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:    September 27, 2003
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

 

 

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          

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES  ý          NO  o          

 

The number of shares outstanding of common stock, $.01 par value, as of September 27, 2003:  29,093,637

 

 

MONACO COACH CORPORATION

 

FORM 10-Q

 

September 27, 2003

 

INDEX

 

PART I - FINANCIAL INFORMATION
	Item 1.  Financial Statements.
		Condensed Consolidated Balance Sheets as of December 28, 2002 and September 27, 2003.
		Condensed Consolidated Statements of Income for the quarters and nine-month periods ended September 28, 2002 and September 27, 2003.
		Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 28, 2002 and September 27, 2003.
		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.
	Item 4.  Controls and Procedures.
PART II - OTHER INFORMATION
	Item 6.  Exhibits and Reports on Form 8-K.
	Signatures.

 

2

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

3

 

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

		December 28, 2002			September 27, 2003
ASSETS
Current assets:
Trade receivables, net		$	116,647		$	105,949
Inventories		175,609			132,142
Resort lot inventory		26,883			14,972
Prepaid expenses		3,612			2,880
Deferred income taxes		33,379			33,047
Total current assets		356,130			288,990
Property, plant, and equipment, net		135,350			141,669
Debt issuance costs net of accumulated amortization of $389, and $686, respectively		683			690
Goodwill, net of accumulated amortization of $5,320 and $5,320, respectively		55,254			55,254
Total assets		$	547,417		$	486,603
LIABILITIES
Current liabilities:
Book overdraft		$	3,518		$	4,724
Line of credit		51,413			0
Current portion of long-term note payable		21,667			15,500
Accounts payable		78,055			77,504
Product liability reserve		21,322			20,626
Product warranty reserve		31,745			28,976
Income taxes payable		4,536			2,096
Accrued expenses and other liabilities		29,633			30,013
Total current liabilities		241,889			179,439
Long-term note payable		30,333			17,000
Deferred income taxes		14,568			16,932
		286,790			213,371
Commitments and contingencies (Note 8)
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par, 1,934,783 shares authorized, no shares outstanding
Common stock, $.01 par value; 50,000,000 shares authorized, 28,871,144 and  29,093,637 issued and outstanding, respectively		289			291
Additional paid-in capital		51,501			52,934
Retained earnings		208,837			220,007
Total stockholders’ equity		260,627			273,232
Total liabilities and stockholders’ equity		$	547,417		$	486,603

 

See accompanying notes.

 

4

 

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

		Quarter Ended						Nine-Months Ended
		September 28, 2002			September 27, 2003			September 28, 2002			September 27, 2003
Net sales		$	314,680		$	303,178		$	922,022		$	845,113
Cost of sales		271,863			266,458			800,230			747,534
Gross profit		42,817			36,720			121,792			97,579
Selling, general, and administrative expenses		22,783			25,667			66,455			77,060
Operating income		20,034			11,053			55,337			20,519
Other income, net		3			64			47			502
Interest expense		(633		)	(767		)	(2,000		)	(2,558		)
Income before income taxes		19,404			10,350			53,384			18,463
Provision for income taxes		7,616			4,088			20,953			7,293
Net income		$	11,788		$	6,262		$	32,431		$	11,170
Earnings per common share:
Basic		$	.41		$	.22		$	1.13		$	.38
Diluted		$	.40		$	.21		$	1.10		$	.38
Weighted average common shares outstanding:
Basic		28,859,515			29,080,716			28,793,435			29,021,742
Diluted		29,527,539			29,625,959			29,604,369			29,478,842

 

See accompanying notes.

 

5

 

MONACO COACH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited: dollars in thousands)

 

