| MONACO COACH CORP /DE/ including those set forth below under Item 1A Risk Factors |
| BUSINESS OVERVIEW Monaco Coach Corporation (the “Company”) is a leading manufacturer of premium recreational vehicles including Class A, B, and C motor coaches, as well as towable recreational vehicles |
| The Company also develops and sells luxury motorcoach resort facilities |
| These three operations, while closely tied into the recreational lifestyle, are segmented for reporting purposes as the Motorized Recreational Vehicle (MRV) segment, the Towable Recreational Vehicle (TRV) segment, and the Motorhome Resort (MR) segment |
| The following table represents the net sales by segment for the fiscal years 2003, 2004, and 2005 |
| All numbers are in thousands: 2003 % of Sales 2004 % of Sales 2005 % of Sales Motorized Recreational Vehicle Segment $ 1cmam059cmam347 91dtta5 % $ 1cmam234cmam233 89dtta1 % $ 1cmam017cmam766 82dtta3 % Towable Recreational Vehicle Segment 87cmam980 7dtta6 % 129cmam331 9dtta3 % 185cmam433 15dtta0 % Motorhome Resort Segment 10cmam756 0dtta9 % 22cmam705 1dtta6 % 33cmam039 2dtta7 % Total Sales $ 1cmam158cmam083 100dtta0 % $ 1cmam386cmam269 100dtta0 % $ 1cmam236cmam238 100dtta0 % RECENT BUSINESS CHANGES On November 18, 2005 the Company acquired R-Vision, Inc, R-Vision Motorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC (“R-Vision”), which manufactures towable and motorized products |
| The Company believes that developing relationships with a broad 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 |
| During the third quarter of 2005, the Company announced that it was closing its Royale Coach operations in Elkhart, Indiana |
| Royale Coach produced Prevost bus conversion motor coaches with price points in excess of dlra1dtta4 million |
| Royale Coach sold approximately 20 coaches per year and was not a significant portion of the Company’s overall business |
| As of the end of 2005, all closure costs have been accrued for in the Company’s financial statements |
| MOTORIZED RECREATIONAL VEHICLE SEGMENT The Company is a leading manufacturer of motorized recreational vehicles |
| The Company’s motorized product line consists of 37 models under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,” “McKenzie”, and “R-Vision” brand names |
| The Company’s motorized products, which are typically priced at the high end of their respective product categories, range in suggested retail price from dlra45cmam000 to dlra575cmam000 |
| Based upon retail registrations in 2005, the Company believes it had a 26dtta0prca share of the market for diesel Class A motor coaches, a 10dtta3prca share of the market for gas Class A motor coaches, a 18dtta1prca share of the market for all Class A motor 3 ______________________________________________________________________ coaches, and a 3dtta2prca share for all Class C motor coaches |
| At December 31, 2005, the Company’s products were sold through an extensive network of approximately 580 dealer lots located primarily in the United States and Canada |
| TOWABLE RECREATIONAL VEHICLE SEGMENT The Company manufactures 34 models of towable recreational vehicles under the “Holiday Rambler,” “McKenzie”, and “R-Vision” brand names |
| The Company’s towable products, range in suggested retail price from dlra1cmam000 to dlra70cmam000 |
| Based upon retail registrations in 2005, the Company believes it had a 4dtta5prca share of the market for fifth wheel towables and a 5dtta1prca share of the market for travel trailers |
| At December 31, 2005, the Company’s products were sold through an extensive network of approximately 580 dealer lots located primarily in the United States and Canada |
| MOTORHOME RESORTS SEGMENT The Company’s motorhome resorts are located in Indio, California, and Las Vegas, Nevada |
| The resorts provide high-end luxury destination locations for owners of Class A motorhomes, that include amenities such as golf courses, swimming pools, tennis courts, and full recreational vehicle hookups for utilities |
| The Company sells individual lots through independent real estate agents, and the owner shares a common interest in the resort amenities |
| As of December 31, 2005, the Company had sold 534 of the 564 lots that have been developed |
| Both the Las Vegas and Indio resorts have future phases to develop, and will continue to provide resort lot sales activity through the second quarter of 2007 |
| In addition to these two resorts, the Company is actively seeking new properties to acquire, with the intent of developing new resorts for selling seasons in late 2007 and 2008 |
| The resort development business is regulated by various governmental authorities for site planning, environmental impact studies, and land usage |
| To comply with the requirements imposed by these various authorities the Company employs technical staff, and utilizes outside legal counsel |
| The motorhome resort industry is highly fragmented, with no single development company occupying a dominant position |
| While there are no single large competitors in the motorhome resort development segment, the Company nonetheless competes with state, county, and national parks and campgrounds, privately owned campgrounds such as KOA, and independent developers |
| The geographic markets that the Company has targeted are located in the southeast (Florida), and the southwest (California and Nevada) |
