SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the period ended:  June 29, 2002

or

 

o	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

 

 

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    ý        NO    o

 

The number of shares outstanding of common stock, $.01 par value, as of June 29, 2002:  28,831,487

 

 

MONACO COACH CORPORATION

 

FORM 10-Q

 

June 29, 2002

 

INDEX

 

PART I - FINANCIAL INFORMATION
	Item 1.  Financial Statements.
		Condensed Consolidated Balance Sheets as of December 29, 2001 and June 29, 2002.
		Condensed Consolidated Statements of Income for the quarters and six-month periods ended June 30, 2001 and June 29, 2002.
		Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2001 and June 29, 2002.
		Notes to Condensed Consolidated Financial Statements.
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
PART II - OTHER INFORMATION
	Item 4.  Submission of Matters to a Vote of Security Holders.
	Item 6.  Exhibits and Reports on Form 8-K.
	Signatures

 

 

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PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

3

 

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited: dollars in thousands)

 

		December 29, 2001			June 29, 2002
ASSETS
Current assets:
Trade receivables, net		$	82,885		$	122,133
Inventories		127,075			151,180
Prepaid expenses		2,063			5,055
Deferred income taxes		27,327			30,073
Total current assets		239,350			308,441
Notes receivable		8,157			8,170
Property, plant and equipment, net		122,795			125,676
Debt issuance costs net of accumulated amortization of $75, and $232, respectively		940			783
Goodwill, net of accumulated amortization of $5,320 and $5,320, respectively		55,856			54,974
Total assets		$	427,098		$	498,044
LIABILITIES
Current liabilities:
Book overdraft		$	5,889		$	16,758
Line of credit		26,004			27,004
Current portion of long-term note payable		10,000			10,000
Accounts payable		66,859			88,057
Income taxes payable		0			6,317
Accrued expenses and other liabilities		66,904			76,794
Total current liabilities		175,656			224,930
Long-term note payable		30,000			25,000
Deferred income taxes		8,312			13,166
		213,968			263,096
Commitments and contingencies (Note 8)
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value; 50,000,000 shares authorized, 28,632,774 and 28,831,487 issued and outstanding, respectively		286			288
Additional paid-in capital		48,522			49,695
Retained earnings		164,322			184,965
Total stockholders’ equity		213,130			234,948
Total liabilities and stockholders’ equity		$	427,098		$	498,044

 

See accompanying notes.

 

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MONACO COACH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited: dollars in thousands, except share and per share data)

 

		Quarter Ended						Six-Months Ended
		June 30, 2001			June 29, 2002			June 30, 2001			June 29, 2002
Net sales		$	223,424		$	313,742		$	434,652		$	607,342
Cost of sales		197,620			272,513			383,360			528,368
Gross profit		25,804			41,229			51,292			78,974
Selling, general and administrative expenses		16,489			22,505			32,728			43,671
Amortization of goodwill		162			0			323			0
Operating income		9,153			18,724			18,241			35,303
Other income, net		245			2			361			43
Interest expense		(414		)	(669		)	(1,098		)	(1,367		)
Income before income taxes		8,984			18,057			17,504			33,979
Provision for income taxes		3,504			7,087			6,827			13,336
Net income		$	5,480		$	10,970		$	10,677		$	20,643
Earnings per common share:
Basic		$	.19		$	.38		$	.37		$	.72
Diluted		$	.19		$	.37		$	.37		$	.70
Weighted average common shares outstanding:
Basic		28,505,199			28,807,792			28,485,257			28,760,396
Diluted		29,204,979			29,660,847			29,166,891			29,642,792

 

See accompanying notes.

