ITEM 1. BUSINESS(1)
Monaco Coach Corporation (the "Company") is a leading manufacturer of premium Class A motor coaches and towable recreational vehicles. The Company's product line consists of sixteen models of motor coaches and nine models of towables (fifth wheel trailers and travel trailers) under the "Monaco", "Holiday Rambler", "Royale Coach", and "McKenzie Towables" brand names. The Company's products, which are typically priced at the high end of their respective product categories, range in suggested retail price from $70,000 to $900,000 for motor coaches and from $18,000 to $65,000 for towables. Based upon retail registrations in 1999, the Company believes it had a 23.6% share of the market for diesel Class A motor coaches, a 7.7% share of the market for mid-to-high end fifth wheel trailers (units with retail prices above $22,000) and a 29.0% share of the market for mid-to-high end travel trailers (units with retail prices above $18,000). The Company's products are sold through an extensive network of 294 dealerships located primarily in the United States and Canada.
The Company is the successor to a company formed in 1968 (the "Predecessor") and commenced operations on March 5, 1993 by acquiring all the assets and liabilities of its predecessor company (the "Predecessor Acquisition").
Prior to March 1996, the Company's product line consisted exclusively of High-Line Class A motor coaches. In March 1996, the Company acquired the Holiday Rambler Division of Harley-Davidson, Inc. ("Holiday Rambler"), a manufacturer of a full line of Class A motor coaches and towables (the "Holiday Acquisition"). The Holiday Acquisition: (i) more than doubled the Company's net sales; (ii) provided the Company with a significantly broader range of products, including complementary High-Line Class A motor coaches and the Company's first product offerings of fifth wheel trailers, travel trailers and entry-level to mid-range motor coaches; and (iii) lowered the price threshold for first-time buyers of the Company's products, thus making them more affordable for a significantly larger base of potential customers. The Company believes that developing relationships with a broader base of first-time buyers, coupled with the Company's strong emphasis on quality, customer service and design innovation, will foster brand loyalty and increase the likelihood that, over time, more customers will trade-up through the Company's line of products. Attracting larger numbers of first-time buyers is important to the Company because of the Company's belief that many recreational vehicle customers purchase multiple recreational vehicles during their lifetime.
PRODUCTS
The Company currently manufactures sixteen motor coach and nine towable models, each of which has distinct features and attributes designed to target the model to a particular suggested retail price range. The Company's product offerings currently target three segments of the recreational vehicle market: Class A motor
- ------------------------------------------------------------------------------- (1) A discussion of the following items can be found in the consolidated financial statements and the notes to the consolidated financial statements instead of in this Item 1: (a) revenue, profit and total assets for the fiscal years 1997, 1998 and 1999; and (b) research and development costs.
coaches, fifth wheel trailers and travel trailers. The Company does not currently compete in any other segment of the recreational vehicle industry. During the third quarter of 1999, the Company introduced the Monarch, a new gasoline powered model under the Monaco brand name. In December 1999, the Company introduced two low-end diesel motor coaches, the Knight, under the Monaco label, and the Admiral, under the Holiday Rambler brand. All three of these products were designed to bring customers into the Company's line of products at a lower price point giving the Company the opportunity to benefit as these customers trade-up through the Company's line of products. The following table highlights the Company's product offerings as of January 1, 2000:
COMPANY MOTOR COACH PRODUCTS
COMPANY TOWABLE PRODUCTS
In 1999, the average unit wholesale selling prices of the Company's motor coaches, fifth wheel trailers and travel trailers were approximately $113,700, $27,500 and $20,300, respectively.
The Company's recreational vehicles are designed to offer all the comforts of home within a 190 to 400 square foot area. Accordingly, the interior of the recreational vehicle is designed to maximize use of available space. The Company's products are designed with five general areas, all of which are smoothly integrated to form comfortable and practical mobile accommodations. The five areas are the living room, kitchen, dining room, bathroom and bedroom. For each model, the Company offers a variety of interior layouts.
Each of the Company's recreational vehicles comes fully equipped with a wide range of kitchen and
bathroom appliances, audio and visual electronics, communication devices, and other amenities, including couches, dining tables, closets and storage spaces. All of the Company's recreational vehicles incorporate products from well-recognized suppliers, including: stereos, CD and cassette players, VCR's, DVD's and televisions from Quasar, Bose, Panasonic and Sony; microwave ovens from Sharp, Magic Chef, and General Electric; stoves and ranges from KitchenAid and Modern Maid; engines from Cummins; transmissions from Allison; and chassis from Ford and Workhorse. The Company's high end products offer top-of-the-line amenities, including 25" Sony stereo televisions, GPS systems from Carin, fully automatic DSS (satellite) systems, Corian and Wilsonart solid surface kitchen and bath countertops, imported ceramic tile and leather furniture, and Ralph Lauren and Martha Stewart fabrics.
PRODUCT DESIGN
To address changing consumer preferences, the Company modifies and improves its products each model year and typically redesigns each model every three or four years. The Company's designers work with the Company's marketing, manufacturing and service departments to design a product that is appealing to consumers, practical to manufacture and easy to service. The designers try to maximize the quality and value of each model at the strategic retail price point for that model. The marketing and sales staffs suggest features or characteristics that they believe could be integrated into the various models to differentiate the Company's products from those of its competitors. By working with manufacturing personnel, the Company's product designers engineer the recreational vehicles so that they can be built efficiently and with high quality. Service personnel suggest ideas to improve the serviceability and reliability of the Company's products and give the designers feedback on the Company's past designs.
The exteriors of the Company's recreational vehicles are designed to be aesthetically appealing to consumers, aerodynamic in shape for fuel efficiency and practical to manufacture. The Company has an experienced team of computer-aided design personnel to complete the product design and produce prints from which the products will be manufactured.
SALES AND MARKETING
DEALERS
The Company expanded its dealer network over the past year from 263 dealerships at the beginning of 1999 to 294 dealerships primarily located in the United States and Canada at January 1, 2000. The Company's dealerships generally sell either Monaco motor coaches, the McKenzie Towables line, or Holiday Rambler motor coaches and towables. The Company intends to continue to expand its dealer network, primarily by adding additional motorized dealers to carry the Company's new lower priced gas and diesel units as well as towables-only dealers to carry the McKenzie Towables line.* The Company maintains an internal sales organization consisting of 43 account executives who service the Company's dealer network.
The Company analyzes and selects new dealers on the basis of such criteria as location, marketing ability, sales history, financial strength and the capability of the dealer's repair services. The Company provides its dealers with a wide variety of support services, including advertising subsidies and technical training, and offers certain model pricing discounts to dealers who exceed wholesale purchase volume milestones. The Company's sales staff is also available to educate dealers about the characteristics and advantages of the Company's recreational vehicles compared with competing products. The Company offers dealers geographic exclusivity to carry a particular model. While the Company's dealership contracts have renewable one or two-year terms, historically the Company's dealer turnover rate has been low.
Dealers typically finance their inventory through revolving credit facilities established with asset-based lending institutions, including specialized finance companies and banks. It is industry practice that such "floor plan" lenders require recreational vehicle manufacturers to agree to repurchase (for a period of 12 to 18 months from the date of the dealer's purchase) motor coaches and towables previously sold to the dealer in the event the dealer defaults on its financing agreements. The Company's contingent obligations under these repurchase agreements are reduced by the proceeds received upon the sale of any repurchased units. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations-- Liquidity and Capital Resources", and Note 17 of Notes to the Company's Consolidated Financial Statements.
ADVERTISING AND PROMOTION
The Company advertises regularly in trade journals and magazines, participates in cooperative advertising programs with its dealers, and produces color brochures depicting its models' performance features and amenities. The Company also promotes its products with direct incentive programs to dealer sales personnel linked to sales of particular models.
A critical marketing activity for the Company is its participation in the more than 150 recreational vehicle trade shows and rallies each year. National trade shows and rallies, which can attract as many as 40,000 attendees, are an integral part of the Company's marketing process because they enable dealers and potential retail customers to compare and contrast all the products offered by the major recreational vehicle manufacturers. Setting up attractive display areas at major trade shows to highlight the newest design innovations and product features of its products is critical to the Company's success in attracting and maintaining its dealer network and in generating enthusiasm at the retail customer level. The Company also provides complimentary service for minor repairs to its customers at several rallies and trade shows.