| These areas provide destination locations that have major cities or resort destinations that provide attractions outside of the motorhome resorts themselves |
| The Company’s website is located at www |
| The Company provides free of charge through a link on its website access to its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the Securities and Exchange Commission |
| MOTORIZED AND TOWABLE RECREATIONAL VEHICLE PRODUCTS The Company’s recreational vehicles (comprised of both motorized and towable vehicles) are designed to offer all the comforts of home within a 215 to 415 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 Sharp, RCA, Sony; microwave ovens from Sharp, Magic Chef, and General Electric; stoves and ranges from KitchenAid 4 ______________________________________________________________________ and Modern Maid; engines from Cummins and Caterpillar; transmissions from Allison; and chassis from Ford, Workhorse, and our own Roadmaster brand |
| The Company’s high end products offer top-of-the-line amenities, including 37” Sharp LCD televisions, GPS systems from Kenwood and Pioneer, fully automatic DSS (satellite) systems, Corian solid surface kitchen and bath countertops, imported ceramic tile, leather furniture, and Ralph Lauren fabrics |
| The following tables illustrate our motorized and towable recreational vehicle segment offerings as of December 31, 2005: MOTORIZED VEHICLES COMPANY PRODUCTS CURRENT SUGGESTED TYPE RETAIL PRICE RANGE Class A Diesel Monaco dlra134cmam000 - dlra565cmam000 Holiday Rambler dlra134cmam000 - dlra445cmam000 Beaver dlra240cmam000 - dlra575cmam000 Safari dlra185cmam000 - dlra215cmam000 Class A Gas Monaco $ 80cmam000 - dlra150cmam000 Holiday Rambler $ 80cmam000 - dlra150cmam000 Safari $ 80cmam000 - dlra130cmam000 R-Vision $ 80cmam000 - dlra130cmam000 Class C Monaco $ 80cmam000 - $ 86cmam000 Holiday Rambler $ 65cmam000 - $ 85cmam000 Safari $ 65cmam000 - $ 75cmam000 R-Vision $ 45cmam000 - $ 65cmam000 TOWABLE VEHICLES COMPANY PRODUCTS CURRENT SUGGESTED TYPE RETAIL PRICE RANGE Fifth Wheels McKenzie $ 28cmam000 - $ 65cmam000 Holiday Rambler $ 28cmam000 - $ 63cmam000 R-Vision $ 8cmam200 - $ 70cmam000 Travel Trailers McKenzie $ 25cmam000 - $ 32cmam000 Holiday Rambler $ 25cmam000 - $ 45cmam000 R-Vision $ 1cmam000 - $ 40cmam000 5 ______________________________________________________________________ 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 staff 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 |
| The Company expensed dlra1dtta2 million, dlra1dtta3 million, and dlra1dtta5 million for research and development in the fiscal years 2003, 2004, and 2005, respectively |
| SALES AND MARKETING FOR MOTORIZED AND TOWABLE RECREATIONAL VEHICLES DEALERS The Company expanded its dealer network over the past year to approximately 580 dealership lots primarily located in the United States and Canada at December 31, 2005 |
| Revenues generated from shipments to dealerships located outside the United States were approximately 3dtta6prca, 3dtta4prca, and 5dtta6prca of total sales for the fiscal years 2003, 2004, and 2005, respectively |
| Sales to the Company’s dealerships are subject to concentrations |
| Sales to the top dealer in the recreational vehicle segments accounted for 12dtta6prca, 10dtta9prca, and 10dtta9prca of total sales for the years ended 2003, 2004, and 2005 respectively |
| The Company intends to continue to expand its dealer network, primarily by targeting key geographic regions where the Company’s products are not well represented |
| * The Company maintains an internal sales organization consisting of 40 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 |
| 6 ______________________________________________________________________ ADVERTISING AND PROMOTIONS 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 |
| An important marketing activity for the Company is its participation with its dealers in the more than 250 recreational vehicle trade shows and rallies each year |
| National trade shows and rallies, which can attract as many as 30cmam000 attendees, are an integral part of the Company’s marketing process because they enable 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 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 |
| The Company attempts to encourage and reinforce customer loyalty through support of owners’ clubs of its products so that they may share experiences and communicate with each other |
| The clubs of the Company’s products currently have more than 30cmam000 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 2cmam100 recreational vehicles per year |
| The Company receives support from its dealers and suppliers to host these rallies |
| The Company’s web sites also offer 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 RV 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 limited warranty to all new vehicle purchasers |
| The Company’s current limited warranty covers its products for up to one year (or 24cmam000 miles, whichever occurs first) from the date of retail sale (a limited structural warranty has a duration of five years for the front and sidewall frame structure, and a limited three year warranty for the Roadmaster chassis) |
| In addition, customers are protected by the limited warranties of major component suppliers such as those of Cummins Engine Company, Inc |