 

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MONACO COACH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited: dollars in thousands)

 

		Six-Months Ended
		June 30, 2001			June 29, 2002
Increase (Decrease) in Cash:
Cash flows from operating activities:
Net income		$	10,677		$	20,643
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Gain on sale of assets		(74		)	0
Depreciation and amortization		3,316			4,010
Deferred income taxes		729			4,030
Changes in working capital accounts:
Trade receivables, net		(11,429		)	(39,301		)
Inventories		17,761			(24,105		)
Prepaid expenses		(520		)	(2,992		)
Accounts payable		(12,645		)	21,198
Income taxes payable		1,695			6,317
Accrued expenses and other liabilities		(1,290		)	8,953
Net cash provided (used) by operating activities		8,220			(1,247		)
Cash flows from investing activities:
Additions to property, plant and equipment		(3,848		)	(6,797		)
Proceeds from sale of assets		106			13
Issuance of notes receivable		(4,750		)	(13		)
Net cash used in investing activities		(8,492		)	(6,797		)
Cash flows from financing activities:
Book overdraft		6,274			10,869
(Payments) borrowings on lines of credit, net		(6,497		)	1,000
Issuance of common stock		495			1,175
Payments on long-term note		0			(5,000		)
Net cash provided by financing activities		272			8,044
Net change in cash		0			0
Cash at beginning of period		0			0
Cash at end of period		$	0		$	0

 

See accompanying notes.

 

6

 

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 December 29, 2001 and June 29, 2002, and the results of its operations for the quarters and six-month periods ended June 30, 2001 and June 29, 2002, and cash flows of the Company for the six-month periods ended June 30, 2001 and June 29, 2002.  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 December 29, 2001 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 December 29, 2001.

 

2.             Acquisition of SMC Corporation

 

The Company announced on June 25, 2001 that it had reached an agreement with Oregon based motor home manufacturer SMC Corporation (“SMC”) to acquire all of the outstanding shares of SMC pursuant to a cash tender offer at a price of $3.70 per share.  On August 6, 2001, the Company completed the back-end merger, and owned 100% of the shares.

 

The cash paid for SMC, including transaction costs of $3,062,000, totaled $24,320,000.  The total assets acquired and liabilities assumed of SMC based on estimated fair values at August 6, 2001, is as follows:

 

		(in thousands)
Receivables		$	1,680
Inventories		25,360
Deferred tax asset		21,391
Property and equipment		15,800
Prepaids and other assets		114
Goodwill		37,037
Total assets acquired		101,382
Book overdraft		(1,551		)
Notes payable		(16,349		)
Accounts payable		(24,079		)
Accrued liabilities		(35,083		)
Total liabilities assumed		(77,062		)
Total assets acquired and liabilities assumed		$	24,320

 

The allocation of the purchase price and the related goodwill is subject to adjustment upon resolution of pre-SMC Acquisition contingencies.  The effects of resolution of pre-SMC Acquisition contingencies occurring: (i) within one year of the acquisition date will be reflected as an adjustment of the allocation of the purchase price and of goodwill, and (ii) after one year they will be recognized in the determination of net income.

 

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3.             Inventories

 

Inventories are stated at lower of cost (first-in, first-out) or market.  The composition of inventory is as follows:

 

		December 29, 2001			June 29, 2002
		(in thousands)
Raw materials		$	53,160		$	60,941
Work-in-process		44,436			60,925
Finished units		29,479			29,314
		$	127,075		$	151,180

 

4.             Goodwill

 

Goodwill represents the excess of the cost of acquisition over the fair value of net assets acquired.  At each balance sheet date, management assesses whether there has been permanent impairment in the value of goodwill.  The amount of any such impairment is determined by comparing the fair value of the associated goodwill with its carrying value.  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.  As of June 29, 2002, as required by FASB Statement No. 142, management has determined that there has been no impairment of goodwill requiring a write down.  FASB Statement No. 142 also states that goodwill and other intangible assets with indefinite lives are no longer subject to amortization.  Therefore, in accordance with the requirements of FASB Statement No. 142, the Company has not recorded amortization for the period ending June 29, 2002.