The Company attempts to encourage and reinforce customer loyalty through clubs for the owners of its products so that they may share experiences and communicate with each other. The Company's clubs currently have more than 15,000 members. The Company publishes magazines to enhance its relations with these clubs and holds rallies for clubs to meet periodically to view the Company's new models and obtain maintenance and service guidance. Attendance at Company-sponsored rallies can be as high as 1,800 recreational vehicles. The Company frequently receives support from its dealers and suppliers to host these rallies.
The Company's web site also offers an extensive listing of the Company's models, floor plans, and features, including "virtual tours" of some models. A dealer locator feature identifies for customers the closest dealers to their location for the model(s) they are interested in purchasing. The Company's web site also provides information for upcoming rallies and club functions as well as links to other R.V. Lifestyle web sites of interest to existing or potential customers.
CUSTOMER SERVICE
The Company believes that customer satisfaction is vitally important in the recreational vehicle market because of the large number of repeat customers and the rapid communication of business reputations among recreational vehicle enthusiasts. The Company also believes that service is an integral part of the total product the Company delivers and that responsive and professional customer service is consistent with the premium image the Company strives to convey in the marketplace.
The Company offers a warranty to all purchasers of its new vehicles. The Company's current warranty covers its products for up to one year (or 24,000 miles, whichever occurs first) from the date of retail sale (five years for the front and sidewall frame structure). In addition, customers are protected by the warranties of major component suppliers such as those of Cummins Engine Company, Inc. ("Cummins") (diesel engines), Spicer Heavy Axle & Brake Division of Dana Corporation ("Dana") (axles), Allison Transmission Division of General Motors Corporation ("Allison") (transmissions), Workhorse (chassis), Ford Motor Company ("Ford") and Freightliner Custom Chassis Corporation ("Freightliner") (chassis). The Company's warranty covers all manufacturing-related problems and parts and system failures, regardless of whether the repair is made at a Company facility or by one of the Company's dealers or authorized service centers. As of January 1, 2000, the Company had 294 dealerships providing service to owners of the Company's products. In addition, owners of the Company's diesel products have access to the entire Cummins dealer network, which includes over 2,000 repair centers.
The Company operates service centers in Coburg and Springfield, Oregon and Elkhart and Wakarusa, Indiana. The Company had approximately 332 employees in customer service at January 1, 2000. The Company
maintains individualized production records and a computerized warranty tracking system which enable the Company's service personnel to identify problems quickly and to provide individualized customer service. While many problems can be resolved on the telephone, the customer may be referred to a nearby dealer or service center. The Company believes that dedicated customer service phone lines are an ideal way to interact directly with the Company's customers and to quickly address their technical problems.
The Company has expanded its on-line dealer support network to assist its service personnel and dealers in providing better service to the Company's customers. Service personnel and dealerships are able to access information relating to specific models and sales orders, file warranty claims and track their status, and view the status of existing parts orders. The Company is currently in the process of expanding its on-line dealer support network to include the ability of service personnel at dealerships to order parts through an electronic parts catalog.
MANUFACTURING
The Company currently operates motorized manufacturing facilities in Coburg, Oregon, where it manufactures Signature Series, Executive, Dynasty, Navigator, Knight, Ambassador, and LaPalma motor coaches and in Wakarusa, Indiana, where it manufactures Imperial, Endeavor, Vacationer, Dynasty, Diplomat, La Palma, Admiral and Windsor motor coaches. The Company's towable manufacturing facilities are in Elkhart, Indiana, where it manufactures Holiday Rambler fifth wheel and travel trailers, and Coburg, Oregon, where it manufactures McKenzie fifth wheel and travel trailers. The Company also operates its Royale Coach bus conversion facility in Elkhart, Indiana.
The Company completed an upgrade and expansion of its Coburg motorized facility in the third quarter of 1999 to allow increased production of its current mix of products as well as new capacity to build its low-end diesel and gasoline powered motor coaches. The Company is currently in the process of expanding its diesel chassis capacity in Elkhart, which will increase the Company's ability to build diesel powered coaches in Wakarusa. The Company believes this expansion will be completed by the second quarter of 2000.* The Company's motor coach production capacity at the end of 1999 was 14 units per day at its Coburg facility and 25 units per day at its Wakarusa facility. The Company believes that this expanded manufacturing capacity will free the Company from capacity constraints on its motor coaches and allow the Company to gradually increase its overall production volumes for motor coaches, consistent with anticipated market demand.*
In the fourth quarter of 1999 the Company moved its McKenzie towable operation into the newly completed production facilty in Coburg. The company's current towables production capacity is a combined 22 units per day at its Coburg and Elkhart facilities.
The Company believes that its manufacturing process is one of the most vertically integrated in the recreational vehicle industry. By manufacturing a variety of items, including the Roadmaster semi-monocoque diesel chassis, plastic components, some of its cabinetry and fiberglass parts, as well as many subcomponents, the Company maintains increased control over scheduling, component production and overall product quality. In addition, vertical integration enables the Company to be more responsive to market dynamics.
Each facility has several stations for manufacturing, organized into four broad categories: chassis manufacturing, body manufacturing, painting and finishing. It takes from two weeks to two months to build each unit, depending on the product. The Company keeps a detailed log book during the manufacture of each product and inputs key information into its computerized service tracking system.
Each unit is given an inspection during which its appliances and plumbing systems are thoroughly tested. As a final quality control check, each motor coach is given a road test. To further ensure both dealer and end-user satisfaction, the Company pays a unit fee per recreational vehicle to its dealers so that they will thoroughly inspect each product upon delivery and return a detailed report form.
The Company purchases raw materials, parts, subcomponents, electronic systems, and appliances from approximately 750 vendors. These items are either directly mounted in the vehicle or are utilized in subassemblies which the Company assembles before installation in the vehicle. The Company attempts to minimize its level of inventory by ordering most parts as it needs them. Certain key components that require longer purchasing lead
times are ordered based on planned needs. Examples of these components are diesel engines, axles, transmissions, chassis and interior designer fabrics. The Company has a variety of major suppliers, including Allison, Workhorse, Cummins, Dana, Ford and Freightliner. The Company does not have any long-term supply contracts with these suppliers or their distributors, but believes it has good relationships with them. To minimize the risks associated with reliance on a single-source supplier, the Company typically keeps a 60-day supply of axles, engines, chassis and transmissions in stock or available at the suppliers' facilities and believes that, in an emergency, other suppliers could fill the Company's needs on an interim basis.* In 1997, Allison put all chassis manufacturers on allocation with respect to one of the transmissions the Company uses, and in 1999 Ford indicated it might need to put its gasoline powered chassis on allocation. The Company presently believes that its allocation by suppliers of all components is sufficient to enable the unit volume increases that are planned for models, and the Company does not foresee any operating difficulties as a result of vendor supply issues.* Nevertheless, there can be no assurance that Allison, Ford, or any of the Company's other suppliers will be able to meet the Company's future requirements for transmissions, chassis, or other key components. An extended delay or interruption in the supply of any components obtained from a single or limited source supplier could have a material adverse effect on the Company's business, results of operations and financial condition.
BACKLOG
The Company's products are generally manufactured against orders from the Company's dealers. As of January 1, 2000, the Company's backlog of orders was $205.7 million, compared to $233.2 million at January 2, 1999. The Company includes in its backlog all accepted purchase orders from dealers shippable within the next six months. Orders in backlog can be canceled at the option of the purchaser at any time without penalty and, therefore, backlog should not be used as a measure of future sales.
COMPETITION
The market for recreational vehicles is highly competitive. The Company currently encounters significant competition at each price point for its recreational vehicle products. The Company believes that the principal competitive factors that affect the market for the Company's products include product quality, product features, reliability, performance, quality of support and customer service, loyalty of customers, brand recognition and price. The Company believes that it competes favorably against its competitors with respect to each of these factors. The Company's competitors include, among others: Coachmen Industries, Inc., Fleetwood Enterprises, Inc., National R.V. Holdings, Inc., Skyline Corporation, SMC Corporation, Thor Industries, Inc. and Winnebago Industries, Inc. Many of the Company's competitors have significant financial resources and extensive marketing capabilities. There can be no assurance that either existing or new competitors will not develop products that are superior to or that achieve better consumer acceptance than the Company's products, or that the Company will continue to remain competitive.