| (“Cummins”) (diesel engines), Caterpillar Inc |
| (“Caterpillar”) (diesel engines), Spicer Heavy Axle & Brake Division of Dana Corporation (“Dana”) (axles), Allison Transmission Division of General Motors Corporation (“Allison”) (transmissions), Workhorse (chassis), Onan (generators), and Ford Motor Company (“Ford”) (chassis) |
| The Company’s limited 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 December 31, 2005, the Company had approximately 580 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 and Caterpillar dealer networks, which include over 2cmam000 repair centers |
| The Company operates service centers in Harrisburg, Oregon; Elkhart, Indiana; and in Wildwood, Florida |
| The Company had approximately 673 employees in customer service at December 31, 2005 |
| 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 |
| 7 ______________________________________________________________________ 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’s on-line dealer support network gives service personnel at dealerships the ability to order parts through an electronic parts catalog |
| MANUFACTURING The Company currently operates motorized manufacturing facilities in Coburg, Oregon; Wakarusa, Indiana; and in Warsaw, Indiana |
| The Company’s towable manufacturing facilities are in Elkhart, Indiana; Milford, Indiana; Warsaw, Indiana; and Goshen, Indiana |
| The Company’s motor coach production capacity at the end of 2005 based on a single shift five-day work week, was 54 motorized products per day, and 125 towable units per day |
| The Company is currently utilizing approximately 55prca of total capacity and therefore believes it is positioned to take advantage of future growth potential of the Company’s products within the RV market |
| * 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 |
| 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 |
| 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 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 |
| * The Company presently believes that its allocation by suppliers of all components is sufficient to meet planned production volumes, 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 |
| 8 ______________________________________________________________________ BACKLOG The Company’s products are generally manufactured against orders from the Company’s dealers |
| As of December 31, 2005, the Company’s backlog of orders was dlra297dtta6 million, compared to dlra256dtta4 million at January 1, 2005 |
| 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 in the motorized recreational vehicle segment include, among others: Coachmen Industries, Inc, Fleetwood Enterprises, Inc, National RV Holdings, Inc, and Winnebago Industries, Inc |
| The Company’s competitors in the towable recreational vehicle segment include, among others: Fleetwood Enterprises, 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’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 |
| Overall product liability insurance, including umbrella coverage, is available to a maximum amount of dlra100dtta0 million for each occurrence, as well as in the aggregate |
| There can be no assurance that the Company will be able to obtain insurance coverage in the future at acceptable levels or that the 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 |
| In 2002, the National Highway Traffic Safety Administration (NHTSA), enacted new vehicle safety legislation referred to as the TREAD Act that imposes significant early warning reporting (“EWR”) requirements on vehicle manufacturers, including the Company |
| The Company believes that it has met the EWR requirements of the TREAD Act that became effective during 2003 |
| Certain US 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 is planning to add a new paint reciprocator system in Wakarusa, Indiana |
| The Company has submitted all required permit applications and does not anticipate any permit delays or that additional air pollution control equipment will be required as a condition of these construction approvals |
| The Company is aware that Elkhart County, Indiana, has been designated as a non-attainment area under the Clean Air Standards for Ozone and PM2dtta5 |
| Regardless, the Company does not anticipate any new conditions that will require additional air pollution control equipment at operations located in Elkhart or at any of our other existing operations, although new regulations and their interpretation may change over time, and there can be no assurance that additional expenditures will not be required |
| * During 2004, additional federal Maximum Achievable Control Technology (“MACT”) regulations were adopted |
| The Company is in compliance with the new MACT regulations, and will not require any material capital expenditures at its facilities beyond those which have already been incurred |
| * However, the ongoing interpretation of these regulations is uncertain and there can be no assurance that additional capital expenditures will not be required |
| The Company is aware of no unresolved 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 completed a voluntary remediation activity at one of its facilities acquired in the SMC acquisition |
| The remediation project was associated with old abandoned fuel storage tanks |