 

The following table presents the impact of SFAS 142 on net income and net income per share had SFAS 142 been in effect prior to the three and six month periods ended June 30, 2001:

 

		Quarter Ended						Six Months Ended
		June 30, 2001			June 29, 2002			June 30, 2001			June 29, 2002
Net income as reported		$	5,480		$	10,970		$	10,677		$	20,643
Add: Amortization of goodwill		162			0			323			0
Income tax effect		(63		)	0			(126		)	0
Net income - adjusted		$	5,579		$	10,970		$	10,874		$	20,643
Earnings per common share:
Basic		$	.20		$	.38		$	.38		$	.72
Diluted		$	.19		$	.37		$	.37		$	.70

 

5.             Line of Credit

 

The Company has a bank line of credit consisting of a revolving line of credit of up to $70 million.  At the election of the Company, the line of credit bears interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company’s leverage ratio.  The Company also pays interest monthly on the unused available portion of the line at varying rates, determined by the Company’s leverage ratio.  The revolving line of credit is due and payable in full on September 30, 2004, and requires monthly interest payments.  The balance outstanding under the line of credit at June 29, 2002 was $27 million.  The line of credit is collateralized by all the assets of the Company and includes various restrictions and financial covenants.

 

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6.             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:

 

		Quarter Ended				Six Months Ended
		June 30, 2001		June 29, 2002		June 30, 2001		June 29, 2002
Basic
Issued and outstanding shares (weighted average)		28,505,199		28,807,792		28,485,257		28,760,396
Effect of Dilutive Securities
Stock Options		699,780		853,055		681,634		882,396
Diluted		29,204,979		29,660,847		29,166,891		29,642,792

 

7.             Long-term Note Payable

 

The Company has a long-term note payable of $35.0 million outstanding at June 29, 2002.  The term note bears interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company’s leverage ratio.  The term note requires monthly interest payments and quarterly principal payments and is collateralized by all the assets of the Company.  The term note is due and payable in full on September 28, 2005.  As of  June 29, 2002, the interest rate on the term debt was 3.9%.

 

The following table displays the scheduled future principal payments by fiscal year that will be due on the term loan.

 

 

8.             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 $423.0 million as of June 29, 2002, with approximately  9.8% concentrated with one dealer.

 

9

 

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.  Management 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.

 

Debt Guarantee

 

In 2000, the Company entered into an agreement with Outdoor Resorts of Las Vegas (“ORLV”) and ORLV’s parent company Outdoor Resorts of America (“ORA”), for the purpose of constructing a luxury motor coach resort in Las Vegas, Nevada.  In the first quarter of 2001, two additional projects, one in Naples, Florida, and the other in Indio, California, were added.  As of June 29, 2002, the Company has advanced $8.1 million in the form of a long term note receivable from ORA and its respective subsidiaries.  Accrued interest receivable from the loans was $1.3 million at June 29, 2002, of which approximately $355,000 was in arrears due to delays in development of the respective projects.  Accordingly, the Company has reserved the entire interest receivable.

 

As part of the financing structure for the projects, the Company also agreed to act as co-guarantor with ORLV’s parent company, ORA, on an $11.2 million construction loan for the Las Vegas resort.  At June 29, 2002, ORLV and ORA had approximately $9.9 million outstanding on the construction loan.  In return for the Company’s loans and guarantee commitment, ORLV and ORA has agreed to pay interest and income participation to the Company.  This guarantee has off-balance sheet credit risk until the construction loan is fully repaid.  The Company could incur a loss if the proceeds from the sale of lots are insufficient to satisfy the construction loan.

 

Subsequent to June 29, 2002, the Company and Outdoor Resorts of America (ORA) reached an agreement in principle in which the Company will purchase the assets of ORA’s resort properties under development in Las Vegas, Nevada, Indio, California, and Naples, Florida.  As consideration for these assets, Monaco will assume the current debt and liabilities of the projects of approximately $30 million, including the $8.2 million note payable to the Company, and the $10 million co-guaranteed debt. The transaction is subject to due diligence procedures by the Company, and execution of a definitive agreement.  This planned acquisition relieves ORA of certain debt pressures associated with resort construction, and will allow ORA to continue to focus on development and lot sales.

 

Aircraft Lease Commitment

 

The Company has a two-year operating lease for an aircraft, with annual renewals for up to three additional years.  If at the end of the initial lease period the Company elects to return the aircraft, the Company has guaranteed up to $16 million in the event the Lessor’s net sales proceeds are less than $18.5 million.

 

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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, 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”, “Beaver”, “Safari”, and “McKenzie” brand names.  The Company’s products, which are typically priced at the high end of their respective product categories, range in suggested retail price from $60,000 to $1.2 million for motor coaches and from $20,000 to $65,000 for towables.