		Nine-Months Ended
		September 28, 2002			September 27, 2003
Increase (Decrease) in Cash:
Cash flows from operating activities:
Net income		$	32,431		$	11,170
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Loss on sale of assets		164			20
Depreciation and amortization		6,364			7,202
Deferred income taxes		(1,511		)	4,297
Changes in working capital accounts:
Trade receivables, net		(28,668		)	11,075
Inventories		(40,468		)	43,467
Resort lot inventory		0			4,712
Prepaid expenses		(2,582		)	724
Accounts payable		30,045			(551		)
Product liability reserve		4,069			(696		)
Product warranty reserve		1,368			(2,769		)
Income taxes payable		13,234			(2,440		)
Accrued expenses and other liabilities		11,043			633
Net cash provided by operating activities		25,489			76,844
Cash flows from investing activities:
Additions to property, plant, and equipment		(13,055		)	(16,969		)
Proceeds from sale of assets		384			2,051
Proceeds from sale of Naples property		0			6,650
Issuance of notes receivable		312			0
Net cash used in investing activities		(12,359		)	(8,268		)
Cash flows from financing activities:
Book overdraft		3,923			1,206
Payments on lines of credit, net		(11,196		)	(51,413		)
Payments on long-term notes payable		(7,500		)	(19,500		)
Debt issuance costs		0			(304		)
Issuance of common stock		1,643			1,435
Net cash used in financing activities		(13,130		)	(68,576		)
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 28, 2002 and September 27, 2003, and the results of its operations for the quarters and nine-month periods ended September 28, 2002 and September 27, 2003, and cash flows of the Company for the nine-month periods ended September 28, 2002 and September 27, 2003.  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 28, 2002 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 28, 2002.

 

2.            Acquisition of Outdoor Resorts

 

On November 27, 2002, the Company completed the acquisition from Outdoor Resorts of America (“ORA”) of all the outstanding stock of Outdoor Resorts of Las Vegas, Inc. (ORLV), Outdoor Resorts of Naples, Inc. (ORN), and Outdoor Resorts Motorcoach Country Club, Inc. (ORMCC), (“the Projects”).  The Projects consist of developed and undeveloped luxury motor coach resorts.  Prior to the acquisition, the Company had provided ORA with loans in the amount of $8.0 million, and had co-guaranteed $10 million in bank debt secured by ORA properties.

 

As consideration for the acquisition, the Company assumed the current debt and liabilities of the projects of approximately $30.8 million, including the $8.0 million note payable to the Company, and the $10 million co-guaranteed debt.

 

The cash portion of the $30.8 million in consideration paid for the Projects, including transaction costs of $522,000, totaled $21,113,000.  The total assets acquired and liabilities assumed of the Projects, based on estimated fair values at November 27, 2002, were as follows:

 

 

7

 

The allocation of the purchase price has been adjusted for the resolution of pre-acquisition contingencies of $1.6 million.  The effects of the resolution of pre-acquisition contingencies occurring: (i) within one year of the acquisition date were reflected as an adjustment of the allocation of the purchase price, and (ii) after one year will be recognized in the determination of net income.

 

3.            Inventories

 

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

 

 

4.            Line of Credit

 

The Company has a bank line of credit consisting of a revolving line of credit of up to $95 million (the “Revolving Loan”).  At the election of the Company, the Revolving Loan bears interest at variable 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 June 30, 2005, and requires monthly interest payments.  There was no balance outstanding under the Revolving Loan at September 27, 2003.  The Revolving Loan is collateralized by all the assets of the Company and includes various restrictions and financial covenants.

 

5.            Long-term Notes Payable

 

The Company has long-term notes payable of $32.5 million outstanding at September 27, 2003.  The term notes bear 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 notes require monthly interest payments and quarterly principal payments and are collateralized by all the assets of the Company.  Additional prepayments for portions of the term notes are required in the event the Company sells substantially all or any motor coach resort location.  The term notes are due and payable in full on October 3, 2005.

 

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

 

 

8

 

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				Nine-Months Ended
		September 28, 2002		September 27, 2003		September 28, 2002		September 27, 2003
Basic
Issued and outstanding shares (weighted average)		28,859,515		29,080,716		28,793,435		29,021,742
Effect of Dilutive Securities
Stock Options		668,024		545,243		810,934		457,100
Diluted		29,527,539		29,625,959		29,604,369		29,478,842

 

7.              Stock Option Plans

 

At June 28, 2003, the Company had three stock-based employee compensation plans.  The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-based Compensation, to stock-based employee compensation.

 

		Quarter Ended						Nine-Months Ended
		September 28, 2002			September 27, 2003			September 28, 2002			September 27, 2003
Net income - as reported		$	11,788		$	6,262		$	32,431		$	11,170
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		202			194			606			532
		$	11,586		$	6,068		$	31,825		$	10,638
Earnings per share:
Basic - as reported		$	0.41		$	0.22		$	1.13		$	0.38
Basic - pro forma		$	0.40		$	0.21		$	1.11		$	0.37
Diluted - as reported		$	0.40		$	0.21		$	1.10		$	0.38
Diluted - pro forma		$	0.39		$	0.20		$	1.08		$	0.36

 

9

 

8.            Commitments and Contingencies

 

Repurchase Agreements

 

Many of the Company’s sales to independent dealers are made on a “floor plan” basis by a bank or finance company which lends the dealer all or substantially all of the wholesale purchase price and retains a security interest in the vehicles.  Upon request of a lending institution financing a dealer’s purchases of the Company’s product, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18 months after a unit is shipped, the Company will repurchase a dealer’s inventory in the event of a default by a dealer to its lender.

