of 1999 was positively affected by the $1.75 million reduction
of incentive based compensation accrued for 1998. Without this benefit operating
margin in the first nine months of 1999 would have been 9.0%.
10
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Net interest expense declined in the first nine months of 2000 to $458,000 from
$1,029,000 in the comparable 1999 period. The Company capitalized $133,000 of
interest expense in the first nine months of 2000 relating to the construction
in progress in Indiana which compared to $195,000 capitalized in the first nine
months of 1999 related to construction in progress in Oregon. The Company's
interest expense included $61,300 in the first nine months of 2000 and $153,000
in the first nine months of 1999 related to the amortization of debt issuance
costs recorded in conjunction with the Company's credit facilities.
Additionally, interest expense in the first nine months of 2000 and 1999
included $52,700 and $639,000, respectively, from accelerated amortization of
debt issuance costs related to the credit facilities. The Company paid off its
revolving credit facility in the third quarter of 2000 and obtained financing
from another lender. 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 $21.5 million, or an
effective tax rate of 38.8% for the first nine months of 2000, compared to $21.1
million, or an effective tax rate of 39.3% for the comparable 1999 period.
Net income increased to $33.9 million in the first nine months of 2000 from
$32.6 million in the first nine months of 1999, due to the increase in net sales
and reduction in interest expense more than compensating for the decline in
operating margin.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are internally generated cash from
operations and available borrowings under its credit facilities. During the
first nine months of 2000, the Company had cash flows of $1.4 million from
operating activities. The Company generated $38.5 million from net income and
non-cash expenses such as depreciation and amortization. This was reduced by
increases to accounts receivable and inventories which were not completely
offset by an increase in accounts payable.
During the third quarter of 2000, the Company paid off its revolving line of
credit and obtained a commitment from another lender for financing. As part of
the transition between credit facilities, the Company's new lender issued the
Company a temporary revolving line of credit of up to $40 million (the
"Temporary Revolving Loans") which is due and payable on November 30, 2000. The
Company's new permanent credit facilities will consist of a revolving line of
credit of up to $50.0 million (the "Revolving Loans"). At the election of the
Company, the Temporary Revolving Loans and the Revolving Loans bear interest at
variable interest rates based on the Prime Rate or LIBOR. The Revolving Loans
will be due and payable in full on April 30, 2003, and require monthly interest
payments. The balance outstanding under the Temporary Revolving Loans at
September 30, 2000 was $19.7 million. The Temporary Revolving Loans and the
Revolving Loans are collateralized by a security interest in all of the assets
of the Company and include various restrictions and financial covenants. The
Company utilizes "zero balance" bank disbursement accounts in which an advance
on the line of credit is automatically made for checks clearing each day. Since
the balance of the disbursement account at the bank returns to zero at the end
of each day 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 September 30, 2000, the
Company had working capital of approximately $62.8 million, an increase of $23.9
million from working capital of $38.9 million at January 1, 2000. 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
$14.6 million in the first nine months of 2000, primarily for the expansion
of facilities which began in late 1999 including the new diesel chassis
manufacturing facility in Elkhart, Indiana. The Company anticipates that
capital expenditures for all of 2000 will be approximately $20 million, which
includes expansion and upgrading our service and warranty facilities in both
Oregon and Indiana as well as a new service center in Florida, and an
additional $4 to $5 million of maintenance capital expenditures for computer
system upgrades and additions, smaller scale plant remodeling projects and
normal replacement of outdated or worn-out equipment.* The Company expects
capital expenditures in 2001 to be between $12 to $15 million, which includes
finishing up the Company's warranty and
11
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service center projects and minor modifications of our existing manufacturing
facilities.* 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 common in the recreational vehicle industry, the Company enters into
repurchase agreements with the financing institutions used by its dealers to
finance their purchases. These agreements obligate the Company to repurchase a
dealer's inventory under certain circumstances in the event of a default by the
dealer to its lender. If the Company were obligated to repurchase a significant
number of its products in the future, it could have a material adverse effect on
the Company's financial condition, business and results of operations. The
Company's contingent obligations under repurchase agreements vary from period to
period and totaled approximately $306.6 million as of September 30, 2000, with
approximately 7.3% concentrated with one dealer.
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, levels of sales incentives, 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 four 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.
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MANUFACTURING EXPANSION The Company has significantly increased its
manufacturing capacity over the last few years and recently completed expansion
of its chassis manufacturing 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 339 dealerships located primarily in the United States
and Canada at the end of third quarter of 2000, a significant percentage of the
Company's sales have been and will continue to be concentrated among a
relatively small number of independent dealers. Although no single dealer
accounted for as much as 10.0% of the Company's net sales in 1998, in 1999,
concentration of sales at the end of the third quarter 2000 was 11.5% for one of
the Company's dealers. The loss of a significant dealer or a substantial
decrease in sales by such a dealer could have a material adverse effect on the
Company's business, results of operations and financial condition.
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS As is common in the
recreational vehicle industry, the Company enters into repurchase agreements
with the financing institutions used by its dealers to finance their purchases.
These agreements obligate the Company to repurchase a dealer's inventory under
certain circumstances in the event of a default by the dealer to its lender. If
the Company were obligated to repurchase a significant number of its products in
the future, it could have a material adverse effect on the Company's financial
condition, business and results of operations. The Company's contingent
obligations under repurchase agreements vary from period to period and totaled
approximately $306.6 million as of September 30, 2000, with approximately 7.3%
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, which have recently increased in price, 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 and chassis
(Workhorse and Ford) for its gas 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, and in 1999 Ford indicated it might need to put its gasoline powered
chassis on allocation. The Company presently believes that its allocation by
suppliers of all components is sufficient to enable the unit volume increases
that are planned for models, and the Company does not foresee any operating
difficulties as a result of vendor supply issues.* Nevertheless, there can be no
assurance that Allison, Ford, or any of the Company's other suppliers will be
able to meet the Company's future requirements for transmissions, chassis or
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement dated as of August 25, 2000 with U.S. Bank
National Association.
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 September 30, 2000, for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONACO COACH CORPORATION
Dated: November 14, 2000 /s/: P. Martin Daley
------------------------ -------------------------------------
P. Martin Daley
Vice President and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer)
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