** **

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**Forthe period ended:  March 30, 2002**

**or**

** **

**o****      Transition Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**Forthe period from            to**

** **

**Commission File Number:  1-14725**

** **

**MONACOCOACH CORPORATION**

 

| **Delaware**              |   | **35-1880244**                        |
|---------------------------|--------|---------------------------------------|
| (State  of Incorporation) |   | (I.R.S.  Employer Identification No.) |

 

**91320 Industrial Way**

**Coburg, Oregon 97408**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code **(541) 686-8011**

 

                Indicate by check mark whetherthe registrant  (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90days.

 

YES  ý   NO  o

 

                The number of shares outstandingof common stock, $.01 par value, as of March 30, 2002: 28,771,447

 

 

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**MONACO COACH CORPORATION**

 

**FORM 10-Q**

 

**March 30, 2002**

 

**INDEX**

 

 

 
| **PART I - FINANCIAL INFORMATION** |                                                                                                            |
|------------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                            |
|                               | **Item 1.  Financial Statements.**                                                                         |
|                               |                                                                                                            |
|                               | Condensed  Consolidated Balance Sheets as of December 29, 2001 and March 30, 2002.                              |
|                               |                                                                                                            |
|                               | Condensed  Consolidated Statements of Income for the quarter ended March 31, 2001 and  March 30, 2002.          |
|                               |                                                                                                            |
|                               | Condensed  Consolidated Statements of Cash Flows for the quarter ended March 31, 2001  and March 30, 2002.      |
|                               |                                                                                                            |
|                               | Notes  to Condensed Consolidated Financial Statements.                                                          |
|                               |                                                                                                            |
|                               | **Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations.** |
|                               |                                                                                                            |
|                               | **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk.**                                 |
|                               |                                                                                                            |
| **PART II - OTHER INFORMATION**    |                                                                                                            |
|                               |                                                                                                            |
|                               | **Item 6.  Exhibits and Reports on Form 8-K.**                                                             |
|                               |                                                                                                            |
|                               | **Signatures**                                                                                                  |
|                                    |                                                                                                                 |  |  |

 

2

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**PARTI - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

 

3

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**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

 

 
|                                                                                                                          |   | **December  29,  2001** |    | **March 30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
| **ASSETS**                                                                                                                    |   |                    |    |                |   |
| Current assets:                                                                                                               |   |                    |    |                |   |
| Trade receivables, net                                                                                                        |   | $                       | 82,885  |                | $      | 101,166 |   |
| Inventories                                                                                                                   |   | 127,075                 |    | 134,887             |   |
| Prepaid  expenses                                                                                                             |   | 2,063                   |    | 4,923               |   |
| Deferred income  taxes                                                                                                        |   | 27,327                  |    | 28,518              |   |
| Total  current assets                                                                                                         |   | 239,350                 |    | 269,494             |   |
|                                                                                                                          |   |                    |    |                |   |
| Notes  receivable                                                                                                             |   | 8,157                   |    | 8,157               |   |
| Property,  plant and equipment, net                                                                                           |   | 122,795                 |    | 125,250             |   |
| Debt issuance costs net of accumulated amortization  of $75 and $152, respectively                                            |   | 940                     |    | 863                 |   |
| Goodwill,  net of accumulated amortization of $5,320 and $5,320, respectively                                                 |   | 55,856                  |    | 54,974              |   |
|                                                                                                                          |   |                    |    |                |   |
| Total assets                                                                                                                  |   | $                       | 427,098 |                | $      | 458,738 |   |
|                                                                                                                          |   |                    |    |                |   |
| **LIABILITIES**                                                                                                               |   |                    |    |                |   |
| Current liabilities:                                                                                                          |   |                    |    |                |   |
| Book  overdraft                                                                                                               |   | $                       | 5,889   |                | $      | 12,534 |   |
| Line  of credit                                                                                                               |   | 26,004                  |    | 11,004              |   |
| Current  portion of long-term note payable                                                                                    |   | 10,000                  |    | 10,000              |   |
| Accounts  payable                                                                                                             |   | 66,859                  |    | 91,369              |   |
| Income  taxes payable                                                                                                         |   |                    |    | 545                 |   |
| Accrued expenses  and other liabilities                                                                                       |   | 66,904                  |    | 70,073              |   |
| Total  current liabilities                                                                                                    |   | 175,656                 |    | 195,525             |   |
|                                                                                                                          |   |                    |    |                |   |
| Long-term  note payable                                                                                                       |   | 30,000                  |    | 27,500              |   |
| Deferred income  taxes                                                                                                        |   | 8,312                   |    | 12,209              |   |
| Total  liabilities                                                                                                            |   | 213,968                 |    | 235,234             |   |
|                                                                                                                          |   |                    |    |                |   |
| Commitments and contingencies (Note 8)                                                                                        |   |                    |    |                |   |
|                                                                                                                          |   |                    |    |                |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                |   |                    |    |                |   |
| Common  stock, $.01 par value; 50,000,000 shares authorized, 28,632,774 and  28,771,447, issued and outstanding, respectively |   | 286                     |    | 288                 |   |
| Additional  paid-in capital                                                                                                   |   | 48,522                  |    | 49,221              |   |
| Retained  earnings                                                                                                            |   | 164,322                 |    | 173,995             |   |
| Total  stockholders’ equity                                                                                              |   | 213,130                 |    | 223,504             |   |
| Total liabilities and  stockholders’ equity                                                                              |   | $                       | 427,098 |                | $      | 458,738 |   |