 

The Company’s liability under repurchase agreements is limited to the unpaid balance owed to the lending institution by reason of its extending credit to the dealer to purchase its vehicles, reduced by the resale value of vehicles which may be repurchased.  The risk of loss is spread over numerous dealers and financial institutions.

 

The approximate amount subject to contingent repurchase obligations arising from these agreements at September 27, 2003 is $440.8 million, with approximately 8.0% concentrated with one dealer.  If the Company were obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results, and financial condition could be adversely affected.  The Company has included the disclosure requirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” in its financial statements, and has determined that the recognition provisions of FIN 45 apply to certain guarantees routinely made by the Company including contingent repurchase obligations to third party lenders for inventory financing of dealer inventories.  As of September 27, 2003, the Company has provided a reserve in the amount of $731,000, and expects to record an expense in the fourth quarter in the amount of $150,000.  This estimated liability is based on the Company’s experience of losses associated with the repurchase and resale of units in prior years.

 

 

Product liability

 

The Company is subject to regulations which may require the Company to recall products with design or safety defects, and such recall could have a material adverse effect on the Company’s business, results of operations, and financial condition.

 

The Company has from time to time been subject to product liability claims.  To date, the Company has been successful in obtaining product liability insurance on terms the Company considers acceptable.  The terms of the policy contain a self-insured retention amount of $500,000 per occurrence, with a maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance, including umbrella coverage, is available to a maximum amount of $100.0 million for each occurrence, as well as 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 cost 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.

 

Litigation

 

The Company is involved in various legal proceedings which are incidental to the industry and for which certain matters are covered in whole or in part by insurance or, otherwise, the Company has recorded accruals for estimated settlements.  Management believes that any liability which may result from these proceedings will not have a material adverse effect on the Company’s consolidated financial statements.

 

10

 

Aircraft Lease Commitment

 

The Company has a two-year operating lease for an aircraft, ending February 11, 2004, 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.

 

11

 

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 and Class C 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 $70,000 to $1.1 million for motor coaches and from $25,000 to $65,000 for towables.

 

 

RESULTS OF OPERATIONS

 

 

Quarter ended September 27, 2003 Compared to Quarter ended September 28, 2002

 

Third  quarter net sales decreased 3.7% to $303.2 million compared to $314.7 million for the same period last year.  Gross diesel motorized revenues were down 3.5%, while gas motorized were down 15.4% and towables were down 0.9%, reflecting continued challenging market conditions.  The Company’s overall unit sales were down 14.4% in the third quarter of 2003 with diesel motorized unit sales down 9.9% to 1,302 units, gas motorized unit sales down 24.7% to 449 units, and towable unit sales down by 14.9% to 685 units.  The Company’s total average selling price increased to $124,000 from $112,000 in the same period last year.

 

Gross profit for the third quarter of 2003 decreased to $36.7 million, down from $42.8 million in 2002, and gross margin decreased from 13.6% in the third  quarter of 2002 to 12.1% in the third quarter of 2003.  The decrease in gross margin over the prior year was due in part to an increase in sales discounts, which increased as a percentage of sales by 0.6%.  Gross margins were further dampened by higher indirect costs of sales due to lower run rates in the Company’s production facilities, which impacted gross margin negatively by approximately 1%.

 

Selling, general, and administrative expenses increased by $2.9 million to $25.7 million in the third quarter of 2003 and increased as a percentage of sales from 7.2% in 2002 to 8.5% in  2003.  The increase in selling, general, and administrative expenses in the third quarter of 2003 was due to increases in retail promotions in the third quarter of 2003 of 1.4% of sales.  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 $11.1 million, or 3.7% of sales in the third quarter of 2003 compared to $20.0 million, or 6.4% of sales in the similar 2002  period.  The decrease in operating margins reflects lower gross margins, and higher selling, general, and administrative costs.

 

Net interest expense was $767,000 in the third quarter of 2003 versus $633,000 in the comparable 2002 period, reflecting a higher level of borrowing during the third quarter of 2003.