GOVERNMENT REGULATION
The manufacture and operation of recreational vehicles are subject to a variety of federal, state and local regulations, including the National Traffic and Motor Vehicle Safety Act and safety standards for recreational vehicles and their components that have been promulgated by the Department of Transportation. These standards permit the National Highway Traffic Safety Administration to require a manufacturer to repair or recall vehicles with safety defects or vehicles that fail to conform to applicable safety standards. Because of its sales in Canada, the Company is also governed by similar laws and regulations promulgated by the Canadian government. The Company has on occasion voluntarily recalled certain products. The Company's operating results could be adversely affected by a major product recall or if warranty claims in any period exceed warranty reserves.
The Company is a member of the Recreation Vehicle Industry Association (the "RVIA"), a voluntary association of recreational vehicle manufacturers and suppliers, which promulgates recreational vehicle safety standards. Each of the products manufactured by the Company has an RVIA seal affixed to it to certify that such standards have been met.
Many states regulate the sale, transportation and marketing of recreational vehicles. The Company is also
subject to state consumer protection laws and regulations, which in many cases require manufacturers to repurchase or replace chronically malfunctioning recreational vehicles. Some states also legislate additional safety and construction standards for recreational vehicles.
The Company is subject to regulations promulgated by the Occupational Safety and Health Administration ("OSHA"). The Company's plants are periodically inspected by federal or state agencies, such as OSHA, concerned with workplace health and safety.
The Company believes that its products and facilities comply in all material respects with the applicable vehicle safety, consumer protection, RVIA and OSHA regulations and standards. Amendments to any of the foregoing regulations and the implementation of new regulations could significantly increase the cost of manufacturing, purchasing, operating or selling the Company's products and could materially and adversely affect the Company's net sales and operating results. The failure of the Company to comply with present or future regulations could result in fines being imposed on the Company, potential civil and criminal liability, suspension of production or cessation of operations.
The Company is subject to product liability and warranty claims arising in the ordinary course of business. To date, the Company has been successful in obtaining product liability insurance on terms the Company considers acceptable. The Company's current policies jointly provide coverage against claims based on occurrences within the policy periods up to a maximum of $41.0 million for each occurrence and $42.0 million in the aggregate. There can be no assurance that the Company will be able to obtain insurance coverage in the future at acceptable levels or that the costs of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could have a material adverse effect on the Company's business, operating results and financial condition.
Certain U.S. tax laws currently afford favorable tax treatment for the purchase and sale of recreational vehicles. These laws and regulations have historically been amended frequently, and it is likely that further amendments and additional laws and regulations will be applicable to the Company and its products in the future. Furthermore, no assurance can be given that any increase in personal income tax rates will not have a material adverse effect on the Company's business, operating results and financial condition by reducing demand for the Company's products.
ENVIRONMENTAL REGULATION AND REMEDIATION
REGULATION The Company's recreational vehicle manufacturing operations are subject to a variety of federal and state environmental regulations relating to the use, generation, storage, treatment and disposal of hazardous materials. These laws are often revised and made more stringent, and it is likely that future amendments to these laws will impact the Company's operations.
The Company has submitted applications for "Title V" air permits for all of its existing and new operations. The air permits have either been issued or are in the process of being issued by the relevant state agency.
The Company does not currently anticipate that any additional air pollution control equipment will be required as a condition of receiving new air permits, although new regulations and their interpretation may change over time, and there can be no assurance that additional expenditures will not be required.*
The Company is aware of the forthcoming adoption and implementation of new federal Maximum Achievable Control Technology ("MACT") regulations. The Company does not currently anticipate that compliance with the MACT regulations by the Company will require any material capital expenditures at its facilities beyond those which have already been incurred.* However, the specific content and interpretation of these regulations is uncertain and there can be no assurance that additional capital expenditures will not be required.
While the Company has in the past provided notice to the relevant state agencies that air permit violations have occurred at its facilities, the Company has resolved all such issues with those agencies, and the Company believes that there are no ongoing violations of any of its existing air permits at any of its owned or leased facilities
at this time. However, the failure of the Company to comply with present or future regulations could subject the Company to: (i) fines; (ii) potential civil and criminal liability; (iii) suspension of production or cessation of operations; (iv) alterations to the manufacturing process; or (v) costly cleanup or capital expenditures, any of which could have a material adverse effect on the Company's business, results of operations and financial condition.
REMEDIATION The Company is not currently involved in remediation activities at any of its facilities and none are in prospect. Nevertheless, there can be no assurances that the Company will not discover environmental problems or incur remediation costs in the future.
EMPLOYEES
As of January 1, 2000, the Company had 3,763 employees, including 3,191 in production, 51 in sales, 332 in service and 189 in management and administration. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage resulting from labor issues. The Company believes its relations with its employees are good.
DEPENDENCE ON KEY PERSONNEL
The Company's future prospects depend upon its key management personnel, including Kay L. Toolson, the Company's Chief Executive Officer. The loss of one or more of these key management personnel could adversely affect the Company's business. The prospects of the Company also depend in part on its ability to attract and retain qualified technical, manufacturing, managerial and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive officers of the Company as of March 24, 2000:
Mr. Toolson has served as Chief Executive Officer of the Company and the Predecessor since 1986 and as Chairman of the Company since July 1993. He has served as President of the Company since 1986 except for the periods from October 1995 to January 1997 and August 1998 to September 1999. From 1973 to 1986, Mr. Toolson held executive positions with two motor coach manufacturers.
Mr. Nepute has served the Company as Executive Vice President, Treasurer and Chief Financial Officer since September 1999. Prior to that and from 1991 he served the Company and the Predecessor in the capacity of Vice President of Finance, Treasurer and Chief Financial Officer. From January 1988 until January 1991 he served the Predecessor as Controller.
Mr. Bond has served as Senior Vice President, Secretary and Chief Administrative Officer of the Company since September 1999 and as Vice President, Secretary and Chief Administrative Officer beginning in August of
1998. Prior to that and from February 1997 he served the Company as Vice President, Secretary and General Counsel, having joined the Company in January 1997. From 1987 to December 1996 he held the position of Vice President, Secretary and General Counsel of Holiday Rambler, and originally joined Holiday Rambler as Vice President and Assistant General Counsel in 1984.
Mr. Garriott has served the Company as Vice President and Director of Oregon Manufacturing since January 1997. He has been continuously employed by the Company or the Predecessor since November 1975 in various capacities, including Vice President of Corporate Purchasing from October 1994 until December 1996.
Mr. Yoder has served the Company as Vice President and Director of Indiana Manufacturing since August 1998. Joining the Company upon the acquisition of Holiday Rambler in March 1996 as Director of Indiana Motorized Manufacturing, he served in that capacity through July 1998. Mr. Yoder began his employment with Holiday Rambler in 1969 and held a variety of production-related positions, serving as Area Manager of Motorized Production from 1980 until March 1996.
Mr. Carroll has served as Vice President of Product Development since August 1998 and prior to that as Director of Product Development since joining the Company in October 1995. He has held a variety of marketing and product development positions with various recreational vehicle manufacturers since 1979.
ITEM 2.
ITEM 2. PROPERTIES
The Company is headquartered in Coburg, Oregon, approximately 100 miles from Portland, Oregon. The following table summarizes the Company's current and planned manufacturing facilities:
The Company believes that after the recent expansion of its motor coach and towable facilities in Oregon, its existing facilities, along with the future expansion in Indiana, will be sufficient to meet its production requirements for the foreseeable future.* Should the Company require increased production capacity in the future, the Company believes that additional or alternative space adequate to serve the Company's foreseeable needs would be available on commercially reasonable terms.*
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings arising in the ordinary course of its business, including a variety of product liability and warranty claims typical in the recreational vehicle industry. The Company does not believe that the outcome of its pending legal proceedings, net of insurance coverage, will have a material adverse effect on the business, financial condition or results of operations of the Company.*
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under the symbol "MNC." The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock (rounded to the nearest $.01 per share).
As of March 24, 2000, there were approximately 467 holders of record of the Company's Common Stock. The high and low closing sales prices listed above have been adjusted to reflect the stock splits approved by the Board on May 19, 1999, November 2, 1998 and March 16, 1998.
The Company has never paid dividends on its Common Stock and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company's existing loan agreements prohibit the payment of dividends on the Common Stock without the lenders' consent.