 

 

See accompanying notes.

 

4

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**MONACO COACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

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

 
|                                         |   | **Quarter  Ended**  |    |
|----------------------------------------------|--------|---------------------|---------|
|                                         |   | **March 31,  2001** |    | **March 30,  2002** |   |
|                                         |   |                |    |   |   |
| Net sales                                    |   | $                   | 211,228 |   | $ | 293,600 |   |
| Cost of sales                                |   | 185,740             |    | 255,855 |   |
| Gross profit                                 |   | 25,488              |    | 37,745 |   |
|                                         |   |                |    |   |   |
| Selling, general and administrative expenses |   | 16,239              |    | 21,166 |   |
| Amortization of goodwill                     |   | 161                 |    | 0 |   |
| Operating income                             |   | 9,088               |    | 16,579 |   |
|                                         |   |                |    |   |   |
| Other income, net                            |   | 116                 |    | 41 |   |
| Interest expense                             |   | (684                | )       | (698 | ) |
| Income before income taxes                   |   | 8,520               |    | 15,922 |   |
|                                         |   |                |    |   |   |
| Provision for income taxes                   |   | 3,323               |    | 6,249 |   |
|                                         |   |                |    |   |   |
| Net income                                   |   | $                   | 5,197   |   | $ | 9,673 |   |
|                                         |   |                |    |   |   |
| Earnings per common share:                   |   |                |    |   |   |
| Basic                                        |   | $                   | .18     |   | $ | .34 |   |
| Diluted                                      |   | $                   | .18     |   | $ | .33 |   |
|                                         |   |                |    |   |   |
| Weighted average common shares outstanding:  |   |                |    |   |   |
| Basic                                        |   | 28,465,316          |    | 28,712,998 |   |
| Diluted                                      |   | 29,132,279          |    | 29,624,722 |   |

 

 

See accompanying notes.

 

5

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**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited:dollars in thousands)**

 
|                                                                                      |   | **Quarter  Ended**  |   |
|-------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                      |   | **March 31,  2001** |   | **March 30,  2002** |   |
|                                                                                      |   |                |   |   |   |
| **Increase  (Decrease) in Cash**:                                                         |   |                |   |   |   |
|                                                                                      |   |                |   |   |   |
| Cash flows from operating activities:                                                     |   |                |   |   |   |
| Net  income                                                                               |   | $                   | 5,197  |   | $ | 9,673 |   |
| Adjustments to reconcile net income to net cash  (used) provided by operating activities: |   |                |   |   |   |
| Depreciation  and amortization                                                            |   | 1,641               |   | 2,004 |   |
| Deferred  income taxes                                                                    |   | 336                 |   | 4,628 |   |
| Changes in working capital accounts:                                                      |   |                |   |   |   |
| Trade  receivables, net                                                                   |   | (8,772              | )      | (18,334 | ) |
| Inventories                                                                               |   | (883                | )      | (7,812 | ) |
| Prepaid  expenses                                                                         |   | (100                | )      | (2,860 | ) |
| Accounts  payable                                                                         |   | 537                 |   | 24,510 |   |
| Income  taxes payable                                                                     |   | 2,632               |   | 545 |   |
| Accrued expenses  and other liabilities                                                   |   | (1,542              | )      | 2,232 |   |
| Net cash (used)  provided by operating activities                                         |   | (954                | )      | 14,586 |   |
| Cash flows from investing activities:                                                     |   |                |   |   |   |
| Additions  to property, plant and equipment                                               |   | (2,076              | )      | (4,432 | ) |
| Issuance of  notes receivable                                                             |   | (4,210              | )      | 0 |   |
| Net cash used in  investing activities                                                    |   | (6,286              | )      | (4,432 | ) |
| Cash flows from financing activities:                                                     |   |                |   |   |   |
| Book  overdraft                                                                           |   | 6,011               |   | 6,645 |   |
| Borrowings  (payments) on lines of credit, net                                            |   | 1,148               |   | (15,000 | ) |
| Issuance of common stock                                                                  |   | 81                  |   | 701 |   |
| Advances  (payments) on long-term note                                                    |   |                |   | (2,500 | )  |
| Net cash  provided (provided) by financing activities                                     |   | 7,240               |   | (10,154 | ) |
| Net  change in cash                                                                       |   | 0                   |   | 0 |   |
| Cash at  beginning of period                                                              |   | 0                   |   | 0 |   |
| Cash at end of period                                                                     |   | $                   | 0      |   | $ | 0 |   |