 

The Company reported a provision for income taxes of $4.1 million, or an effective tax rate of 39.5%, in the third quarter of 2003, compared to $7.6 million, or an effective tax rate of 39.3%, for the comparable 2002 period.

 

12

 

Net income for the third quarter of 2003 was $6.3 compared to $11.8 million in 2002 due to a decrease in sales combined with a lower operating margin and higher interest expense.

 

Nine Months ended  September 27, 2003 Compared to Nine Months ended September 28, 2002

 

Net revenues decreased 8.3% to $845.1 million compared to $922.0 million for the same period last year.  Gross diesel  motorized sales revenues were down 10.1% for the nine months ended September 27, 2003, gas motorized were down 4.7%, and towables were down 12.1%. Overall unit sales for the Company were down 17.2% in the first nine months of 2003 compared to the similar period in 2002, with diesel motorized unit sales down 16.5% to 3,698 units, gas motorized down 10.5% to 1,459 units,  and towables down 23.0% to 1,906. The Company’s average unit selling prices increased in the first nine months of 2003 compared to the similar 2002 period to $119,000 from $109,000.

 

Gross profit for the nine months ended September 27, 2003 decreased to $97.6 million from $121.8 million in 2002, and gross margin decreased to 11.6% in 2003 from 13.2% in 2002. The decrease in gross margin over the prior year was due in part to an increase in sales discounts, which increased as a percentage of sales by 0.8%.   Gross margins were further dampened by higher indirect costs of sales due to lower run rates in the Company’s production facilities which impacted gross margin negatively by 1.5%, and by various other direct costs of sales.

 

Selling, general, and administrative expenses increased by $10.6 million to $77.1 million in the first nine months of 2003 and increased as a percentage of sales from  7.2% in 2002 to 9.1% in 2003.  Selling, general, and administrative expenses in the first nine months of 2003 were higher than the corresponding period of 2002, due primarily to an increase of 1.8%, as a percentage of sales, in dealer promotions, which include retail incentives.

 

Operating income decreased to $20.5 million in the first nine months of 2003 from $55.3 million in 2002. The Company’s higher selling, general, and administrative expenses as a percentage of sales, combined with the decline in the Company’s gross margin, resulted in a decrease in operating margin, as a percentage of sales, to 2.4% in the first nine months of 2003 compared to 6.0% in the first nine months of 2002.

 

Net interest expense was $2.6 million (after the capitalization of $135,000 for construction-in-progress) in the first nine months of 2003 versus $2.0 million in the comparable 2002  period, reflecting a higher level of borrowing during the first nine months of 2003.

 

The Company reported a provision for income taxes of $7.3 million, or an effective tax rate of 39.5%, for the first nine months of 2003, compared to $21.0 million, or an effective tax rate of 39.3%, for the comparable 2002 period.

 

Net income for the first nine months of 2003 was $11.2 million compared to $32.4 million in 2002 due to the decrease in sales combined with lower gross margins, and higher selling, general, and administrative costs.

 

 

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 2003, the Company generated cash of $76.8 million from operating activities.  The Company generated $18.4 million from net income and non-cash expenses such as depreciation and amortization.  Additional sources of cash included a decrease in trade receivables of $11.1 million, a decrease in inventories of $43.5 million, and a decrease in resort lot inventory of $4.7 million.  The uses of cash in operating activities included a decrease in accounts payable of $551,000, a decrease in product liability reserve of $696,000, a decrease in product warranty reserve of $2.8 million, and a decrease of $2.4 million in income taxes payable.  The decrease in trade receivables reflects decreased shipments in the last week of the third quarter of 2003 compared to the fourth quarter of 2002.  Decreased inventory levels reflect a decrease in finished goods and raw materials in accordance with the Company’s desire to reduce working capital needs.  Decreased payables and liabilities are reflective of decreased purchases for lower production run rates over the prior year, model change, accruals for current income taxes payable, and various other accrued liabilities.  In addition to cash flows from operations, the Company also received $6.7 million from the sale of investment property in Naples, Florida, as well as $2.1 million from the sale of property in Leesburg, Florida.  Proceeds from the sale of properties served to pay

 

13

 

down long-term debt in the amount of $6.5 million, and to reduce the Company’s outstanding borrowings under it’s operating line of credit.