The market price of the Company's Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, changes in earnings estimates by analysts, announcements of new products by the Company or its competitors, general conditions in the recreational vehicle market and other events or factors. In addition, the stocks of many recreational vehicle companies have experienced price and volume fluctuations which have not necessarily been directly related to the companies' operating performance, and the market price of the Company's Common Stock could experience similar fluctuations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The Consolidated Statements of Income Data set forth below with respect to fiscal years 1997, 1998 and 1999, and the Consolidated Balance Sheet Data at January 2, 1999 and January 1, 2000, are derived from, and should be read in conjunction with, the audited Consolidated Financial Statements and Notes thereto of the Company included in this Annual Report on Form 10-K. The Consolidated Statements of Income Data set forth below with respect to fiscal years 1995 and 1996 and the Consolidated Balance Sheet Data at December 30, 1995, December 28, 1996 and January 3, 1998 are derived from audited consolidated financial statements of the Company which are not included in this Annual Report on Form 10-K.
The data set forth in the following table should be read in conjunction with, and are qualified in their entirety by, Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Annual Report on Form 10-K.
FIVE-YEAR SELECTED FINANCIAL DATA
The following table sets forth financial data of Monaco Coach Corporation for the years indicated (in thousands of dollars, except share and per share data and consolidated operating data).
- ------------------ (1) Includes the operations of Holiday Rambler and the Holiday World Dealerships from March 4, 1996. The Holiday World Dealerships generated $25.0 million and $6.8 million in net sales in 1996 and 1997, respectively, which included the sale of 820 and 211 units in 1996 and 1997, respectively, that were either previously owned or not Holiday Rambler units, as well as service revenues. The Company sold seven Holiday World Dealerships in 1996 and the remaining three dealerships in 1997. (2) Includes a $1.7 million increase in cost of sales resulting from the sale of inventory that was written up to fair value at the date of the Holiday Acquisition. (3) Includes a one time charge of $0.07 per share, net of tax effect, related to the inventory write-up described in Note 2 above. Excluding this charge, diluted earnings per common share would have been $0.44 per share. (4) Excludes units sold by the Holiday World Dealerships that were either previously owned or not Holiday Rambler units.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the successor to a company formed in 1968 (the "Predecessor") and commenced operations on March 5, 1993 by acquiring substantially all of the assets and liabilities of the Predecessor. The Predecessor's management and the manufacturing of its High-Line Class A motor coaches were largely unaffected by the Predecessor Acquisition. However, the Company's consolidated financial statements for fiscal years 1997, 1998 and 1999 all contain Predecessor Acquisition-related expenses, consisting primarily of the amortization of goodwill.
On March 4, 1996, the Company acquired from Harley-Davidson certain assets of Holiday Rambler (the "Holiday Acquisition") in exchange for $21.5 million in cash, 65,217 shares of the Company's Redeemable Preferred Stock (which was subsequently converted into 230,767 shares of the Company's Common Stock), and the assumption of most of the liabilities of Holiday Rambler. Concurrently, the Company acquired ten Holiday World Dealerships for $13.0 million, including a $12.0 million subordinated promissory note, and the assumption of certain liabilities. The Company sold seven Holiday World Dealerships in 1996, retired the $12.0 million note from the proceeds of these sales, and sold the remaining three dealerships in 1997. The Holiday Acquisition was accounted for using the purchase method of accounting.
Beginning on March 4, 1996, the acquired operations were incorporated into the Company's consolidated financial statements. The Company's consolidated financial statements for the fiscal years ended January 3, 1998, January 2, 1999 and January 1, 2000 contain expenses related to the Holiday Acquisition, consisting of interest expense, the amortization of debt issuance costs and Holiday Acquisition goodwill.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
Net sales increased 31.3% from $594.8 million in 1998 to $780.8 million in 1999. The Company's overall unit sales were up 36% from 6,985 in 1998 to 9,502 units in 1999. The Company's units sales were up 30.7% on the motorized side reflecting higher production rates in both the Coburg, Oregon and Wakarusa, Indiana motorized plants. The Company's 1999 sales of motorized units were helped by the introduction in December 1998 of two new motorized products which accounted for 923 of the 1,465 unit increase in 1999 motorized sales over 1998 motorized sales. The Company's 1998 sales of motorized units were helped by the introduction of three new motorized products in 1998 which accounted for 989 of the 1,439 units increase in 1998 motorized unit sales over 1997 unit sales. The Company's unit sales of towable products were up 47.5% from 1998 to 1999 as both the Holiday Rambler and McKenzie towable operations reported strong increases. The Company's sales of towable units had been dampened in 1998 by the consolidation of the two Indiana-based towable facilities into one Company-owned facility in Elkhart, Indiana. This consolidation slowed unit production volume in that facility in the second quarter of 1998, and production of towables in Indiana was constrained in the second half of 1998 while that plant was expanded and remodeled. The remodeling and expansion of the Elkhart facility was completed by the end of 1998 and Indiana towable production capacity returned to pre-consolidation levels in 1999. The Company's overall average unit selling price decreased slightly from $86,100 in 1998 to $82,900 in 1999 reflecting the strong sales growth of the Company's new lower priced motorized and towable products. The Company's continued push into the less expensive gasoline motor coach market as well as the repositioning of some of its existing towable models into slightly lower price points are expected to keep the overall average selling price below $100,000.*
Gross profit increased by $40.1 million from $82.2 million in 1998 to $122.3 million in 1999 and gross margin increased from 13.8% in 1998 to 15.7% in 1999. In 1999 gross margin benefited from a strong mix of motorized products and manufacturing efficiencies from an increase in production volume in all of the Company's manufacturing plants. Gross margin in 1998 was dampened by lower gross margins in the three towable plants in
the first half of 1998 due to reduced production volumes in those plants and by costs incurred in the second quarter of 1998 related to consolidation of the two Indiana-based towable plants into one Company-owned facility in Elkhart, Indiana. The Company's overall gross margin may fluctuate in future periods if the mix of products shifts from higher to lower gross margin units or if the Company encounters unexpected manufacturing difficulties or competitive pressures.
Selling, general, and administrative expenses increased by $7.2 million from $41.6 million in 1998 to $48.8 million in 1999 and decreased as a percentage of sales from 7.0% in 1998 to 6.2% in 1999. Selling, general, and administrative expenses benefited in 1999 from a $1.75 million reduction in the estimated accrual for 1998 incentive based compensation. Without this benefit, selling, general, and administrative expenses in 1999 would have increased by $9.0 million to $50.5 million or 6.5% of sales, still significantly less than the 7.0% of sales in 1998. The decrease in selling, general, and administrative expenses as a percentage of sales reflected efficiencies arising from the Company's increased sales level.
Operating income increased $32.8 million from $40.0 million in 1998 to $72.8 million in 1999. The Company's lower selling, general, and administrative expense as a percentage of sales combined with the improvement in the Company's gross margin, resulted in an increase in operating margin to 9.3% in 1999 compared to 6.7% in 1998. The Company's operating margin in 1999 was positively affected by the $1.75 million reduction of incentive based compensation accrued for 1998. Without this benefit the Company's operating margin in 1999 would have been 9.1%.
Net interest expense decreased $718,000 from $1.9 million in 1998 to $1.1 million in 1999. The Company capitalized $44,000 of interest expense in 1998 relating to the construction in Indiana and $195,000 in 1999 relating to the construction in Oregon. The Company's interest expense included $411,000 in 1998 and $176,000 in 1999 related to the amortization of debt issuance costs recorded in conjunction with the Company's credit facilities. Additionally, interest expense in 1999 included $639,000 from accelerated amortization of debt issuance costs related to the credit facilities. The Company paid off its long term debt of approximately $10 million at the end of the first quarter of 1999 and also reduced the amount of availability on its revolving line of credit. See "Liquidity and Capital Resources".
The Company reported a provision for income taxes of $16.1 million, or an effective tax rate of 41.5%, for 1998, compared to $28.1 million, or an effective tax rate of 39.1% for 1999.
Net income increased by $21.1 million from $22.7 million in 1998 to $43.8 million in 1999, due to the increase in net sales combined with an improvement in operating margin and a decrease in interest expense.
1998 COMPARED WITH 1997
Net sales increased 34.6% from $441.9 million in 1997 to $594.8 million in 1998. Included in net sales in 1997 were $10.1 million of sales of units that were either previously owned or not Holiday Rambler units and service revenues generated by the Holiday World Dealerships prior to their sale. The Company's overall unit sales increased 21.6% from 5,744 units in 1997 to 6,985 units in 1998 (excluding 211 units in 1997 sold by the Holiday World Dealerships that were either previously owned or not Holiday Rambler units). The Company's unit sales were up 43.2% in 1998 on the motorized side and down 7.9% for towables. The Company's overall average unit selling price (excluding units sold by the Holiday World dealerships that were either previously owned or not Holiday Rambler units) increased from $76,900 in 1997 to $86,100 in 1998 reflecting the strong showing of the Company's motorized products.