 

 

See accompanying notes.

 

6

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**MONACOCOACH CORPORATION**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.     Basis of Presentation**

 

The interim condensed consolidated financialstatements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 29, 2001and March 30, 2002, and the results of its operations and its cash flows forthe quarters ended March 31, 2001 and March 30, 2002.  The condensed consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiaries, and all significantintercompany accounts and transactions have been eliminated inconsolidation.  The balance sheet dataas of December 29, 2001 was derived from audited financial statements, but doesnot include all disclosures contained in the Company’s Annual Report toStockholders.  These interim condensedconsolidated financial statements should be read in conjunction with theaudited financial statements and notes thereto appearing in the Company’sAnnual Report to Stockholders for the year ended December 29, 2001.

 

**2.     Acquisition of SMC Corporation**

** **

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

** **

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

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

 

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

 

7

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**3.     Inventories**

 

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

 
|            |   | **December  29,  2001** |    | **March 30,  2002** |   |
|-----------------|--------|-------------------------|---------|---------------------|--------|
|            |   | ***(in thousands)***    |    |
| Raw  materials  |   | $                       | 53,160  |                | $      | 60,155 |   |
| Work-in-process |   | 44,436                  |    | 48,779              |   |
| Finished units  |   | 29,479                  |    | 25,953              |   |
|            |   | $                       | 127,075 |                | $      | 134,887 |   |

 

**4.     Goodwill**

 

Goodwill, represents the excess of the cost ofacquisition over the fair value of net assets acquired.  At each balance sheet date, managementassesses whether there has been permanent impairment in the value ofgoodwill.  The amount of any suchimpairment is determined by comparing the fair value of the associated goodwillwith its carrying value.  The factorsconsidered by management in performing this assessment include currentoperating results, trends and prospects, as well as the effects ofobsolescence, demand, competition and other economic factors.  As of March 30, 2002, as required by FASBStatement No. 142, management has determined that there has been no impairmentof goodwill requiring a write down. FASB Statement No. 142 also states that goodwill and other intangibleassets with indefinite lives are no longer subject to amortization.  Therefore, in accordance with therequirements of FASB Statement No. 142, the Company has not recordedamortization for the period ending March 30, 2002.

** **

**5.     Line of Credit**

 

The Company has a bank line of credit consisting of arevolving line of credit of up to $70 million. At the election of the Company, the line of credit bears interest atvarying rates that fluctuate based on the Prime rate or LIBOR, and aredetermined based on the Company’s leverage ratio.  The Company also pays interest monthly on the unused availableportion of the line at varying rates, determined by the Company’s leverageratio.  The revolving line of credit isdue and payable in full on September 30, 2004, and requires monthly interestpayments.  The balance outstanding underthe line of credit at  March 30, 2002was $11 million.  The line of credit iscollateralized by all the assets of the Company and includes variousrestrictions and financial covenants.