 

On May 29, 2003 the Company amended it’s credit facility to increase it’s operating line of credit from $70.0 million to $95.0 million.  This amendment also extended the maturity date of the operating line of credit from September 30, 2004 to June 30, 2005.  At September 27, 2003, the Company had credit facilities consisting of a revolving line of credit of up to $95.0 million, under which no borrowings were outstanding  (the “Revolving Loan”) and term loans with aggregate balances of $32.5 million at September 27, 2003 (the “Term Loans”).  At the election of the Company, the Revolving Loan and Term Loans bear  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 June 30, 2005, and requires monthly interest payments.  Additional prepayments for portions of the term notes are required in the event the Company sells substantially all of any motor coach resort location.  The Term Loans require monthly interest payments and quarterly principal payments that total $4.3 million.  The Revolving Loan and Term Loans are collateralized by all 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 financing of trade receivables.  Many of the Company’s dealers finance product purchases under wholesale floor plan arrangements with third parties as described below.  At September 27, 2003, the Company had working capital of approximately $109.6 million, a decrease of $4.7 million from working capital of $114.2 million at December 28, 2002.  The Company has been using short-term credit facilities and cash flows from operations to finance its 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 $17.0 million in the first nine months of 2003, which included costs related to the construction of a new paint facility at the Company’s Indiana location, an expansion of the Indiana towable plant, a new service facility in Florida, as well as various other routine capital expenditures.  The Company anticipates that capital expenditures for all of 2003 will be approximately $21 to $22 million, which includes expenditures to complete the Indiana towable plant expansion, and 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 typical in the recreational vehicle industry, many of the Company’s retail dealers utilize wholesale floor plan financing arrangements with third party lending institutions to finance their purchases of the Company’s products.  Under the terms of these floor plan arrangements, institutional lenders customarily require the recreational vehicle manufacturer to agree to repurchase any unsold units if the dealer fails to meet its commitments to the lender, subject to certain conditions.  The Company has agreements with several institutional lenders under which the Company currently has repurchase obligations.  The Company’s contingent obligations under these repurchase agreements are reduced by the proceeds received upon the sale of any repurchased units.  The Company’s obligations under these repurchase agreements vary from period to period.  At September 27, 2003, approximately $440.8 million of products sold by the Company to independent dealers were subject to potential repurchase under existing floor plan financing agreements with approximately 8.0% concentrated with one dealer.  Historically, the Company has been successful in mitigating losses associated with repurchase obligations.  During  the first nine months of 2003, there were approximately $600,000 in losses associated with the exercise of repurchase agreements. If the Company were obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results, and financial condition could be adversely affected.

 

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

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 as of September 27, 2003:

 

 

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)		$	15,500		$	17,000		$	0		$	0		$	32,500
Operating Leases (2)		2,598			2,216			2,003			2,528			9,345
Total Contractual Cash Obligations		$	18,098		$	19,216		$	2,003		$	2,528		$	41,845

 

 

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		$	95,000		$	0		$	0		$	95,000
Guarantees		0			16,000		(2)	0			0			16,000
Repurchase Obligations (4)		0			440,789			0			0			440,789
Total Commitments		$	0		$	551,789		$	0		$	0		$	551,789

 

(1)   See Note 5 to the financial  statements included in this report.  Amount represented reflects a prepayment of $6.5 million from proceeds received from the sale of property held for sale in Naples, Florida.

(2)   Various leases including manufacturing facilities, aircraft, and machinery and equipment.  See Note 8 to the financial statements included in this report.

(3)   See Note 4 to the financial statements included in this report.  The amount listed represents available borrowings on the line of credit at September 27, 2003.

(4)   Reflects obligations under manufacturer repurchase commitments.  See Note 8 to the financial statements included in this report.

 

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.

 

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.

 

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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 analysis involves management comparing the market capitalization of the Company, to the carrying amount, including goodwill, of the net book value of the Company to determine if goodwill has been impaired.

 

INVENTORY RESERVES  The Company writes down its inventory for obsolescence, and the difference between the cost of inventory and its estimated market value. These write-downs are based on assumptions about future sales demand and market conditions.  If actual sales demand or market conditions change from those projected by management, additional inventory write-downs may be required.

 

INCOME TAXES  In conjunction with preparing its consolidated financial statements, the Company must estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent management believes that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets.

 

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 our manufacturing resources efficiently may be adversely impacted due to reduced run rates in our plants.

 

•                  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, including significant discounting offered by our competitors.

 

•                  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.  Our overall gross margin may also decline in the future to the extent we continue to run at reduced rates in our plants.  These reduced rates create inefficiencies in plant overhead and indirect costs associated with the production process.