Gross profit increased by $22.7 million from $59.5 million in 1997 to $82.2 million in 1998 and gross margin increased from 13.5% in 1997 to 13.8% in 1998.
Selling, general and administrative expenses increased by $5.3 million from $36.3 million in 1997 to $41.6 million in 1998 and decreased as a percentage of net sales from 8.2% in 1997 to 7.0% in 1998. The decrease in selling, general, and administrative expenses as a percentage of sales reflected efficiencies arising from the
Company's increased sales level as well as savings derived from consolidation of Indiana-based office staff into office space built in conjunction with the expansion of production facilities in Wakarusa, Indiana.
Operating income increased $17.4 million from $22.6 million in 1997 to $40.0 million in 1998. The increase in the Company's gross margin combined with the reduction of selling, general and administrative expenses as a percentage of net sales resulted in an increase in operating margin from 5.1% in 1997 to 6.7% in 1998.
Interest expense decreased from $2.4 million in 1997 to $1.9 million in 1998. The Company's 1997 interest expense included approximately $281,000 of floor plan interest expense relating to the Holiday World dealerships. Additionally, interest expense included $411,000 in both years related to the amortization of $2.1 million in debt issuance costs recorded in conjunction with the Holiday Acquisition. These costs are being written off over a five-year period. The Company capitalized $643,000 of interest in 1997 and $44,000 in 1998 related to the construction in progress at the manufacturing facilities in Wakarusa, Indiana.
In the third quarter of 1997 the Company had other income from the sale of its two remaining Holiday World retail dealerships which resulted in a pretax gain on the sale of the buildings and fixed assets from the stores of $539,000. The impact was $315,000, net of tax, or 2.7 cents per share. The Company had other income of $523,000 in the third quarter of 1998 related to insurance reimbursement of income loss from the fire at our Coburg manufacturing plant in July of 1997. The impact was $306,000, net of tax, or 2.4 cents per share.
The Company reported a provision for income taxes of $8.8 million, or an effective tax rate of 41.5%, for 1997 compared to $16.1 million, or an effective tax rate of 41.5%, for 1998.
Net income increased by $10.3 million from $12.4 million in 1997 to $22.7 million in 1998 due to the increase in net sales combined with an improvement in operating margin and a decrease 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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS The Company's net sales, gross margin and operating results may fluctuate significantly from period to period due to factors such as the mix of products sold, the ability to utilize and expand manufacturing resources efficiently, material shortages, the introduction and consumer acceptance of new models offered by the Company, competition, the addition or loss of dealers, the timing of trade shows and rallies, and factors affecting the recreational vehicle industry as a whole. In addition, the Company's overall gross margin on its products may decline in future periods to the extent the Company increases its sales of lower gross margin towable products or if the mix of motor coaches sold shifts to lower gross margin units. Due to the relatively high selling prices of the Company's products (in particular, its High-Line Class A motor coaches), a relatively small variation in the number of recreational vehicles sold in any quarter can have a significant effect on sales and operating results for that quarter. Demand in the overall recreational vehicle industry generally declines during the winter months, while sales and revenues are generally higher during the spring and summer months. With the broader range of recreational vehicles now offered by the Company, seasonal factors could have a significant impact on the Company's operating results in the future. In addition, unusually severe weather conditions in certain markets could delay the timing of shipments from one quarter to another.
CYCLICALITY The recreational vehicle industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic, demographic and political conditions that affect disposable income for leisure-time activities. Unit sales of recreational vehicles (excluding conversion vehicles) reached a peak of approximately 259,000 units in 1994 and declined to approximately 247,000 units in 1996. Although unit sales of High-Line Class A motor coaches have increased in each year since 1989, there can be no
assurance that this trend will continue. Furthermore, the Company now offers a much broader range of recreational vehicle products and will likely be more susceptible to recreational vehicle industry cyclicality than in the past. Factors affecting cyclicality in the recreational vehicle industry include fuel availability and fuel prices, prevailing interest rates, the level of discretionary spending, the availability of credit and overall consumer confidence. In particular, a decline in consumer confidence and/or a slowing of the overall economy has had a material adverse effect on the recreational vehicle market in the past. Recurrence of these conditions could have a material adverse effect on the Company's business, results of operations and financial condition.
MANAGEMENT OF GROWTH Over the past four years the Company has experienced significant growth in the number of its employees and the scope of its business. This growth has resulted in the addition of new management personnel and increased responsibilities for existing management personnel, and has placed added pressure on the Company's operating, financial and management information systems. While management believes it has been successful in managing this expansion there can be no assurance that the Company will not encounter problems in the future associated with the continued growth of the Company. Failure to adequately support and manage the growth of its business could have a material adverse effect on the Company's business, results of operations and financial condition.
MANUFACTURING EXPANSION The Company has significantly increased its manufacturing capacity over the last few years and recently announced plans for additional expansion of manufacturing facilities. The integration of the Company's facilities and the expansion of the Company's manufacturing operations involve a number of risks including unexpected building and production difficulties. In the past the Company experienced startup inefficiencies in manufacturing a new model and also has experienced difficulty in increasing production rates at a plant. There can be no assurance that the Company will successfully integrate its manufacturing facilities or that it will achieve the anticipated benefits and efficiencies from its expanded manufacturing operations. In addition, the Company's operating results could be materially and adversely affected if sales of the Company's products do not increase at a rate sufficient to offset the Company's increased expense levels resulting from this expansion.
The setup of new models and scale-up of production facilities involve various risks and uncertainties, including timely performance of a large number of contractors, subcontractors, suppliers and various government agencies that regulate and license construction, each of which is beyond the control of the Company. The setup of production for new models involves risks and costs associated with the development and acquisition of new production lines, molds and other machinery, the training of employees, and compliance with environmental, health and safety and other regulatory requirements. The inability of the Company to complete the scale-up of its facilities and to commence full-scale commercial production in a timely manner could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company may from time to time experience lower than anticipated yields or production constraints that may adversely affect its ability to satisfy customer orders. Any prolonged inability to satisfy customer demand could have a material adverse effect on the Company's business, results of operations and financial condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS Although the Company's products were offered by 294 dealerships located primarily in the United States and Canada at the end of 1999, a significant percentage of the Company's sales have been and will continue to be concentrated among a relatively small number of independent dealers. Although no single dealer accounted for as much as 10.0% of the Company's net sales in 1998, in 1999, concentration of sales was 10.0% for Lazy Days RV Center, Inc. The loss of a significant dealer or a substantial decrease in sales by such a dealer could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Sales and Marketing."
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS As is common in the recreational vehicle industry, the Company enters into repurchase agreements with the financing institutions used by its dealers to finance their purchases. These agreements obligate the Company to repurchase a dealer's inventory under certain circumstances in the event of a default by the dealer to its lender. If the Company were obligated to repurchase a significant number of its products in the future, it could have a material adverse effect on the Company's financial condition, business and results of operations. The Company's contingent obligations under repurchase agreements vary from period to period and totaled approximately $278.2 million as of January 1, 2000, with approximately
7.1% concentrated with one dealer. See "Liquidity and Capital Resources" and Note 17 of Notes to the Company's Consolidated Financial Statements.
AVAILABILITY AND COST OF FUEL An interruption in the supply, or a significant increase in the price or tax on the sale, of diesel fuel or gasoline on a regional or national basis could have a material adverse effect on the Company's business, results of operations and financial condition. Diesel fuel and gasoline have, at various times in the past, been difficult to obtain, and there can be no assurance that the supply of diesel fuel or gasoline will continue uninterrupted, that rationing will not be imposed, or that the price of or tax on diesel fuel or gasoline, which have increased in price over the last few months, will not significantly increase in the future, any of which could have a material adverse effect on the Company's business, results of operations and financial condition.
DEPENDENCE ON CERTAIN SUPPLIERS A number of important components for certain of the Company's products are purchased from single or limited sources, including its turbo diesel engines (Cummins), substantially all of its transmissions (Allison), axles (Dana) for all diesel motor coaches other than the Holiday Rambler Endeavor Diesel model and chassis (Workhorse, Ford and Freightliner) for certain of its motorhome products. The Company has no long term supply contracts with these suppliers or their distributors, and there can be no assurance that these suppliers will be able to meet the Company's future requirements for these components. In 1997, Allison put all chassis manufacturers on allocation with respect to one of the transmissions the Company uses, and in 1999 ford indicated it might need to put its gasoline powered chassis on allocation. The Company presently believes that its allocation by suppliers of all components is sufficient to enable the unit volume increases that are planned for models, and the Company does not foresee any operating difficulties as a result of vendor supply issues.* Nevertheless, there can be no assurance that Allison, Ford, or any of the Company's other suppliers will be able to meet the Company's future requirements for transmissions, chassis or other key components. An extended delay or interruption in the supply of any components obtained from a single or limited source supplier could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business -- Changes."