 

**6.     Earnings Per Common Share**

 

Basic earnings per common share is based on theweighted average number of shares outstanding during the period.  Diluted earnings per common share is basedon the weighted average number of shares outstanding during the period, afterconsideration of the dilutive effect of stock options. The weighted average number of common shares used in the computationof earnings per common share are as follows:

 
|                                              |   | **March 31,  2001** |   | **March 30,  2002** |   |
|---------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| **Basic**                                         |   |                |   |                |   |
| Issued  and outstanding shares (weighted average) |   | 28,465,316          |   | 28,712,998          |   |
|                                              |   |                |   |                |   |
| **Effect  of Dilutive Securities**                |   |                |   |                |   |
| Stock options                                     |   | 666,963             |   | 911,724             |   |
| **Diluted**                                       |   | 29,132,279          |   | 29,624,722          |   |

 

 

8

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**7.     Long-term Note Payable**

** **

The Company has a long-term note payable of $37.5million outstanding at March 30, 2002. The term note bears interest at varying rates that fluctuate based onthe Prime rate or LIBOR, and are determined based on the Company’s leverageratio.  The term note requires monthlyinterest payments and quarterly principal payments and is collateralized by allthe assets of the Company.  The termnote is due and payable in full on September 28, 2005.  As of March 30, 2002, the interest rate on the term debt was 3.9%.

 

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

** **

| **Year** |   | **Amount of  payment due** |
|----------|--------|----------------------------|
| 2002     |   | $                          | 7,500 |
| 2003     |   | $                          | 12,500 |
| 2004     |   | $                          | 10,000 |
| 2005     |   | $                          | 7,500 |
|     |   | $                          | 37,500 |

 

**8.  Commitments and Contingencies**

 

Repurchase Agreements

 

Substantially all of the Company’s sales toindependent dealers are made on terms requiring cash on delivery.  However, most dealers finance units on a“floor plan” basis with a bank or finance company lending the dealer all orsubstantially all of the wholesale purchase price and retaining a securityinterest in the vehicles.  Upon requestof a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement.  These agreements provide that, for varyingperiods of up to 18 months after a unit is shipped, the Company will repurchaseits products from the financing institution in the event that they haverepossessed them upon a dealer’s default. The risk of loss resulting from these agreements is further reduced bythe resale value of the products repurchased. The Company’s contingent obligations under repurchase agreements varyfrom period to period and totaled approximately $388.8 million as of March 30,2002, with approximately  8.2%concentrated with one dealer.

 

Litigation

 

The Company is involved in legal proceedings arisingin the ordinary course of its business, including a variety of productliability and warranty claims typical in the recreational vehicleindustry.  The Company does not believethat the outcome of its pending legal proceedings will have a material adverseeffect on the business, financial condition, or results of operations of theCompany.

 

Debt Guarantee

 

In 2000, theCompany entered into an agreement with Outdoor Resorts of Las Vegas (“ORLV”)and ORLV’s parent company Outdoor Resorts of America (“ORA”), for the purposeof constructing a luxury motor coach resort in Las Vegas, Nevada.  In the first quarter of 2001, two additionalprojects, one in Naples, Florida, and the other in Indio, California, wereadded.  As of March 30, 2002, theCompany advanced $8.1 million in the form of a long-term note receivable fromORA and its respective subsidiaries. Accrued interest receivable from the loans was $810,000 at March 30,2002, of which approximately $752,000 was in arrears due to delays indevelopment of the respective projects. Accordingly, the Company has provided an allowance on the interestreceivable of $409,000.

 

9

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As part of thefinancing structure for the projects, the Company also agreed to act asco-guarantor with ORLV’s parent company, ORA, on an $11.2 million constructionloan for the Las Vegas resort.  At March30, 2002, ORLV and ORA had drawn approximately $10.8 million on theconstruction loan.  In return for theCompany’s loans and guarantee commitment, ORLV and ORA has agreed to payinterest and income participation to the Company.

 

Aircraft Lease Committment

 

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

 

10

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**Item 2.    Management’s Discussion and Analysis of Financial Condition**

**and Results of Operations**

 

This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements include, but are not limited to, those below that havebeen marked with an asterisk (*).  Inaddition, the Company may from time to time make forward-looking statementsthrough statements that include the words “believes”, “expects”, “anticipates”or similar expressions.  Suchforward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actualresults, performance or achievements of the Company to differ materially fromthose expressed or implied by such forward-looking statements, including thoseset forth below under the caption “Factors That May Affect Future OperatingResults” and elsewhere in this Quarterly Report on Form 10-Q.  The reader should carefully consider,together with the other matters referred to herein, the factors set forth underthe caption “Factors That May Affect Future Operating Results”.  The Company cautions the reader, however,that these factors may not be exhaustive.