| The Company is currently unaware of any other sites owned or facilities operated by the Company that require environmental remediation |
| 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 10 ______________________________________________________________________ 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 |
| EMPLOYEES As of December 31, 2005, the Company had 6cmam040 full-time employees, including 4cmam607 in production, 109 in sales, 673 in service, and 651 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 |
| EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to the executive officers of the Company as of December 31, 2005: Name Age Position with the Company Kay L Toolson 62 Chairman and Chief Executive Officer John W Nepute 54 President Richard E Bond 52 Senior Vice President, Secretary, and Chief Administrative Officer Martin W Garriott 50 Vice President and Director of Oregon Manufacturing Irvin M Yoder 58 Vice President and Director of Indiana Manufacturing Patrick F Carroll 48 Vice President of Product Development P Martin Daley 41 Vice President and Chief Financial Officer Michael P Snell 37 Vice President of Sales and Marketing John B Healey, Jr |
| Toolson has served as Chief Executive Officer of the Company and its predecessor since 1986 and as Chairman of the Company since July 1993 |
| He served as President of the Company from 1986 to October 2000, except for the periods from October 1995 to January 1997 and August 1998 to September 1999 |
| Toolson held executive positions with two motor coach manufacturers |
| Nepute has served the Company as President since October 2000 |
| He served as Executive Vice President, Treasurer and Chief Financial Officer from September 1999 to October 2000 |
| Prior to that and from 1991, he served the Company and its predecessor in the capacity of Vice President of Finance, Treasurer and Chief Financial Officer |
| From January 1988 until January 1991, he served as Controller of the Company’s predecessor |
| 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 11 ______________________________________________________________________ 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, which was acquired by the Company in 1996, and originally joined Holiday Rambler as Vice President and Assistant General Counsel in 1984 |
| 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 its predecessor since November 1975 in various capacities, including Vice President of Corporate Purchasing from October 1994 until December 1996 |
| 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 |
| 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 |
| 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 |
| Daley has served as Vice President and Chief Financial Officer since October 2000 |
| He served as Corporate Controller from March 1996 to October 2000 |
| Prior to that, he served as the Oregon Controller since joining the Company in November 1994 |
| Snell has served as Vice President of Sales and Marketing since November 2004 |
| Prior to that and since joining the Company in October 1994, he held various positions including Vice President of Sales and National Sales Manager of Monaco Motorized Sales |
| Healey has served as Vice President of Corporate Purchasing since October 2000 and as Director of Purchasing for Indiana Operations beginning in August 1998 |
| Kangail has served as the Vice President of Human Resources since joining the Company in October 2004 |
| Kangail served in several human resources executive roles with Unocal Corporation (1996-2004), and with Atlantic Richfield Corp |
| Greene has served as Vice President of Monaco Engineering since May 2005 |
| Previously, Mr |
| Greene served as Vice President of Operations at Workhouse Custom Chassis Company from March 2004 until May 2005 |
| Greene served in various senior operation and technology positions at Dana Corporation and Workhorse Custom Chassis |
| Both Workhorse Custom Chassis Company and Dana Corporation manufacture components such as chassis and drive train components for the transportation industry |
| Herring has served as Vice President of Service Operations since October 2001 |
| Prior to that, and during his 12 year employment with the Company, Mr |
| Herring served as Vice President of Customer Service and Director of Oregon Service |
| Lynch-Klein has served as Vice President Customer Support Services since 2003, and is responsible for warranty, parts, customer service call centers, technical publications and dealer training |
| Prior to 2003 and since she began working for the Company in 1988, she has held various supervisory and management positions of increasing levels of authority within the Company |
| Stone has served as the Director of Information Services since December 2003 |
| Prior to that and since joining the Company in October 2001, he held a variety of increasingly responsible positions within the information systems department |
| Robertson has been with Monaco Coach Corporation since January 1988 and has been serving as the Special Assistant to the CEO since 1999 |
| Previous to this, he served as President of the Company from 1995 to 1998 |
| Robertson served as the Vice President of Sales and Marketing |
| From 1988 to 1990, he was a National Sales Manager for the Company |
| Kimball has served as Corporate Controller since October 2000 |