NEW PRODUCT INTRODUCTIONS The Company believes that the introduction of new features and new models will be critical to its future success. Delays in the introduction of new models or product features or a lack of market acceptance of new models or features and/or quality problems with new models or features could have a material adverse effect on the Company's business, results of operations and financial condition. For example unexpected costs associated with model changes have adversely affected the Company's gross margin in the past. Future product introductions could divert revenues from existing models and adversely affect the Company's business, results of operations and financial condition.
COMPETITION The market for the Company's products is highly competitive. The Company currently competes with a number of other manufacturers of motor coaches, fifth wheel trailers and travel trailers, many of which have significant financial resources and extensive distribution capabilities. There can be no assurance that either existing or new competitors will not develop products that are superior to, or that achieve better consumer acceptance than, the Company's products, or that the Company will continue to remain competitive.
RISKS OF LITIGATION The Company is subject to litigation arising in the ordinary course of its business, including a variety of product liability and warranty claims typical in the recreational vehicle industry. Although the Company does not believe that the outcome of any pending litigation, net of insurance coverage, will have a material adverse effect on the business, results of operations or financial condition of the Company, due to the inherent uncertainties associated with litigation there can be no assurance in this regard.
To date, the Company has been successful in obtaining product liability insurance on terms the Company considers acceptable. The Company's current policies jointly provide coverage against claims based on occurrences within the policy periods up to a maximum of $41.0 million for each occurrence and $42.0 million in the aggregate. There can be no assurance that the Company will be able to obtain insurance coverage in the future at acceptable levels or that the costs of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could
have a material adverse effect on the Company's business, results of operations and financial condition.
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 1999, the Company had cash flows of $32.2 million from operating activities. The Company generated $49.7 million from net income and non-cash expenses such as depreciation and amortization, which was partially offset by a net increase in the Company's working capital accounts caused by the higher level of net sales and increased production levels in the plants. Inventories increased by $28.0 million and deferred income taxes and income taxes payable declined by $4.2 million, which was more than the $15.4 million increase in accounts payable and accrued expenses.
At the end of 1998 the Company had credit facilities consisting of a term loan of $20.0 million (the "Term Loan") and a revolving line of credit of up to $45.0 million (the "Revolving Loans"). The Term Loan bore interest at various rates based upon the prime lending rate announced from time to time by Banker's Trust Company (the "Prime Rate") or Eurodollar and was due and payable in full on March 1, 2001. At the end of the first quarter of 1999 the Company paid off the remaining balance on the Term Loan, $10.4 million, without penalty. Additionally, at the end of the first quarter of 1999, the Company elected to reduce the availability on its Revolving Loans from $45 million to $20 million. At the election of the Company, the Revolving Loans bear interest at variable interest rates based on the Prime Rate or Eurodollar. The Revolving Loans are due and payable in full on March 1, 2001, and require monthly interest payments. As of January 1, 2000, $7.9 million was outstanding under the Revolving Loans, with an effective interest rate of 8.5%. The Revolving Loans are collateralized by a security interest in all of the assets of the Company and include various restrictions and financial covenants. The Company utilizes "zero balance" bank disbursement accounts in which an advance on the line of credit is automatically made for checks clearing each day. Since the balance of the disbursement account at the bank returns to zero at the end of each day the outstanding checks of the Company are reflected as a liability. The outstanding check liability is combined with the Company's positive cash balance accounts to reflect a net book overdraft or a net cash balance for financial reporting.
The Company's principal working capital requirements are for purchases of inventory and, to a lesser extent, financing of trade receivables. The Company's dealers typically finance product purchases under wholesale floor plan arrangements with third parties as described below. At January 1, 2000, the Company had working capital of approximately $38.9 million, an increase of $15.2 million from working capital of $23.7 million at January 2, 1999. The Company has been using short-term credit facilities and cash flow to finance its construction of facilities and other capital expenditures.
The Company believes that cash flow from operations and funds available under its credit facilities will be sufficient to meet the Company's liquidity requirements for the next 12 months.* The Company's capital expenditures were $32.2 million in 1999, primarily for the acquisition of the Coburg property and construction costs for the new Coburg manufacturing facilities. In the second half of 1999 the Company reached an agreement to acquire an additional production facility in Elkhart, Indiana. The Elkhart facility is adjacent to the Company's existing Elkhart operations, and includes 30 acres and 250,000 square feet of additional production space which will be used to more than double the Company's diesel chassis capacity in Indiana.* The Company is expecting capital expenditures in 2000 to be approximately $20 to $25 million, which includes remodeling and upgrading of the new Elkhart facility, finishing expansion projects started in the second half of 1999, as well as $4 to $5 million of maintenance capital expenditures for computer system upgrades and additions, 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 further expands its operations to address greater than anticipated growth in the market for its products. The Company may also from time to time seek to acquire businesses that would complement the Company's current business, and any
such acquisition could require additional financing. There can be no assurance that additional financing will be available if required or on terms deemed favorable by the Company.
As is typical in the recreational vehicle industry, many of the Company's retail dealers utilize wholesale floor plan financing arrangements with third party lending institutions to finance their purchases of the Company's products. Under the terms of these floor plan arrangements, institutional lenders customarily require the recreational vehicle manufacturer to agree to repurchase any unsold units if the dealer fails to meet its commitments to the lender, subject to certain conditions. The Company has agreements with several institutional lenders under which the Company currently has repurchase obligations. The Company's contingent obligations under these repurchase agreements are reduced by the proceeds received upon the sale of any repurchased units. The Company's obligations under these repurchase agreements vary from period to period. At January 1, 2000, approximately $278.2 million of products sold by the Company to independent dealers were subject to potential repurchase under existing floor plan financing agreements with approximately 7.1% 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue was the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date sensitive software may have recognized a date using "00" as the year 1900, rather than the year 2000. To be in "Year 2000 compliance" a computer program must be written using four digits to define years. As a result, before the end of 1999, computer systems and/or software used by many companies may have needed upgrades to comply with such "Year 2000" requirements. Without upgrades, computer systems could fail or miscalculate causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities.
To date, the Company has not incurred material costs associated with Year 2000 compliance nor any disruption with vendors or operations. Furthermore, the Company believes that any future costs associated with Year 2000 compliance efforts will not be material.*
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Monaco Coach Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity, and of cash flows listed in the accompanying index present fairly, in all material respects, the financial position of Monaco Coach Corporation and Subsidiaries (the Company) at January 2, 1999 and January 1, 2000, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 27, 2000
MONACO COACH CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MONACO COACH CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MONACO COACH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MONACO COACH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Monaco Coach Corporation and its subsidiaries (the "Company") manufacture a line of premium motor coaches, bus conversions and towable recreational vehicles at manufacturing facilities in Oregon and Indiana. These products are sold primarily to independent dealers throughout the United States and Canada.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 31, 1997. SFAS No. 131 establishes a framework for segment reporting which includes interim reporting requirements of selected segment information.
The Company has determined that it has a single reportable operating segment consisting of the design, manufacture, and sale (wholesale) of recreational vehicles including motor coaches and towable fifth wheel and travel trailers. These product lines have similar economic characteristics and are similar in the nature of products, manufacturing processes, customer characteristics, and distribution methods.
CONSOLIDATION POLICY
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated.
FISCAL PERIOD
The Company follows a 52/53 week fiscal year period ending on the Saturday closest to December 31. Interim periods also end on the Saturday closest to the calendar quarter end. Therefore 1997 was 53 weeks long, and 1998 and 1999 were each 52 weeks long. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.
STOCK SPLITS
On May 18, 1999 the Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend on the Company's Common stock. Accordingly, all historical weighted average share and per share amounts have been restated to reflect the stock split. Share amounts presented in the Consolidated Statement of Stockholders' Equity reflect the actual share amounts outstanding for each period presented.