 

RESULTS OF OPERATIONS

 

Quarter ended June 29, 2002 Compared to Quarter ended June 30, 2001

 

Second quarter net sales increased 40.4% to $313.7 million compared to $223.4 million for the same period last year. Gross diesel motorized sales revenues were up 36.5%, while gas motorized were up 75.4% and towables were up 16.4%, reflecting improved market conditions.  The Company’s overall unit sales were up 25.1% in the second quarter of 2002 with diesel motorized unit sales up 27.4% to 1,486 units, gas motorized unit sales up 62.8% to 609 units, and towable unit sales up by 5.4% to 901 units.  The Company’s total average selling price increased to $106,000 from $95,000 in the same period last year.

 

Gross profit for the second quarter of 2002 increased to $41.2 million, up from $25.8 million in 2001, and gross margin increased from 11.5% in the second quarter of 2001 to 13.1% in the second quarter of 2002.  The increase in gross margin over the prior year was primarily due to a reduction in sales discounts.  Gross margins were otherwise comparable to the prior year, even with continued integration activities of the Safari and Beaver operations.  The integration of Beaver and Safari has gone as planned.  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 $6.0 million to $22.5 million in the second quarter of 2002 and decreased as a percentage of sales from 7.4% in 2001 to 7.2% in 2002.  Selling, general and administrative expenses in the first quarter of 2002 included slight decreases in spending related to retail promotion efforts that were partially offset by slightly higher legal costs.  The Company’s selling, general, and administrative expense may fluctuate in future periods depending on the Company’s strategy of retail promotions as a  result of difficult market conditions or competitive pressures.

 

Operating income was $18.7 million, or 6.0% of sales in the second quarter of 2002 compared to $9.2 million, or 4.1% of sales in the similar 2001 period.  The increase in operating margins reflects an improved gross profit combined with slightly lower selling, general and administrative costs.

 

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Net interest expense was $669,000 in the second quarter of 2002 compared to $414,000 in the comparable 2001  period, reflecting a higher level of borrowing during the second quarter of 2002.

 

The Company reported a provision for income taxes of $7.1 million, or an effective tax rate of 39.3% in the second quarter of 2002, compared to $3.5 million, or an effective tax rate of 39.0% for the comparable 2001 period.

 

Net income for the second quarter of 2002 was $11.0 million compared to $5.5 million in 2001 due to the increase in sales combined with an improved operating margin that was only partially offset by an increase in interest expense.

 

Six Months ended June 29, 2002 Compared to Six Months ended June 30, 2001

 

Net sales increased 39.7% to $607.3 million compared to $434.7 million for the same period last year.  Gross diesel motorized sales revenues were up 39.1%, gas motorized were up 58.8%, and towables were up 41.4%.  Overall unit sales for the Company were up 37.7% in the first six months of 2002 compared to the similar period in 2001 with diesel motorized unit sales up 30.2% to 2,984 units, gas motorized up 52.1% to 1,034 units, and towables down 2.9% to 1,670. The Company’s average unit selling prices increased in the first six months of 2002 compared to the similar 2001 period to $108,000 from $95,000 .

 

Gross profit for the six-month period ended June 29, 2002 increased to $79.0 million from $51.3 million in 2001, and gross margin increased to 13.0% in 2002 from 11.8% in 2001. Gross margin in the first six months of 2002 was  improved due to a reduction in sales discounts of 1.8% of sales.  This was partially offset by a slight increase in direct labor caused by shifts in production, and the introductions of new models.

 

Selling, general, and administrative expenses increased by $10.9 million to $43.7 million in the first six months of 2002 and decreased as a percentage of sales from 7.5% in 2001 to 7.2% in 2002.  Selling, general and administrative expenses in the first six months of 2002 were lower than the corresponding quarter of 2001, due to a reduction of promotional expense of .6% of sales.

 

Operating income increased to $35.3 million in the first six months of 2002 from $18.2 million in 2001.  The Company’s lower selling, general, and administrative expense as a percentage of sales combined with the improvements in the Company’s gross margin, resulted in an increase in operating margin to 5.8% in the first six months of 2002 compared to 4.2% in the first six months of 2001.