 

**GENERAL**

 

Monaco CoachCorporation is a leading manufacturer of premium Class A motor coaches andtowable recreational vehicles (“towables”). The Company’s product line currently consists of a broad line of motorcoaches, fifth wheel trailers and travel trailers under the “Monaco”, “HolidayRambler”, “Safari”, “Beaver”, “Royale Coach”, and “McKenzie Towables” brandnames.  The Company’s products, whichare typically priced at the high end of their respective product categories,range in suggested retail price from $60,000 to $1.0 million for motor coachesand from $20,000 to $65,000 for towables.

 

**RESULTS OF OPERATIONS**

 

**Quarter ended  March 31, 2001 Compared to Quarter endedMarch 30, 2002**

 

First quarter netsales increased 39.0% to $293.6 million compared to $211.2 million for the sameperiod last year. Gross sales dollars on motorized products were up 41.4%,reflecting the combination of sales from the Beaver and Safari brands whichincreased sales by 22.9% over last year’s first quarter. The 18.5% increase inthe Monaco and Holiday Rambler brands over last year’s first quarter was due toimproved demand for motorized products and the addition of new products thatwere introduced in the second half of 2001. The Company’s gross towable sales were down 3.6% as the McKenzie towableoperations reported decreases which more than offset increases on the HolidayRambler towable products.  The Company’soverall unit sales were up 17.2% in the first quarter of 2002 with motorizedunits increasing by 34.3%, and towable units decreasing by 11.0%.  The Company’s average unit gross sellingprice increased in the first quarter of 2002 to $110,000 from $94,000 in thecomparable 2001 quarter due to the Company’s strong mix of diesel motorcoaches. 

 

Gross profit forthe first quarter of 2002 increased to $37.7 million, up from $25.5 million in2001, and gross margin increased to 12.9% in the first quarter of 2002 from12.1% in the first quarter of 2001. Gross margin in the first quarter of 2002 was improved by reductions insales discounts by 1.6% of sales, which were partially offset by increased costof goods sold as a percentage of sales due to the inclusion of operatingresults and the continued integration activities of the SMC acquisition.  The Company’s overall gross margin mayfluctuate in future periods if the mix of products shifts from higher to lowergross margin units or if the Company encounters unexpected manufacturingdifficulties or competitive pressures.

 

Selling, generaland administrative expenses increased by $5.0 million from $16.2 million in thefirst quarter of 2001 to $21.2 million in the first quarter of 2002, butdecreased as a percentage of sales from 7.7% in 2001 to 7.2% in 2002.  The decrease in sales, general and administrativeexpenses as a percentage of sales was due to the decrease in sales discounts,which net against gross sales, combined with higher net sales.

 

Operating incomewas $16.6 million, or 5.6% of sales in the first quarter of 2002 compared to$9.1 million, or 4.3% of sales in the similar 2001 period.  The increase in operating margins reflectimproved gross profit combined with improved selling, general andadministrative costs as a percentage of sales.

 

Net interestexpense was $698,000 in the first quarter of 2002 compared to $684,000 in thecomparable 2001 period, reflecting a higher level of borrowing during the firstquarter of 2002.

 

The Companyreported a provision for income taxes of $6.2 million, or an effective tax rateof 39.25% in the first quarter of 2002, compared to $3.3 million, or aneffective tax rate of 39.00% for the comparable 2001 period.

 

 

11

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Net income was$9.7 million in the first quarter of 2002 compared to $5.2 million in the firstquarter of 2001 due to the increase in sales, reductions in selling, generaland administrative costs as a percentage of sales, and improved gross profitmargins.

 

**INFLATION**

 

             The Company does not believe thatinflation has had a material impact on its results of operations for theperiods presented.

 

**CRITICALACCOUNTING POLICIES**

 

                Thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances.  Actual results may differ from these estimates under differentassumptions or conditions.  We believethe following critical accounting policies and related judgments and estimatesaffect the preparation of our consolidated financial statements.

 

                WARRANTYCOSTS  The Company provides an estimatefor accrued warranty costs at the time a product is sold.  This estimate is based on historical averagerepair costs, as well as other reasonable assumptions as have been deemedappropriate by management.

 

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

 

                IMPAIRMENTOF GOODWILL  The Company assesses thepotential impairment of goodwill in accordance with Financial AccountingStandards Board (FASB) Statement No. 142. This estimate involves management comparing the fair value of goodwillto the respective carrying value, to see if goodwill has been impaired.