| Before joining the Company, Mr |
| Kimball worked in the public accounting sector |
| 12 ______________________________________________________________________ ITEM 1A RISK FACTORS We have listed below various risks and uncertainties relating to our businesses |
| This list is not inclusive of all the risks and uncertainties we face, but any of these could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report or that we may issue from time to time in the future |
| THE EXPECTED BENEFITS OF OUR RECENT ACQUISITION OF R-VISION AND AFFILIATES MAY NOT BE REALIZED On November 18, 2005 we acquired Indiana based towable and motorhome manufacturer R-Vision, Inc, R-Vision Motorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC (collectively “R-Vision”) to acquire all of the outstanding shares of R-Vision |
| The process of integrating R-Vision into our company operations may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business |
| This may cause an interruption or a loss of momentum in our operating activities, which in turn, could have a material adverse affect on our operating results and financial condition |
| Moreover, the acquisition involves a number of additional risks, such as the loss of key employees of R-Vision as a result of the acquisition, the incorporation of acquired products into our existing product line, the amortization of debt issuance costs, and the difficulty of integrating disparate corporate cultures |
| Accordingly, the anticipated benefits may not be realized or the acquisition may have a material adverse affect on our operating results and financial condition |
| WE MAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OF REASONS Our net sales, gross margin, and operating results may fluctuate significantly from period to period due to a number of factors, many of which are not readily predictable |
| These factors include the following: • The margins associated with the mix of products we sell in any particular period |
| • Our ability to utilize and expand our manufacturing resources efficiently |
| • Shortages of materials used in our products |
| • The effects of inflation on the costs of materials used in our products |
| • A determination by us that goodwill or other intangible assets are impaired and have to be written down to their fair values, resulting in a charge to our results of operations |
| • Our ability to introduce new models that achieve consumer acceptance |
| • The introduction, marketing and sale of competing products by others, including significant discounting offered by our competitors |
| • The timing of trade shows and rallies, which we use to market and sell our products |
| • Factors affecting the recreational vehicle industry as a whole, including economic and seasonal factors |
| • Our inability to acquire and develop key pieces of property for on-going resort activity |
| • Fluctuations in demand for our resort lots due to changing economic and other conditions |
| Our overall gross margin may decline in future periods to the extent that we increase the percentage of sales of lower gross margin towable products or if the mix of motor coaches we sell shifts to lower gross margin units |
| In addition, a relatively small variation in the number of recreational vehicles we sell in any quarter can have a significant impact on total sales and operating results for that quarter |
| Demand in the recreational vehicle industry generally declines during the winter months, while sales are generally higher during the spring and summer months |
| With the broader range of products we now offer, seasonal 13 ______________________________________________________________________ factors could have a significant impact on our operating results in the future |
| Additionally, unusually severe weather conditions in certain markets could delay the timing of shipments from one quarter to another |
| We attempt to forecast orders for our products accurately and commence purchasing and manufacturing prior to receipt of such orders |
| However, it is highly unlikely that we will consistently accurately forecast the timing, rate, and mix of orders |
| This aspect of our business makes our planning inexact and, in turn, affects our shipments, costs, inventories, operating results, and cash flow for any given quarter |
| THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY The recreational vehicle industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic, demographic, and political conditions that affect disposable income for leisure-time activities |
| Some of the factors that contribute to this cyclicality include fuel availability and costs, interest rate levels, the level of discretionary spending, and availability of credit and overall consumer confidence |
| The recent decline in consumer confidence and slowing of the overall economy has adversely affected the recreational vehicle market |
| An extended continuation of these conditions would materially affect our business, results of operations, and financial condition |
| WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES Although our products were offered by approximately 580 dealerships located primarily in the United States and Canada as of December 31, 2005, a significant percentage of our sales are concentrated among a relatively small number of independent dealers |