 

Net interest expense was $1.4 million in the first six months of 2002 compared to $1.1 million in the comparable 2001  period, reflecting a higher level of borrowing during the first half of 2002.

 

The Company reported a provision for income taxes of $13.3 million, or an effective tax rate of 39.3% for the first six months of 2002, compared to $17.5 million, or an effective tax rate of 39.0% for the comparable 2001 period.

 

Net income for the first half of 2002 was $20.6 million compared to $10.7 million in 2001 due to the increase in sales combined with an improved operating margin that was only partially offset by an increase in interest expense.

 

INFLATION

 

The Company does not believe that inflation has had a material impact on its results of operations for the periods presented.

 

CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to warranty costs, product liability, and impairment of goodwill.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the following critical accounting policies and related judgments and estimates affect the preparation of our consolidated financial statements.

 

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WARRANTY COSTS  The Company provides an estimate for accrued warranty costs at the time a product is sold.  This estimate is based on historical average repair costs, as well as other reasonable assumptions as have been deemed appropriate by management.

 

PRODUCT LIABILITY  The Company provides an estimate for accrued product liability based on current pending cases, as well as for those cases which are incurred but not reported.  This estimate is developed by legal counsel based on professional judgment, as well as historical experience.

 

IMPAIRMENT OF GOODWILL  The Company assesses the potential impairment of goodwill in accordance with Financial Accounting Standards Board (FASB) Statement No. 142.  This estimate involves management comparing the fair value of goodwill to the respective carrying value, to see if goodwill has been impaired.  See note 4 of the Notes to Condensed Consolidated Financial Statements.

 

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

 

WE MAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN  OUR OPERATING RESULTS FOR A VARIETY OF REASONS  Our net sales, gross margin and operating results may fluctuate significantly from period to period due to a number of factors, many of which are not readily predictable.  These factors include the following:

 

•  The margins associated with the mix of products we sell in any particular period

 

•   Our ability to utilize and expand our manufacturing resources efficiently

 

•   Shortages of materials used in our products

 

•         A determination by us that goodwill or other intangible assets are impaired and have to be written down to their fair values, resulting in a charge to our results of operations

 

•  Our ability to introduce new models that achieve consumer acceptance

 

•  The introduction, marketing and sale of competing products by others

 

•  The addition or loss of our dealers

 

•  The timing of trade shows and rallies, which we use to market and sell our products

 

•  Factors affecting the recreational vehicle industry as a whole, including economic and seasonal factors

 

Our overall gross margin may decline in future periods to the extent that we increase the percentage of sales of lower gross margin towable products or if the mix of motor coaches we sell shifts to lower gross margin units.  In addition, a relatively small variation in the number of recreational vehicles we sell in any quarter can have a significant impact on total sales and operating results for that quarter.

 

Demand in the recreational vehicle industry generally declines during the winter months, while sales are generally higher during the spring and summer months.  With the broader range of products we now offer, seasonal factors could have a significant impact on our operating results in the future.  Additionally, unusually severe weather conditions in certain markets could delay the timing of shipments from one quarter to another.

 

We attempt to forecast orders for our products accurately and commence purchasing and manufacturing prior to receipt of such orders.  However, it is highly unlikely that we will consistently accurately forecast the timing and rate of orders.  This aspect of our business makes our planning inexact and, in turn, affects our shipments, costs, inventories, operating results and cash flow for any given quarter.

 

THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY  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

 

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disposable income for leisure-time activities.  For example, unit sales of recreational vehicles (excluding conversion vehicles) peaked at approximately 259,000 units in 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 at approximately 321,000 units and declined in 2000 and 2001 to approximately 300,000 and 257,000 units, respectively.  Our business is necessarily subject to the cyclical nature of this industry.  Some of the factors that contribute to this cyclicality include fuel availability and costs, interest rate levels, the level of discretionary spending, and availability of credit and overall consumer confidence.  The recent decline in consumer confidence and slowing of the overall economy has adversely affected the recreational vehicle market.  An extended continuation of these conditions would materially affect our business, results of operations and financial condition.