 

**FACTORSTHAT MAY AFFECT FUTURE OPERATING RESULTS**

 

                WEMAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR AVARIETY OF REASONS  Our net sales, grossmargin and operating results may fluctuate significantly from period to perioddue to a number of factors, many of which are not readily predictable.  These factors include the following:

 

·        The margins associated with the mix of products wesell in any particular period

 

·        Our ability to utilize and expand our manufacturingresources efficiently

 

·        Shortages of materials used in our products

 

·        A determination by us that goodwill or other intangibleassets are impaired and have to be written down to their fair values, resultingin a charge to our results of operations

 

·        Our ability to introduce new models that achieveconsumer acceptance

 

·        The introduction, marketing and sale of competingproducts by others

 

·        The addition or loss of our dealers

 

·        The timing of trade shows and rallies, which we useto market and sell our products

 

·        Factors affecting the recreational vehicle industryas a whole, including economic and seasonal factors

 

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

 

 

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                Demandin the recreational vehicle industry generally declines during the wintermonths, while sales are generally higher during the spring and summer months.With the broader range of products we now offer, seasonal factors could have asignificant impact on our operating results in the future.  Additionally, unusually severe weatherconditions in certain markets could delay the timing of shipments from onequarter to another.

 

                Weattempt to forecast orders for our products accurately and commence purchasingand manufacturing prior to receipt of such orders. However, it is highlyunlikely that we will consistently accurately forecast the timing and rate oforders.  This aspect of our businessmakes our planning inexact and, in turn, affects our shipments, costs,inventories, operating results and cash flow for any given quarter.

 

                WEMAY EXPERIENCE DIFFICULTIES INTEGRATING THE BUSINESS OF SMC CORPORATION INTOOUR BUSINESS AND THIS COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OFOPERATIONS ADVERSELY  We completed theacquisition of SMC Corporation, an Oregon-based motor home manufacturer, inAugust 2001.  We may not achieve theanticipated benefit of this acquisition unless we successfully complete theintegration of SMC's business into our operations. Moreover, unless we are ableto increase sales of SMC products or reduce the operating expenses of theacquired business substantially from historical levels, the acquisition couldaffect our financial condition and results of operations adversely. Theacquisition also entails a number of other risks, including the following:

 

·        The integration process requires significantmanagement attention that would otherwise be available for the ongoingdevelopment of our principal business.

 

·        The assimilation of SMC's operations and personnelwill cause some disruption of our existing operations.

 

·        We may experience difficulty in incorporating SMC'sproducts into our existing product line without adversely affecting sales ofour other products.

 

·        We are amortizing the issuance costs of debt weincurred to finance the acquisition, and this adversely affects our operatingresults.

 

·        We may experience difficulty in integrating thedifferent corporate cultures and presenting a unified corporate image.

 

                THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY  The recreationalvehicle industry has been characterized by cycles of growth and contraction inconsumer demand, reflecting prevailing economic, demographic and politicalconditions that affect disposable income for leisure-time activities.  For example, unit sales of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2000 and 2001 to approximately300,000 and 257,000 units, respectively. Our business is necessarily subject to the cyclical nature of thisindustry.  Some of the factors thatcontribute to this cyclicality include fuel availability and costs, interestrate levels, the level of discretionary spending, and availability of creditand overall consumer confidence.  Therecent decline in consumer confidence and slowing of the overall economy hasadversely affected the recreational vehicle market.  An extended continuation of these conditions would materiallyaffect our business, results of operations and financial condition.

 

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

 

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

 

This expansion involves risks, including thefollowing:

 

·        We must rely on timely performance by contractors,subcontractors and government agencies, whose performance we may be unable tocontrol.

 

·        The development of new products involves costsassociated with new machinery training of employees, and compliance withenvironmental, health, and other government regulations.

 

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

 

                WERELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OFOUR SALES  Although our products wereoffered by 385 dealerships located primarily in the United States and Canada asof March 30, 2002, a significant percentage of our sales are concentrated amonga relatively small number of independent dealers.  Sales to one dealer, Lazy Days RV Center, accounted for 12.1% of totalsales in 2000 and 11.7% in 2001.  Our 10largest dealers, including Lazy Days RV Center, accounted for a total of 36% ofour sales in 2000 and 39% of our sales in 2001.  The loss of a significant dealer or a substantial decrease insales by any of these dealers could have a material impact on our business,results of operations and financial condition.