| For fiscal years 2004 and 2005, sales to one dealer, Lazy Days RV Center, accounted for 10dtta9prca of total sales |
| For fiscal years 2004 and 2005, sales to our 10 largest dealers, including Lazy Days RV Center, accounted for a total of 39dtta0prca and 38dtta7prca of total sales, respectively |
| The loss of a significant dealer or a substantial decrease in sales by any of these dealers could have a material impact on our business, results of operations, and financial condition |
| WE MAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITS LENDER As is common in the recreational vehicle industry, we enter into repurchase agreements with the financing institutions used by our dealers to finance their purchases of our products |
| These agreements require us to repurchase the dealer’s inventory in the event that the dealer does not repay its lender |
| Obligations under these agreements vary from period to period, but totaled approximately dlra607dtta3 million as of December 31, 2005, with approximately 5dtta9prca concentrated with one dealer |
| If we were obligated to repurchase a significant number of units under any repurchase agreement, our business, operating results, and financial condition could be adversely affected |
| OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK We sell our product to dealers who are predominantly located in the United States and Canada |
| The terms and conditions of payment are a combination of open trade receivables, and commitments from dealer floor plan lending institutions |
| For our RV dealers, terms are net 30 days for units that are financed by a third party lender |
| Terms of open trade receivables are granted by us, on a very limited basis, to dealers who have been subjected to evaluative credit processes conducted by us |
| For open receivables, terms vary from net 30 days to net 180 days, depending on the specific agreement |
| Agreements for payment terms beyond 30 days generally require additional collateral, as well as security interest in the inventory sold |
| As of December 31, 2005, total trade receivables were dlra102dtta7 million, with approximately dlra72dtta6 million, or 70dtta7prca of the outstanding accounts receivable balance concentrated among floor plan lenders |
| The remaining dlra30dtta1 million of trade receivables were concentrated substantially all with one dealer |
| For resort lot customers, funds are required at the time of closing |
| WE MAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR A DECREASE IN THE SUPPLY OF FUEL An interruption in the supply, or a significant increase in the price or tax on the sale, of diesel fuel or gasoline on a regional or national basis could significantly affect our business |
| Diesel fuel and gasoline have, at various times in the past, been either expensive or difficult to obtain |
| 14 ______________________________________________________________________ WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OUR PRODUCTS A number of important components for our products are purchased from a single or a limited number of sources |
| These include turbo diesel engines (Cummins and Caterpillar), substantially all of our transmissions (Allison), axles (Dana) for all diesel motor coaches, and chassis (Workhorse and Ford) for gas motor coaches |
| We have no long-term supply contracts with these suppliers or their distributors, and we cannot be certain that these suppliers will be able to meet our future requirements |
| Consequently, the Company has periodically been placed on allocation of these and other key components |
| The last significant allocation occurred in 1997 from Allison, and in 1999 from Ford |
| An extended delay or interruption in the supply of any components that we obtain from a single supplier or from a limited number of suppliers could adversely affect our business, results of operations, and financial condition |
| OUR INDUSTRY IS VERY COMPETITIVE WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE The market for our products is very competitive |
| We currently compete with a number of manufacturers of motor coaches, fifth wheel trailers, and travel trailers |
| Some of these companies have greater financial resources than we have and extensive distribution networks |
| These companies, or new competitors in the industry, may develop products that customers in the industry prefer over our products |
| We believe that the introduction of new products and new features is critical to our success |
| Delays in the introduction of new models or product features, quality problems associated with these introductions, or a lack of market acceptance of new models or features could affect us adversely |
| For example, unexpected costs associated with model changes have affected our gross margin in the past |
| Further, new product introductions can divert revenues from existing models and result in fewer sales of existing products |
| OUR PRODUCTS COULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES Our customers require demanding specifications for product performance and reliability |
| Because our products are complex and often use advanced components, processes and techniques, undetected errors and design flaws may occur |