 

OUR RECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS  In the past few years we have significantly expanded the size and scope of our business, which has required us to hire additional employees.  Some of these new employees include new management personnel.  In addition, our current management personnel have assumed additional responsibilities.   The increase in our size over a relatively short period of time has put pressure on our operating, financial, and management information systems.  If we continue to expand, such growth would put additional pressure on these systems and may cause such systems to malfunction or to experience significant delays.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH THE EXPANSION OF OUR MANUFACTURING CAPACITY  In the past few years we have significantly increased our manufacturing capacity.   In connection with this expansion, we have also integrated some of our manufacturing facilities.   We may experience unexpected building and production problems associated with this expansion.  In the past, we have had difficulties with the manufacturing of new models and increasing the rates of production of our plants.   Our expenses have increased as a result of the expansion and we will be materially and adversely affected if the expansion does not result in an increase in revenue from the new or additional products.

 

This expansion involves risks, including the following:

 

•         We must rely on timely performance by contractors, subcontractors, and government agencies, whose performance we may be unable to control.

 

•         The development of new products involves costs associated with new machinery, training of employees, and compliance with environmental, health, and other government regulations.

 

•         We may be unable to complete a planned expansion in a timely manner, which could result in lower production levels and an inability to satisfy customer demand for our products.

 

WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES  Although our products were offered by 385 dealerships located primarily in the United States and Canada as of June 29, 2002, a significant percentage of our sales are concentrated among a relatively small number of independent dealers.  Sales to one dealer, Lazy Days RV Center, accounted for 12.1% of total sales in 2000 and 11.7% in 2001.  Our 10 largest dealers, including Lazy Days RV Center, accounted for a total of 36% of our sales in 2000 and 39% of our sales in 2001.  The loss of a significant dealer or a substantial decrease in sales by any of these dealers could have a material impact on our business, results of operations and financial condition.

 

WE MAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITS LENDER  As is common in the recreational vehicle industry, we enter into repurchase agreements with the financing institutions used by our dealers to finance their purchases of our products.  These agreements require us to repurchase the dealer’s inventory in the event that the dealer does not repay its lender.  Obligations under these agreements vary from period to period, but totaled approximately $423.0 million as of June 29, 2002, with approximately 9.8% concentrated with one dealer.  If we have to repurchase a significant number of our products in the future, it could have a material adverse effect on our financial condition, business and results of operations.

 

WE MAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL  An interruption in the supply, or a significant increase

 

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in the price or tax on the sale, of diesel fuel or gasoline on a regional or national basis could significantly affect our business.  Diesel fuel and gasoline have, at various times in the past, been either expensive or difficult to obtain.

 

WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS  A number of important components for certain of our products are purchased from single or a limited number of sources. These include turbo diesel engines (Cummins and Caterpillar), substantially all of our transmissions (Allison), axles (Dana) for all diesel motor coaches and chassis (Workhorse and Ford) for certain motor home products.  We have no long-term supply contracts with these suppliers or their distributors, and we cannot be certain that these suppliers will be able to meet our future requirements.  For example, in 1997, Allison placed all chassis manufacturers on allocation with respect to one of the transmissions that we use, and again in 1999 Ford placed one of its gasoline powered chassis on allocation.  An extended delay or interruption in the supply of any components that we obtain from a single supplier or from a limited number of suppliers could adversely affect our business, results of operations and financial condition.

 

OUR INDUSTRY IS VERY COMPETITIVE.  WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for our products is very competitive.  We currently compete with a number of manufacturers of motor coaches, fifth wheel trailers, and travel trailers.  Some of these companies have greater financial resources than we have and extensive distribution networks.  These companies, or new competitors in the industry, may develop products that customers in the industry prefer over our products.

 

We believe that the introduction of new products and new features is critical to our success.  Delays in the introduction of new models or product features, quality problems associated with these introductions, or a lack of market acceptance of new models or features could affect us adversely.  For example, unexpected costs associated with model changes have affected our gross margin in the past.  Further, new product introductions can divert revenues from existing models and result in fewer sales of existing products.