 

 

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                WEMAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THATTHE DEALER DOES NOT REPAY ITS LENDER  Asis common in the recreational vehicle industry, we enter into repurchaseagreements with the financing institutions used by our dealers to finance theirpurchases of our products.  Theseagreements require us to repurchase the dealer’s inventory in the event thatthe dealer does not repay its lender. Obligations under these agreements vary from period to period, buttotaled approximately $388.8 million as of March 30, 2002, with approximately8.2% concentrated with one dealer.  Ifwe have to repurchase a significant number of our products in the future, itcould have a material adverse effect on our financial condition, business andresults of operations.

 

                WEMAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THEPRICE OR A DECREASE IN THE SUPPLY OF FUEL An interruption in the supply, or a significant increase in the price ortax on the sale, of diesel fuel or gasoline on a regional or national basiscould significantly affect our business. Diesel fuel and gasoline have, at various times in the past, been eitherexpensive or difficult to obtain.

 

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

 

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

 

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

 

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

 

                OURBUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITYAND WARRANTY CLAIMS  We are subject tolitigation arising in the ordinary course of our business, typically forproduct liability and warranty claims that are common in the recreationalvehicle industry. While we do not believe that the outcome of any pendinglitigation, net of insurance coverage, will materially adversely affect ourbusiness, results of operations or financial condition, we cannot provideassurances in this regard because litigation is an inherently uncertainprocess.*

 

To date, we have been successful in obtainingproduct liability insurance on terms that we consider acceptable. Our currentpolicies jointly provide coverage against claims based on occurrences withinthe policy periods up to a maximum of $100.1 million for each occurrence and$102 million in the aggregate. We cannot be certain we will be able to obtaininsurance coverage in the future at acceptable levels or that the costs of suchinsurance will be reasonable. Further, successful assertion against us of oneor a series of large uninsured claims, or of a series of claims exceeding ourinsurance coverage, could have a material adverse effect on our business,results of operations and financial condition.

 

                WEMAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENTAND MANUFACTURING  Our success dependsin part upon attracting and retaining highly skilled professionals. A number ofour employees are highly skilled engineers and other technical professionals,and our failure to continue to attract and retain such individuals couldadversely affect our ability to compete in the industry.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’sprimary sources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During the first quarter of 2002, the Company generated cashflows of $13.9 million from operating activities.  The Company generated $11.0 million from net income and non-cashexpenses such as depreciation and amortization.  Additional cash flow in the amount of $24.5 million was providedby an increase in accounts payable, due to increased inventory levels. Thisamount was offset by an increase in trade receivables of $18.3 million due toan increase in sales quarter to quarter, and an increase of $7.8 million ininventories related to increased purchases for product model change.

 

The Company hascredit facilities consisting of a revolving line of credit of up to $70.0million (the “Revolving Loan”), and a term loan (the “Term Loan”) of $37.5million.  At the election of theCompany, the Revolving Loan and Term Loan bear interest at varying rates thatfluctuate based on the Prime rate or LIBOR, and are determined based on theCompany’s leverage ratio.  The Companyalso pays interest monthly on the unused available portion of the RevolvingLoan at varying rates, determined by the Company’s leverage ratio.  The Revolving loan is due and payable infull on September 30, 2004, while the Term Loan is due and payable in full onSeptember 28, 2005 and both require monthly interest payments.  The balances outstanding under the RevolvingLoan, and Term Loan at  March 30, 2002were $11.0 million, and $37.5 million, respectively.  The Revolving Loan is collateralized by all the assets of theCompany and includes various restrictions and financial covenants.  The Company utilizes “zero balance” bankdisbursement accounts in which an advance on the line of credit isautomatically made for checks clearing each day.  Since the balance of the disbursement account at the bank returnsto zero at the end of each day, the outstanding checks of the Company arereflected as a liability.  Theoutstanding check liability is combined with the Company’s positive cashbalance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

 

The Company’sprincipal working capital requirements are for purchases of inventory and, to alesser extent, financing of trade receivables. The Company’s dealers typically finance product purchases underwholesale floor plan arrangements with third parties as described below.  At March 30, 2002, the Company had workingcapital of approximately $74.0 million, an increase of $10.3 million fromworking capital of $63.7 million at December 29, 2001.  The Company has been using short-term creditfacilities and cash flow to finance its capital expenditures.