ESTIMATES AND INDUSTRY FACTORS
ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - The Company distributes its products through an independent dealer network for recreational vehicles. Sales to one customer were approximately 9%, 6%, and 10% of net revenues for the fiscal years ended January 3, 1998, January 2, 1999, and January 1, 2000 respectively. No other individual dealers represented over 10% of net revenues in 1997 or 1998. The loss of a significant dealer or a substantial decrease in sales by such a dealer could have a material adverse effect on the Company's business, results of operations and financial results.
Continued
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Concentrations of credit risk exist for accounts receivable and repurchase agreements (see Note 17), primarily for the Company's largest dealers. The Company generally sells to dealers throughout the United States and there is no geographic concentration of credit risk.
RELIANCE ON KEY SUPPLIERS - The Company's production strategy relies on certain key suppliers' ability to deliver subassemblies and component parts in time to meet manufacturing schedules. The Company has a variety of key suppliers, including Allison, Workhorse, Cummins, Dana, Ford and Freightliner. The Company does not have any long-term contracts with these suppliers or their distributors. In 1997, Allison put all chassis manufacturers on allocation with respect to one of the transmissions the Company uses, and in 1999 Ford indicated it might need to put its gasoline powered chassis on allocation. In light of these dependencies, it is possible that failure of Allison, Ford or any of the other suppliers to meet the Company's future requirements for transmissions, chassis or other key components could have a material near-term impact on the Company's business, results of operations and financial condition.
WARRANTY CLAIMS - Estimated warranty costs are provided for at the time of sale of products with warranties covering the products for up to one year from the date of retail sale (five years for the front and sidewall frame structure).
INVENTORIES
Inventories consist of raw materials, work-in-process and finished recreational vehicles and are stated at the lower of cost (first-in, first-out) or market. Cost of work-in-process and finished recreational vehicles includes material, labor and manufacturing overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements thereto, are stated at cost less accumulated depreciation and amortization. Cost includes expenditures for major improvements, replacements and renewals and the net amount of interest cost associated with significant capital additions during periods of construction. Capitalized interest was $643,000 in 1997, $44,000 in 1998 and $195,000 in 1999. Maintenance and repairs are charged to expense as incurred. Replacements and renewals are capitalized. When assets are sold, retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income.
The cost of plant and equipment is depreciated using the straight-line method over the estimated useful lives of the related assets. Buildings are generally depreciated over 39 years and equipment is depreciated over 3 to 10 years. Leasehold improvements are amortized under the straight-line method based on the shorter of the lease periods or the estimated useful lives.
At each balance sheet date, management assesses whether there has been permanent impairment in the value of long-lived assets. The amount of any such impairment is determined by comparing anticipated undiscounted future cash flows from operating activities with the associated 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.
Continued
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
GOODWILL AND DEBT ISSUANCE COSTS
Goodwill represents the excess of the cost of acquisition over the fair value of net assets acquired. The Company is the successor to a company formed in 1968 (the "Predecessor") and commenced operations on March 5, 1993 by acquiring substantially all of the assets and liabilities of the Predecessor. The goodwill arising from the acquisition of the assets and operations of the Company's Predecessor in March 1993 is being amortized on a straight-line basis over 40 years and, at January 1, 2000, the unamortized amount was $2.1 million. The goodwill arising from the Holiday Acquisition (as hereinafter defined) is being amortized on a straight-line basis over 20 years; at January 1, 2000, the unamortized amount was $17.1 million. 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 anticipated undiscounted future cash flows from operating activities with the associated 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.
Unamortized debt issuance costs of $929,000 at January 2, 1999 and $114,000 at January 1, 2000, arising from the Holiday Acquisition, are being amortized over the term of the loan.
INCOME TAXES
Deferred taxes are recognized based on the difference between the financial statement and tax bases of assets and liabilities at enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense or benefit represents the change in deferred tax asset/liability balances. A valuation allowance is established for deferred tax assets when it is more likely than not that the deferred tax asset will not be realized.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of recreational vehicles (i) upon shipment or dealer/customer pick-up (most dealers finance their purchases under floor plan financing arrangements with banks or finance companies; for these sales, the financing is completed before the vehicles are shipped), or (ii) when the dealer has arranged floor plan financing for the vehicle and the vehicle is available for delivery but has been set aside and held at the request of the dealer, generally for a few days, until pick-up or delivery.
ADVERTISING COSTS
The Company expenses advertising costs as incurred, except for prepaid show costs which are expensed when the event takes place. During 1999, approximately $6.4 million ($6.2 million in 1997 and $6.2 million in 1998) of advertising costs were expensed.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and were $4.7 million for 1999 ($4.6 million in 1997 and $4.2 million for 1998).
Continued
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SUPPLEMENTAL CASH FLOW DISCLOSURES :
2. HOLIDAY ACQUISITION:
On March 4, 1996, the Company acquired certain assets of the Holiday Rambler Recreational Vehicle Manufacturing Division ("Holiday Rambler") and certain assets of the Holiday World Retail Division ("Holiday World") of Harley-Davidson, Inc. ("Harley-Davidson"). The acquisition ("Holiday Acquisition") was accounted for as a purchase.
The allocation of the purchase price and the related goodwill was subject to adjustment upon resolution of pre-Holiday Acquisition contingencies. The effects of resolution of pre-Holiday Acquisition contingencies occurring: (i) within one year of the acquisition date were reflected as an adjustment of the allocation of the purchase price and of goodwill, and (ii) after one year were recognized in the determination of net income.
The ten acquired Holiday World retail store properties were classified as "assets held for sale". Eight of the stores were sold within one year of the acquisition date. The remaining two stores were sold for a gain of $539,000 in the third quarter of 1997 which was recognized in the determination of net income for the period. The Company's results of operations and cash flows include Holiday World since March 4, 1996, as the operating activities of Holiday World are not clearly distinguishable from other continuing operations. Net sales of Holiday World stores subsequent to the purchase and included in the fiscal year ended January 3, 1998 were $6.8 million.
3. INVENTORIES:
Inventories consist of the following:
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
5. NOTES RECEIVABLE:
The Company acquired notes receivable as consideration for the sale of certain Holiday World retail stores. As of the year ended January 1, 2000, there were no outstanding notes receivable balances.
6. ACCRUED EXPENSES AND OTHER LIABILITIES:
7. LINE OF CREDIT:
The Company has a revolving line of credit up to $20 million, with interest payable monthly at varying rates based on the Company's interest coverage ratio and interest payable monthly on the unused available portion of the line at .375%. There were outstanding borrowings of $7.9 million at January 1, 2000 with an effective interest rate of 8.5%.
The weighted average interest rate on the outstanding borrowings under the revolving line of credit was 8.4% and 8.0% for 1998 and 1999, respectively. Interest expense on the unused available portion of the line was $154,000 or 3.7% and $89,000 or 3.2% of weighted average outstanding borrowings for 1998 and 1999, respectively. The revolving line of credit expires March 1, 2001 and is collateralized by all the assets of the Company. The agreement contains restrictive covenants as to EBITDA (earnings before interest, taxes, depreciation and amortization), interest coverage ratio, leverage ratio and capital expenditures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. LONG-TERM BORROWINGS:
In 1996, the Company obtained a term loan to finance the Holiday Acquisition, with interest payable monthly at various rates based on the Company's interest coverage ratio. During the first quarter of 1999, the Company paid the remaining portion of the term loan in full without penalty.
9. PREFERRED STOCK:
The Company has authorized "blank check" preferred stock (1,934,783 shares authorized, $.01 par value) ("Preferred Stock"), which may be issued from time to time in one or more series upon authorization by the Company's Board of Directors. The Board of Directors, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each series of the Preferred Stock. There were no shares of Preferred Stock outstanding as of January 2, 1999 or January 1, 2000.
The Company had designated 100,000 shares of the original 2,000,000 shares authorized of Preferred Stock as Series A Convertible Preferred Stock ("Series A") at $.01 par value. The Company issued 65,217 shares of Series A in connection with the Holiday Acquisition. The outstanding shares of Series A were converted into 230,767 shares of Common Stock in conjunction with the Company's secondary public offering on June 23, 1997. None of the Series A remained authorized at January 1, 2000.
The excess of redemption value over the carrying value of Series A was accreted by charges to retained earnings. For the year ended January 3, 1998 the accretion charge was $317,000.