 

OUR PRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES  Our customers require demanding specifications for product performance and reliability.  Because our products are complex and often use advanced components, processes and techniques, undetected errors and design flaws may occur.  Product defects result in higher product service and warranty and replacement costs and may cause serious damage to our customer relationships and industry reputation, all of which will negatively affect our sales and business.

 

OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS  We are subject to litigation arising in the ordinary course of our business, typically for product liability and warranty claims that are common in the recreational vehicle industry.  While we do not believe that the outcome of any pending litigation, net of insurance coverage, will materially adversely affect our business, results of operations or financial condition, we cannot provide assurances in this regard because litigation is an inherently uncertain process.*

 

To date, we have been successful in obtaining product liability insurance on terms that we consider acceptable.  Our current policies jointly provide coverage against claims based on occurrences within the policy periods up to a maximum of $101 million for each occurrence and $102 million in the aggregate.  We cannot be certain we will be able to obtain insurance coverage in the future at acceptable levels or that the costs of such insurance will be reasonable.  Further, successful assertion against us of one or a series of large uninsured claims, or of a series of claims exceeding our insurance coverage, could have a material adverse effect on our business, results of operations and financial condition.

 

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING  Our success depends in part upon attracting and retaining highly skilled professionals.  A number of our employees are highly skilled engineers and other technical professionals, and our failure to continue to attract and retain such individuals could adversely affect our ability to compete in the industry.

 

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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 2002, the Company used cash of $1.2 million from operating activities.  The Company generated $24.7 million from net income and non-cash expenses such as depreciation and amortization. This amount was reduced by an increase of $39.3 million in trade receivables, as well as an increase of $24.1 million in inventories, that was mostly offset by an increase in trade payables of $21.2, and an additional increase in other liabilities and deferred taxes of $19.3 million.  The increase in trade receivables reflect increased shipments near the end of the quarter compared to the year end of 2001.  Increased inventory levels reflect an increase of work in process as the Company implemented a new quality improvement process that added an additional stage to the final completion of the product.  Increased payables and liabilities are reflective of increased purchases for model change, accruals for current income taxes payable, and various other accrued liabilities.

 

The Company has credit facilities consisting of a revolving line of credit of up to $70.0 million (the “Revolving Loan”).  At the election of the Company, the Revolving Loan bears interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company’s leverage ratio.  The Company also pays interest monthly on the unused available portion of the Revolving Loan at varying rates, determined by the Company’s leverage ratio.  The Revolving loan is due and payable in full on September 30, 2004, and requires monthly interest payments.  The balance outstanding under the Revolving Loan at June 29, 2002 was $27.0 million.  The Revolving Loan is collateralized by all the assets of the Company and includes 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 June 29, 2002, the Company had working capital of approximately $83.5 million, an increase of $19.8 million from working capital of $63.7 million at December 29, 2001.  The Company has been using short-term credit facilities and cash flow to finance its capital expenditures.

 

The Company believes that cash flow from operations and funds available under its anticipated credit facilities will be sufficient to meet the Company’s liquidity requirements for the next 12 months.*  The Company’s capital expenditures were $6.8 million in the first half of 2002, primarily for completing the Company’s warranty and service center project in Harrisburg, Oregon, as well as various other smaller projects.  The Company anticipates that capital expenditures for all of 2002 will be approximately $10 to $12 million, which includes $4 to $5 million of routine capital expenditures for computer system upgrades and additions, smaller scale plant remodeling projects and normal replacement of outdated or worn-out equipment.*  The Company may require additional equity or debt financing to address working capital and facilities expansion needs, particularly if the Company significantly increases the level of working capital assets such as inventory and accounts receivable.  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 $423.0 million as of June 29, 2002, with approximately 9.8% concentrated with one dealer.

 

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As part of the normal course of business, the Company incurs certain contractual obligations and commitments which will require future cash payments. The following tables summarize the significant obligations and commitments.