| Product defects result in higher product service, warranty and replacement costs and may cause serious damage to our customer relationships and industry reputation, all of which will negatively affect our sales and business |
| OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS We are subject to litigation arising in the ordinary course of our business, typically for product liability and warranty claims that are common in the recreational vehicle industry |
| While we do not believe that the outcome of any pending litigation, net of insurance coverage, will materially adversely affect our business, results of operations, or financial condition, we cannot provide assurances in this regard because litigation is an inherently uncertain process |
| * To date, we have been successful in obtaining product liability insurance on terms that we consider acceptable |
| The terms of the policy contain a self-insured retention amount of dlra500cmam000 per occurrence, with a maximum annual aggregate self-insured retention of dlra3dtta0 million |
| Overall product liability insurance, including umbrella coverage, is available to a maximum amount of dlra100dtta0 million for each occurrence, as well as in the aggregate |
| We cannot be certain we will be able to obtain insurance coverage in the future at acceptable levels or that the costs of such insurance will be reasonable |
| Further, successful assertion against us of one or a series of large uninsured claims, or of a series of claims exceeding our insurance coverage, could have a material adverse effect on our business, results of operations, and financial condition |
| IN ORDER TO BE SUCCESSFUL, WE MUST ATTRACT, RETAIN AND MOTIVATE MANAGEMENT PERSONNEL AND OTHER KEY EMPLOYEES, AND OUR FAILURE TO DO SO COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS The Company’s future prospects depend upon retaining and motivating key management personnel, including Kay L Toolson, the Company’s Chief Executive Officer, and John W Nepute, the Company’s President |
| 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 highly skilled engineers and other qualified technical, manufacturing, financial, 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 |
| OUR RECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS In the past few years, we have significantly 15 ______________________________________________________________________ expanded the size and scope of our business, which has required us to hire additional employees |
| Some of these new employees include new management personnel |
| In addition, our current management personnel have assumed additional responsibilities |
| The increase in our size over a relatively short period of time has put pressure on our operating, financial, and management information systems |
| If we continue to expand, such growth would put additional pressure on these systems and may cause such systems to malfunction or to experience significant delays |
| WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN As we continue to work towards involving automated machinery and equipment to improve efficiencies and quality, we will be subject to certain risks involving implementing new technologies into our facilities |
| The expansion into new machinery and equipment technologies involves risks, including the following: • We must rely on timely performance by contractors, subcontractors, and government agencies, whose performance we may be unable to control |
| • The development of new processes involves costs associated with new machinery, training of employees, and compliance with environmental, health, and other government regulations |
| • The newly developed products may not be successful in the marketplace |
| • We may be unable to complete a planned machinery and equipment implementation in a timely manner, which could result in lower production levels and an inability to satisfy customer demand for our products |
| WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP) IMPLEMENTATION We have recently begun to implement a new ERP system and will be subject to certain risks including the following: • We must rely on timely performance by contractors whose performance we may be unable to control |
| • The implementation could result in significant and unexpected increases in our operating expenses and capital expenditures, particularly if the project takes longer than we expect |
| • The project could complicate and prolong our internal data gathering and analysis processes |
| • It could require us to restructure or develop our internal processes to adapt to the new system |
| • We could require extended work hours from our employees and use temporary outside resources, resulting in increased expenses, to resolve any software configuration issues or to process transactions manually until issues are resolved |
| • As management focuses attention to the implementation, they could be diverted from other issues |
| • The project could disrupt our operations if the transition to the ERP system creates new or unexpected difficulties or if the system does not perform as expected |
| OUR STOCK PRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE The market price of our Common Stock is 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 us or our 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 our Common Stock could experience similar fluctuations |