10. INCOME TAXES:
The provision for income taxes is as follows:
Continued
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
The reconciliation of the provision for income taxes at the U.S. federal statutory rate to the Company's effective income tax rate is as follows:
The components of the current net deferred tax asset and long-term net deferred tax liability are:
Management believes that the temporary differences which gave rise to the deferred income tax assets will be reversed in the foreseeable future and that the benefit thereof will be realized as a reduction in the provision for current income taxes.
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. EARNINGS PER SHARE:
EARNINGS PER SHARE
Basic earnings per common share is based on the weighted average number of shares outstanding during the period using net income attributable to common stock as the numerator. 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 and convertible preferred stock, using net income as the numerator. The weighted average number of common shares used in the computation of earnings per common share for the years ended January 3, 1998, January 2, 1999 and January 1, 2000 are as follows:
12. LEASES:
The Company has commitments under certain noncancelable operating leases. Total rental expense for the fiscal years ended January 3, 1998, January 2, 1999, and January 1, 2000 related to operating leases amounted to approximately $1.1 million, $1.1 million, and $1.0 million respectively.
Approximate future minimum rental commitments under these leases at January 1, 2000 are summarized as follows:
13. BONUS PLAN:
The Company has a discretionary bonus plan for certain key employees. Bonus expense included in selling, general and administrative expenses for the years ended January 3, 1998, January 2, 1999 and January 1, 2000 was $4.3 million , $9.0 million and $8.0 million, respectively.
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. STOCK OPTION PLANS:
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") - 1993, a Non-employee Director Stock Option Plan (the "Director Plan") - 1993, and an Incentive Stock Option Plan (the "Option Plan") - 1993:
STOCK PURCHASE PLAN
The Company's Purchase Plan qualifies under Section 423 of the Internal Revenue Code. The Company has reserved 455,625 shares of Common Stock for issuance under the Purchase Plan. During the years ended January 2, 1999 and January 1, 2000, 26,863 shares and 25,394 shares, respectively, were purchased under the Purchase Plan. The weighted-average fair value of purchase rights granted in 1998 and 1999 was $10.77 and $20.40, respectively. Under the Purchase Plan, an eligible employee may purchase shares of common stock from the Company through payroll deductions of up to 10% of base compensation, at a price per share equal to 85% of the lesser of the fair market value of the Company's Common Stock as of the first day (grant date) or the last day (purchase date) of each six-month offering period under the Purchase Plan.
The Purchase Plan is administered by a committee appointed by the Board. Any employee who is customarily employed for at least 20 hours per week and more than five months in a calendar year by the Company, or by any majority-owned subsidiary designated from time to time by the Board, and who does not own 5% or more of the total combined voting power or value of all classes of the Company's outstanding capital stock, is eligible to participate in the Purchase Plan.
DIRECTORS' OPTION PLAN
Each non-employee director of the Company, other than directors affiliated with Liberty Investment Partners II, L.P. or Cariad Capital, Inc., is entitled to participate in the Company's "Director Plan". The Board of Directors and the stockholders have authorized a total of 135,000 shares of Common Stock for issuance pursuant to the Director Plan. Under the terms of the Director Plan, each eligible non-employee director is automatically granted an option to purchase 8,000 shares of Common Stock (the "Initial Option") on the later of the effective date of the Company's initial public offering or the date on which the optionee first becomes a director of the Company. Thereafter, each optionee is automatically granted an additional option to purchase 2,500 shares of Common Stock (a "Subsequent Option") on September 30 of each year if, on such date, the optionee has served as a director of the Company for at least six months. Each Initial Option vests over five years at the rate of 20% of the shares subject to the Initial Option at the end of each anniversary following the date of grant. Each Subsequent Option vests in full on the fifth anniversary of its date of grant. The exercise price of each option is the fair market value of the Common Stock as determined by the closing price reported by the New York Stock Exchange on the date of grant. As of January 1, 2000, 10,800 options had been exercised, and options to purchase 80,600 shares of common stock were outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. STOCK OPTION PLANS, CONTINUED:
OPTION PLAN
The Option Plan provides for the grant to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for the grant to employees and consultants of the Company of nonstatutory stock options. A total of 1,771,875 shares of Common Stock have been reserved for issuance under the Option Plan. As of January 1, 2000, options to purchase 728,829 shares of Common Stock were outstanding. These options vest ratably over five years commencing with the date of grant.
The exercise price of all incentive stock options granted under the Option Plan must be at least equal to the fair market value of a share of the Company's Common Stock on the date of grant. With respect to any participant possessing more than 10% of the voting power of the Company's outstanding capital stock, the exercise price of any option granted must equal at least 110% of the fair market value on the grant date, and the maximum term of the option must not exceed five years. The terms of all other options granted under the Option Plan may not exceed ten years.
Transactions involving the Director Plan and the Option Plan are summarized with corresponding weighted-average exercise prices as follows (effected for all stock splits-- See Note 11):
For various price ranges, weighted average characteristics of all outstanding stock options at January 1, 2000 were as follows:
Continued
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. STOCK OPTION PLAN CONTINUED:
The Company complies with the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", and thus no compensation cost has been recognized for the Director Plan, the Option Plan or the Purchase Plan. Had compensation cost for the three stock-based compensation plans been determined based on the fair value of options at the date of grant consistent with the provisions of SFAS No. 123, the Company's pro forma net income and pro forma earnings per share would have been as follows:
The pro forma effect on net income for 1997, 1998 and 1999 is not representative of the pro forma effect in future years because compensation expense related to grants made in prior years is not considered. For purposes of the above pro forma information, the fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's financial instruments are presented below. The estimates require subjective judgments and are approximate. Changes in methodologies and assumptions could significantly affect estimates.
LINE OF CREDIT - The carrying amount outstanding on the revolving line of credit is $1.6 million and $7.9 million at January 2, 1999 and January 1, 2000, respectively, which approximates the estimated fair value as this instrument requires interest payments at a market rate of interest plus a margin.
16. 401(K) DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan covering substantially all full-time employees. Company contributions to the plan totaled $571,000 in 1999, $439,000 in 1997 and $493,000 in 1998.
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. COMMITMENTS AND CONTINGENCIES:
REPURCHASE AGREEMENTS
Substantially all of the Company's sales to independent dealers are made on terms requiring cash on delivery. The Company does not finance dealer purchases. However, most purchases are financed 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.
No significant net losses were incurred during the years ended January 3, 1998, January 2, 1999 or January 1, 2000. The approximate amount subject to contingent repurchase obligations arising from these agreements at January 1, 2000 is $278.2 million. If the Company were obligated to repurchase a significant number of recreational vehicles in the future, losses and reduction in new recreational vehicle sales could result.
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 $100,000 per occurrence, with a maximum annual aggregate self-insured retention of $1.0 million. Overall product liability insurance, including umbrella coverage, is available to a maximum amount of $41.0 million for each occurrence and an annual aggregate of $42.0 million. 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 materially 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.
OTHER COMMITMENTS
In 1999, the Company began construction of additional office facilities in Oregon. The new facility is scheduled to be completed in 2000 at a total budgeted cost of $2.0 million. At January 1, 2000, the Company had incurred approximately $407,000 in expenditures related to construction in progress on the facility.
MONACO COACH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. QUARTERLY RESULTS (UNAUDITED):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this Item regarding directors and executive officers set forth under the captions "Proposal 1 - Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act" in the Registrant's definitive Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item regarding compensation of the Registrant's directors and executive officers set forth under the captions "Proposal 1 - Election of Directors - Compensation of Directors" and "Additional Information - Executive Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item regarding beneficial ownership of the Registrant's Common Stock by certain beneficial owners and management of the Registrant set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item regarding certain relationships and related transactions with management set forth under the caption "Additional Information - Compensation Committee Interlocks and Insider Participation" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K:
1. FINANCIAL STATEMENTS. The Consolidated Financial Statements of Monaco Coach Corporation and the Report of Independent Accountants are filed in Item 8 within this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule of Monaco Coach Corporation for the fiscal years ended January 3, 1998, January 2, 1999 and January 1, 2000 is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of Monaco Coach Corporation.
SCHEDULE PAGE II Valuation and Qualifying Accounts 47
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
3. EXHIBITS. The following Exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K.
------------ + The item listed is a compensatory plan.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company during the quarter ended January 1, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
March 30, 2000 MONACO COACH CORPORATION
By: /s/ Kay L. Toolson ------------------ Kay L. Toolson Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kay L. Toolson and John W. Nepute, and each of them, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on 10-K has been signed by the following persons in the capacities and on the dates indicated:
MONACO COACH CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
EXHIBIT INDEX
------------ + The item listed is a compensatory plan..