 

PAYMENTS DUE BY PERIOD

 

Contractual Obligations (in thousands)		1 year or less			1 to 3 years			4 to 5 years			Thereafter				Total
Long-term debt (1)		$	10,000		$	25,000		$	0		$	0			$	35,000
Operating Leases (2)		2,204			2,988			1,350			4,333				10,875
Total Contractual Cash Obligations		$	12,204		$	27,988		$	1,350		$	4,333			$	45,875
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
Other Commitments (in thousands)		1 year or less			1 to 3 years			4 to 5 years			Thereafter				Total
Lines of Credit (3)		$	0		$	70,000		$	0		$		0		$		70,000
Guarantees		9,900		(4)	16,039		(2)	0			0				25,939
Repurchase Obligations (5)		0			423,000			0			0				423,000
Total Commitments		$	9,900		$	509,039		$	0		$		0		$		518,939

 

(1)  See Note 7 to the financials.

(2)  Various leases including manufacturing facilities, aircraft, and machinery and equipment.  See Note 8 to the financials.

(3)  See Note 5  to the financials.  The amount listed represents available borrowings on the line of credit at June 29, 2002.

(4)  See Note 8 to the financials.

(5)  Reflects obligations under manufacturer repurchase commitments.  See Note 8 to the financials.

 

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

 

SFAS 143, Accounting for Asset Retirement Obligations

 

In June 2001, FASB issued Statement No. 143, Accounting for Asset Retirement Obligations.  FASB Statement No. 143 is effective for the fiscal years beginning after June 15, 2002.  FASB Statement No. 143, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FASB Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The impact of this pronouncement on the Company’s financial statements is not expected to be material.

 

FAS 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002

 

This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their

 

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applicability under changed conditions.  The Company has reviewed this pronouncement and will consider it’s impact on any relevant transactions.

 

FAS 146, Accounting for Costs Associated with Exit or Disposal Activities

 

This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”

 

This Statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.  Those costs include, but are not limited to, the following:

 

a.  Termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (hereinafter referred to as one-time termination benefits),

 

b.  Costs to terminate a contract that is not a capital lease, and,

 

c.  Costs to consolidate facilities or relocate employees.

 

This Statement does not apply to costs associated with the retirement of a long-lived asset covered by FASB Statement No. 143, Accounting for Asset Retirement Obligations.  The impact of this pronouncement on the Company’s financial statements is not expected to be material.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

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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 16, 2002 in Coburg, Oregon, the Stockholders (i) elected three Class I directors to serve on the Company’s Board of Directors, (ii) amended the Company’s Director Option Plan to (a) extend the term of the Director Plan an additional ten years until March 2012; and (b) make certain other changes to the Director Option Plan as set forth in the proxy statement, (iii) amended the Company’s Incentive Stock Option Plan to (a) increase the number of shares issuable thereunder by 600,000 shares; (b) extend the term of the Incentive Stock Option Plan an additional ten years until March 2012; (c) allow “performance based compensation” grants under the Stock Plan in compliance with Section 162(m) of the Tax Code; and (d) make certain other changes to the Incentive Stock Option Plan as set forth in the proxy statement, and (iv)  ratified the Company’s appointment of PricewaterhouseCoopers LLP as independent auditors.

 

The vote for the election of the three Class I directors was as follows:

 

 

The vote for amending the Company’s Director Option Plan was as follows:

 

For		Against		Abstained
21,591,918		4,601,669	+	1,162,572

 

The vote for amending the Company’s Incentive Stock Option Plan was as follows:

 

For		Against		Abstained
14,300,095		11,902,077	+	1,153,987

 

The vote for ratifying the appointment of PricewaterhouseCoopers LLP was as follows:

 

For		Against		Abstained
27,106,679		139,544		9,386

 

+ Includes 3,692,636 broker nonvotes

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)	Exhibits
	3.1	Amended and Restated Bylaws of the Registrant.
	10.1	1993 Incentive Stock Option Plan as Amended Through May 16, 2002.
	10.2	1993 Director Option Plan as Amended Through May 16, 2002.
	99.1	Certification by CEO and CFO of Financial Statements.
(b)	Reports on Form 8-K
	No reports on Form 8-K were required to be filed during the quarter ended June 29, 2002, 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:	August 13, 2002			/s/ P. Martin Daley
				P. Martin Daley
				Vice President and
				Chief Financial Officer (Duly
				Authorized Officer and Principal
				Financial Officer)

 

 

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