 

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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, rate, and mix 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 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 2001 to 257,000 units.  In 2002, the industry rebounded up to approximately 307,000 units.  Our business is 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 could 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 WHEN WE EXPAND 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 any such 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 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.

 

•                  The newly developed products may not be successful in the marketplace.

 

•                  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 approximately 420 dealerships located primarily in the United States and Canada as of September 27, 2003, a significant percentage of our sales are concentrated among a relatively small number of independent dealers.  For the nine months ended September 27, 2003, sales to one dealer, Lazy Days RV Center, accounted for 11.8% of total sales compared to 12.3% of sales in the same period ended last year.  For the nine months ended September 27, 2003, sales to our 10 largest dealers, including Lazy Days RV Center, accounted for a total of 39.2% of sales, compared to 40.4% of sales for the same

 

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period in 2002.  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 $440.8 million as of September 27, 2003, with approximately 8.0% concentrated with one dealer.  Losses associated with repurchases and subsequent resales of the Company’s products have historically been immaterial to operations, however the Company has provided a reserve in accordance with FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, in the amount of $731,000 for the first nine months of 2003.  Nonetheless, if the Company were obligated to repurchase a significant number of units under any repurchase agreement, our business, operating results, and financial condition could be adversely affected.

 

OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO CONCENTRATION RISK  We sell our product to dealers who are predominantly located in the United States and Canada.  The terms and conditions of payment are a combination of open trade receivables, and commitments from dealer floor plan lending institutions.  As of September 27, 2003, total trade receivables were $105.9 million, with approximately $82.8 million, or 78.2% of the outstanding accounts receivable balance concentrated among floor plan lenders. The remaining $23.1 million of trade receivables were concentrated substantially all with one dealer.

 

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 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 and Meritor) for all diesel motor coaches and chassis (Workhorse and Ford) for gas motor coaches.  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

 

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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.  The terms of the policy contain a self-insured retention amount of $500,000 per occurrence, with a maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance, including umbrella coverage, is available to a maximum amount of $100 .0 million for each occurrence, as well as 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.

 

WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES WITH OUR INVESTMENT IN THE OUTDOOR RESORTS PROJECTS  We acquired from Outdoor Resorts of America, Inc. (“ORA”) three luxury motor coach resort properties being developed by ORA in Las Vegas, Nevada; Indio, California; and Naples, Florida.  The resorts offer individual lots to owners, with undivided interests in the resort amenities.   The investment property in Naples, Florida was sold in September 2003.  If we experience difficulties in selling the remaining properties, we could incur additional expenses which would adversely affect our profits.

 

 

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

 

FIN 46

 

In January 2003, the Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51, Consolidated Financial Statements.  The Interpretation addresses how variable interest entities are to be identified and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity.  The Interpretation also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved.

 

FIN 46 is effective at the end of the interim or annual period ending after December 15, 2003 to variable interest entities (VIE), in which a company holds a variable interest that is acquired before February 1, 2003.  The Company does not believe it is a primary beneficiary of a VIE or holds any significant interest or involvement in a VIE; and therefore, there will be no impact of adopting this standard on the Company’s consolidated financial statements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

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Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c) and 15-d-14(c)) have concluded that as of a date within 90 days of the filing date of this report (the “Evaluation Date”) our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Changes in Internal Controls

 

Subsequent to the “Evaluation Date,” there were no significant changes in our internal controls or in other factors that could significantly affect internal controls, nor were there any significant deficiencies or material weaknesses in our internal controls.  As a result, no corrective actions were required or undertaken.

 

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PART II - OTHER INFORMATION

 

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)		Exhibits
		31.1	Sarbanes-Oxley Section 302(a) Certification.
		31.2	Sarbanes-Oxley Section 302(a) Certification.
		32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, and Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K
		i.	On July 14, 2003, the Company filed a Form 8-K which furnished a copy of a press release announcing  preliminary results for the three months ended June 28, 2003.
		ii.	On July 24, 2003, the Company filed a Form 8-K which furnished a copy of a press release announcing the Company’s results of operations for the three months ended June 28, 2003.

 

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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 3, 2003		/s/   P. Martin Daley
			P. Martin Daley
			Vice President and
			Chief Financial Officer (Duly
			Authorized Officer and Principal
			Financial Officer)

 

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EXHIBITS INDEX

 

Exhibit Number		Description of Document
31.1		Sarbanes-Oxley Section 302(a) Certification.
31.2		Sarbanes-Oxley Section 302(a) Certification.
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, and Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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