 

The Companybelieves that cash flow from operations and funds available under its creditfacilities will be sufficient to meet the Company’s liquidity requirements forthe next 12 months.*  The Company’scapital expenditures were $3.8 million in the first quarter of 2002, primarilyfor completing the Company’s warranty and service center projects, computersystem updgrades, and various small plant modifications.  The Company anticipates that capitalexpenditures for all of 2002 will be approximately $12 to $15 million, whichincludes $4 to $5 million of routine capital expenditures for computer systemupgrades and additions, smaller scale plant remodeling projects and normalreplacement of outdated or worn-out equipment.*  The Company may require additional equity or debt financing to addressworking capital and facilities expansion needs, particularly if the Companysignificantly increases the level of working capital assets such as inventoryand accounts receivable.  The Companymay also from time to time seek to acquire businesses that would complement theCompany’s current business, and any such acquisition could require additionalfinancing.  There can be no assurancethat additional financing will be available if required or on terms deemed favorableby the Company.

 

As is common inthe recreational vehicle industry, the Company enters into repurchaseagreements with the financing institutions used by its dealers to finance theirpurchases. These agreements obligate the Company to repurchase a dealer’sinventory under certain circumstances in the event of a default by the dealerto its lender. If the Company were obligated to repurchase a significant numberof its products in the future, it could have a material adverse effect on theCompany’s financial condition, business and results of operations. TheCompany’s contingent obligations under repurchase agreements vary from periodto period and totaled approximately $388.8 million as of March 30, 2002, withapproximately 8.2% concentrated with one dealer.

 

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                Aspart of the normal course of business, the Company incurs certain contractualobligations and commitments which will require future cash payments. Thefollowing tables summarize the significant obligations and commitments.

 

PAYMENTS DUE BYPERIOD

 
| **Contractual  Obligations (in thousands)** |   | **1 year or  less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|---------------------------------------------|--------|---------------------|--------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
| Long-term Debt (1)                          |   | $                   | 10,000 |              | $      | 27,500            |   | $              | 0      |      | $      | 0 |   | $ | 37,500 |   |
| Operating Leases  (2)                       |   | 2,204               |   | 3,539             |   | 1,350             |   | 4,333          |   | 11,426    |   |
| Total Contractual Cash  Obligations         |   | $                   | 12,204 |              | $      | 31,039            |   | $              | 1,350  |      | $      | 4,333 |   | $ | 48,926 |   |

 

AMOUNT OFCOMMITMENT EXPIRATION BY PERIOD

 
| **Other  Commitments (in thousands)** |   | **1 year or  less** |   | **1 to 3  years** |   | **4 to 5  years** |   | **Thereafter** |   | **Total** |   |
|---------------------------------------|--------|---------------------|--------|-------------------|--------|-------------------|--------|----------------|--------|-----------|--------|
| Lines of Credit (3)                   |   | $                   | 0      |              | $      | 70,000            |   | 0              |   | 0         |   | $ | 70,000 |   |
| Guarantees                            |   | 11,200              | (4)    | 16,039            | (2)    | 0                 |   | 0              |   | 27,239    |   |
| Repurchase  Obligations (5)           |   | 0                   |   | 388,800           |   | 0                 |   | 0              |   | 388,800   |   |
| Total Commitments                     |   | $                   | 11,200 |              | $      | 474,839           |   | 0              |   | 0         |   | $ | 486,039 |   |

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(1)  See Note 7to the financials.

(2)  Variousleases including manufacturing facilities, aircraft, machinery andequipment.  See Note 8 to thefinancials.

(3)  See Note5  to the financials.  The amount listed represents availableborrowings on the line of credit at March 30, 2002.

(4)  See Note 8to the financials.

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

 

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

 

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

 

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**Item 3.  Quantitative and Qualitative Disclosures About Market Risk.**

 

                Not applicable.

 

 

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**PART II - OTHER INFORMATION**

 

**Item6.  Exhibits and Reports on Form 8-K**

 
|   | (a)    | Exhibits                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                       |
|   |   | None.                                                                                                                      |
|   |   |                                                                                                                       |
|   | (b)    | Reports on Form 8-K                                                                                                        |
|   |   |                                                                                                                       |
|   |   | No reports on Form 8-K were required to be filed  during the quarter ended March 30, 2002, for which this report is filed. |

 

 

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**SIGNATURES**

 

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   |           |   | **MONACO COACH CORPORATION**      |
|--------|----------------|--------|-----------------------------------|
|   |           |   |                              |
|   |           |   |                              |
|   |           |   |                              |
| Dated: | April 30, 2002 |   | /s/  P. Martin Daley         |
|   |           |   | P. Martin Daley                   |
|   |           |   | Vice President  and               |
|   |           |   | Chief Financial  Officer (Duly    |
|   |           |   | Authorized  Officer and Principal |
|   |           |   | Financial  Officer)               |

 

 

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